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The Future of the European Union

The Future of the European Union

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The Future of

FINANCIAL TIMES SPECIAL REPORT | Wednesday May 9 2012

THE EUROPEAN UNION
www.ft.com/eu-2012 | twitter.com/ftreports

Bloc faces stiffest test in its history
Amid the turmoil, it is easy to lose sight of the fact that the EU has booked some solid achievements, says Tony Barber

Inside this issue
Eurozone crisis Many economists believe fiscal union is essential Page 2 Membership Currency troubles exacerbate ‘enlargement fatigue’ Page 2 Britain and the EU Public scepticism masks efforts to rebuild entente Page 2 Single market There is little agreement over what finishing the EU’s internal market entails Page 3 Foreign affairs Developing joint policies is a slow and difficult job Page 3 Institutions Painful treaty renegotiation is needed to beef up eurozone economic rules, Page 4 Renewable energy Clean power will require serious investment Page 4 Franco-German links Events have underlined the cracks in a relationship that has always required work to reconcile differences Page 4 Guest Column Is Europe destined to become super Monaco, or a superpower? asks Radoslaw Sikorski, foreign minister of Poland Page 4

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ifty-five years after the Treaty of Rome, which founded the European Economic Community, its successor, the EU is battling to prove to itself and the rest of the world it can overcome its most profound challenge. What started four years ago as a financial sector emergency, and then evolved into a sovereign debt crisis, expanded in 2011 into a full-scale threat to European monetary union, the cornerstone of the integration project. The financial upheaval coincided with a recognition on the part of Europe’s leaders that the EU’s institutions, redesigned by the 2009 Lisbon treaty, were still failing to deepen a sense of common purpose and build the trust of citizens. At the same time, demographic, military and economic

weaknesses combined with the rise of non-European powers to place a question mark over the EU’s ability to maintain its influence in the wider world. Amid the turmoil it is sometimes forgotten that the EU, for all its troubles, has immense achievements to its credit. With 27 member states (rising to 28 next year with the admission of Croatia) and more than 500m people, the EU is the world’s biggest common market and trade bloc. Many of its citizens enjoy a standard of living that is the envy of much of the world. Its social and economic model, which blends capitalism and the welfare state, is under strain, but is adapting in response to the financial crisis. Moreover, the integration process that started with Belgium, the Netherlands, Luxembourg, France, Germany and Italy in 1957 was dynamic enough to attract ever more adherents in the following halfcentury. EU membership helped stabilise young democracies in Greece, Portugal and Spain, and, later, reunited a continent divided in the aftermath of the

second world war, permitting the entry of 10 former communist states in central and eastern Europe. The desire of Serbia and other countries in former Yugoslavia to join testifies to the bloc’s enduring attractiveness as a pole of liberty and prosperity. Nonetheless, the present crisis is tearing at the fabric of integration so painstakingly woven over past decades. In political terms, the damage is visible in the emergence of

anti-establishment populist parties, on the far left and far right, that exploit the public’s sense of economic insecurity and fractured national identity. These parties share an instinct to make the EU a scapegoat for everything from public spending cuts and job losses to weak immigration controls. While most extremists stand little chance of entering government, their influence on European politics is not to be discounted.

From France to Greece, the UK and Hungary, more than a few mainstream centre-left and centre-right politicians have succumbed to the temptation to rail against the EU, in an effort to blunt the appeal of the extremists. In economic terms, the impact of the crisis is no less marked. The launch of the euro in 1999 accelerated the integration of Europe’s financial markets but, as the European Central Bank observed in a report in April,

the upheavals in the banking sector and debt markets since 2007 have halted this development or even, in some segments, thrown it into reverse. Many banks have retreated into their home markets, ridding themselves of debt issued by financial institutions and governments outside their own countries. This process of “renationalisation” was accentuated by the
Continued on Page 2

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FINANCIAL TIMES WEDNESDAY MAY 9 2012

The Future of the European Union

Currency crisis exacerbates ‘enlargement fatigue’ Bloc faces
Membership A two-tier or multitier EU might ease the path for new members, explains Neil Buckley
Despite its problems, EU enlargement is not dead. In January, two-thirds of Croats voted in favour of joining the union, putting Croatia on course to become the 28th member of the bloc by the middle of next year. A month later, neighbouring Serbia achieved its long-held aim of gaining candidate status, putting it alongside Montenegro, another former Yugoslav state. But the reality is that the enlargement process has slowed sharply. The last great wave of EU expansion between the end of 1995 and the start of 2007 saw the number of member countries more than double, from 12 to 27. In the decade to 2017, however, at best three or four members might join. “The financial crisis is definitely delaying enlargement, and this is understandable,” says Bozidar Djelic, who resigned as Serbia’s deputy prime minister and chief negotiator on Europe last December, when EU ministers failed to grant Serbia candidate status. In fact, there were signs of “enlargement fatigue” even before the financial crisis struck in 2008. The EU was increasingly aware that it had not addressed the issue of how to govern a bloc of 27 members. It knew the next countries lining up for membership, from the former Yugoslavia, were particularly problematic – economic laggards still troubled by how to deal with war crimes and territorial disputes There was a sense, too, among older member states that Romania and Bulgaria had been allowed to join – in January 2007 – before they had made sufficient progress in areas such as organised crime and corruption. So the bar was set higher for subsequent prospective members – Croatia’s accession talks took six and a half years. But the global economic slowdown and ensuing eurozone debt crisis have exacerbated enlargement fatigue. The crisis not only tied up EU institutions with firefighting and made big states more wary of accepting smaller, poorer members. It also eroded the principles of European solidarity, and boosted support for populist and nationalist parties calling, for example, for limits on immigration. “There has been a loss of solidarity, in the sense of having to solve common problems together,” says Heather Grabbe, head of the Open Society Institute NGO in Brussels and a former top official in the EU’s enlargement directorate. “If you have lost that sense between Germany and Greece, then how are you going to have it between Germany and, say, Albania?” The implications of an enlargement slowdown are significant. The prospect of membership has been a vital spur to political, judicial, and economic reforms in the 10 former socialist bloc countries that joined in 2004 and 2007. If that prospect starts appearing ever more distant for
Heather Grabbe, head of the Open Society Institute: ‘There has been a loss of solidarity’

ex-Yugoslav countries, officials and analysts fear at best they could lose the stimulus for reforms – and at worst explode into violence again. Countries such as Serbia and Bosnia-Herzegovina still suffer because of the damage to their infrastructure and industry from the wars of the 1990s. Although they attracted investment and began growing

strongly in the credit boom before 2008, they have been slow to emerge from the recession. Joblessness across the region is high. Mr Djelic admits it will take Serbia far longer to gain full membership of the EU than had been hoped just a few years ago, but he says being on that path spurs reform, as well as providing foreign investors with a greater sense of security. Zlatko Lagumdzija, foreign minister of Bosnia-Herzegovina, adds that the facts that Slovenia is already in the EU – and the euro, that Croatia is virtually there, and Serbia is a candidate are “very positive signs for us”. But he is pushing for the bloc to release more funding to Bosnia and other western Balkan states ahead of formal membership, for transport and energy infrastructure projects that run through their territories, in recognition of their particular history. He says it is “important that Bosnia sees results from moderate policies”, so as to guard

against disappointment fanning the flames of nationalism again. Yet, paradoxically, if – as seems increasingly likely – a two-tier or multi-tier EU emerges after the crisis, that might ease the path for enlargement. Countries could be admitted to a looser outer circle without full integration in all areas. A multi-tier union might, on the other hand, warns Ms Grabbe, be less attractive to prospective members – particularly Turkey, which began accession talks in 2005 but, as a Muslim country largely in Asia, faces deep divisions among EU states over its membership ambitions. Istanbul, she says, has always seen accession in terms of winning recognition as a member of an elite European club. But one ambassador from a western Balkan state says these countries, already closely linked to the EU geographically and economically, are likely to accept whatever is on offer. “A multi-tier EU,” he says, “is better than no EU at all.”

stiffest test in its history
Continued from Page 1

Public scepticism masks efforts to rebuild entente
Britain and the EU Government leaders know the UK’s economic fate is tied to Europe, writes George Parker
The 21-mile stretch of sea between Dover and continental Europe has seldom seemed wider in recent times, the divide encapsulated by the isolation of David Cameron, the British prime minister and Conservative party leader, at last December’s European summit. While EU member states debated matters of economic life or death for the eurozone, Mr Cameron tried and failed to extract concessions for the UK financial services industry. The episode was portrayed by the prime minister’s office as a British veto – in reality the rest of Europe just walked on by. The “veto” lifted Mr Cameron in opinion polls and Euroscepticism has rarely seemed more widespread in Britain. Recent soundings have put the UK Independence party – whose symbol is the £ sign – ahead of the Liberal Democrats, the proEurope minority party in Britain’s coalition government. Yet behind the scenes, Mr Cameron has been quietly trying to rebuild relations, in recognition that Britain’s economic fate is inextricably linked to the rest of the EU, which accounts for 60 per cent of its foreign trade. The UK economy, wallowing in a double-dip recession, needs growth in Europe to offset an austerity programme at home. George Osborne, chancellor of the exchequer, has no interest in making things worse. In April he agreed to an additional £10bn British loan to the International Monetary Fund, in spite of fierce complaints from Labour and many of his own Tory MPs that the money would be used to help a eurozone that was not helping itself. “The [centre] of the problem now lies on our doorstep in Europe and with some of our largest trading partners, including Ireland,” Mr Osborne told the House of Commons. “We will not turn our back on the IMF, or turn our back on the world.” The move was the clearest manifestation of the coalition’s attempt to rebuild bridges in Europe, which also included Mr Cameron’s attendance at a Nordic summit: the focus of his efforts to build a liberal, freetrading alliance in Europe. In spite of differences over European integration, Mr Cameron has worked hard on his relationship with Angela Merkel, the German chancellor: the two have shared convivial weekends at Chequers, the UK prime minister’s country retreat. Mr Cameron has tried to forge relationships with two new European leaders – Mario Monti, Italy’s technocrat prime minister, who is seen in London as a liberal reformer, and Mariano Rajoy, Spain’s prime minister – as potential allies in trying to open Europe’s economy. The UK prime minister also endorsed Nicolas Sarkozy who lost the French presidential campaign; Britain is braced for a problematic cross-channel relationship with François Hollande, the socialist who won the vote. “We don’t normally meet candidates in election periods,” said Mr Cameron’s office after he declined to meet Mr Hollande on his recent visit to London, where he was campaigning for votes among French expats. Mr Hollande’s identification of finance as “the enemy” threatens more tension, as Mr Cameron tries to defend the City of London from EU regulation. The UK premier’s covert efforts to repair relations have been spotted by his own party, which today is even more Eurosceptic than in the days of Margaret Thatcher. The former Tory leader’s famous 1988 Bruges speech, in which she railed against a European superstate, now looks more moderate. John Redwood, a former Tory cabinet minister, said of the UK’s IMF contribution that loans should only be made when recipient countries were “in a position to devalue or when they are withdrawing from the single currency”. Europe may be low on the list of concerns for most UK voters, but Euroscepticism is an article of faith for most Tory MPs and British newspapers. And it still has the capacity to divide the party and ruling coalition. Over the next 18 months, Mr Cameron will try to channel Eurosceptic fervour into efforts to contain the next seven-year EU budget. Britain’s EU membership is also complicated by the prospect of a referendum on Scotland separating from the rest of the UK in 2014. A “yes” vote would be seen by the separatist Scottish National Party as a prelude to the EU admitting it as a new member state. Alex Salmond, Scotland’s first minister, wants his country ultimately to adopt the euro – a requirement of new EU members in any cases. Wisely, he appears to be in no hurry Polls suggest a “no” vote is the more likely outcome in Scotland, but Mr Salmond is a wily political veteran.

enormous amounts of state aid – €1.6tn, or 13.1 per cent of EU gross domestic product – that national governments channelled to banks after 2008 in the form of public loans, capital injections and guarantees. Meanwhile, the gap between the 17-nation eurozone’s strongest and weakest economies yawns wider as the crisis drags on. Unemployment fell in Germany in March to 6.7 per cent, a two-decade low, but in Spain it rose to 24.4 per cent. Roughly half of Spaniards under 25 are jobless. In the debt markets, borrowing costs for fiscally prudent northern European countries have never been lower: Germany’s benchmark 10-year government bond yield touched 1.63 per cent in mid-April, and that of Sweden is also less than 2 per cent. The yield on equivalent Greek debt stands at about 20 per cent, and for Portugal it is more than 10 per cent. In fact, neither Greece nor Portugal has access to the bond markets, having received emergency rescues from their EU partners and the International Monetary Fund that turned them into wards of the global financial system. The same goes for Ireland – which, however, is slowly returning to health. Cyprus avoided a similar fate only by turning to Russia last year for a €2.5bn loan. Now the big question is whether Spain, deep in recession and with its banks devastated by a property and construction bubble, will also require emergency help. The conservative government of Mariano Rajoy, prime minister, is adamant its €54bn plan for banks to increase capital and bad loan provisions this year will avert the need for any EUfunded rescue of its financial system. However, in April the IMF expressed concern about the balance sheets and governance of various Spanish lenders, notably Bankia, a collection of seven cajas – savings banks – floated last year on the stock exchange. More broadly, handling the crisis will call for courageous leadership from Germany, the most populous and economically
Angela Merkel and her government were criticised for a slow initial response to the debt crisis

They agree with S&P: protests in Madrid against cuts. The rating agency wrote: ‘Austerity in Spain will likely exacerbate risks to growth’

Markets fret that austerity medicine will kill patient
Eurozone crisis Many economists believe fiscal union is essential if the single currency is to survive, says Peter Spiegel

AFP

Contributors
Tony Barber Europe Editor Alex Barker EU Correspondent James Blitz Defence and Diplomatic Editor Neil Buckley East European Editor Joshua Chaffin EU Correspondent Jonathan Ford Chief Leader Writer George Parker Political Editor Quentin Peel Chief Correspondent, Germany Peter Spiegel Brussels Bureau Chief Ursula Milton Commissioning Editor Steven Bird Designer Andy Mears Picture Editor For advertising details, contact: Robert Grange on: +44 (0) 207 873 4418; fax: +44 (0) 207 873 4006; email: robert.grange@ft.com or your usual representative

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sk senior EU officials whether enough has been done to stem the two-year-old eurozone debt crisis, and many point to the number of new rules and institutions they argue would have been unthinkable before the upheaval. There is the permanent €500bn rescue fund; firm rules with penalties for growing budget deficits and a new Brussels-based head of a “euro working group”, among others. But after three months of relative calm at the start of the year, thanks to the €1tn pumped into the region’s credit-starved banking system by the European Central Bank, markets have begun to wobble again, worried that the underlying causes of the crisis have not yet been addressed. Indeed as Standard & Poor’s, the credit rating agency, said in its recent downgrade of Spanish debt, there is increasing market sentiment that the medicine – tough debt and deficit limits imposed by the new rules that eurozone leaders have agreed to – may kill rather than cure the patient, by stifling economic growth. “[W]e believe front-loaded fiscal austerity in Spain will likely exacerbate the numerous risks to growth over the medium term,” S&P wrote in its April 26 downgrade statement.

Privately, eurozone officials acknowledge the creation of efficient and effective monetary union is far from finished. Although significant power over eurozone government budgets has shifted from national parliaments to Brussels, the goal of fiscal and economic union to accompany the single currency remains far off. “European integration has brought peace and prosperity,” Mario Draghi, the ECB president, said during a recent hearing of the European parliament. “While I hesitate to sketch out the long-term end point of the integration process, I am convinced that we need to actively step up our reflections about the longer term vision for Europe as we have done in the past at other defining moments in the history of our union.” But achieving the fiscal union that many economists believe essential for the survival of the euro, demands clearing several hurdles that some worry may be insurmountable. The first problem, which has hindered responses to the crisis so far, concerns how to create a fiscal union and has divided north from south, new member states from old, and Germany from France. So far, integration has largely followed a path backed by Germany and a likeminded group of northern eurozone countries whose creditworthiness have been relied on in euro bailout efforts. This system has been largely rule-based, culminating in the new fiscal discipline treaty that would forever enshrine balanced budgets and low debt in national constitutions. Other countries, particularly Italy and other southerners, but also some more northern coun-

tries, such as France and Luxembourg, have argued that the new rules must be accompanied by pooling of financial resources if a workable fiscal union is to be achieved. Mario Monti, Italy’s technocrat prime minister, and a respected economist and veteran EU official before he took office in Rome, has long urged the eurozone to issue common bonds backed by all 17 countries in the currency union. By spreading lending risk among the 17 and including the triple-A rated economic giant Germany, the whole bloc would be able to borrow at lower rates, argue advocates of common bonds, giving weaker countries

‘Good intentions and sound policies are not enough. Ultimately, [integration] must be supported by those for whom it was made’
time and resources to reform their economies and make them more competitive. German leaders have resisted the plan, arguing that cheaper borrowing would also remove the pressure on weak economies to make improvements. But Berlin has also resisted other less ambitious ideas, including a Paris-backed push to give the €500bn eurozone rescue fund unlimited resources by linking it to the bottomless pockets of the ECB. The French government, with backing of other G7 countries such as the US and UK, has argued that showing the eurozone’s willingness to protect the

currency through the ECB, could tackle panic in peripheral bond markets, where traders are worried they may not be repaid for the debt they hold. But Germany has objected, and the integrationist push that enthused eurozone leaders in 2011 has largely stalled in 2012. In recent weeks, European voters have shown they are also becoming more resistant to the path the bloc is taking, demonstrating a new willingness to back candidates who reject the status quo. In the first round of the French presidential election, for instance, nearly 30 per cent of voters supported candidates of the far left and right with firmly eurosceptic views. Similarly, recent polls in the Netherlands, where the government fell because of disagreements over Brussels-mandated deficit targets, show that eurosceptic populist and fringe parties could make up nearly a third of the new parliament after elections in September. Indeed, eurozone leaders’ big recent achievement, the fiscal discipline treaty, is under attack on many fronts: from the new Socialist French president, François Hollande, who has vowed to revisit it, to Irish voters, who appear likely to reject it in a referendum scheduled for the end of May. “No matter the outcome, this is a necessary and healthy infusion of democratic legitimacy into our body politic,” says one Brussels-based EU diplomat of the raised profile of the “Europe question” in national elections. “Good intentions and sound policies are not enough. Ultimately, [integration] must be supported by those for whom it was made.”

powerful member-state, as well as from the ECB. Much is also expected of France, with a freshly elected president, François Hollande, and new government due to take office after June’s parliamentary elections. Angela Merkel, Germany’s Christian Democrat chancellor, and her government have come under criticism both for their initially slow response to the debt crisis and for their emphasis on national fiscal discipline and structural economic reforms as the essential policy tools for overcoming it. In the long run, however, the most important feature of Germany’s behaviour in the crisis may turn out to be the intense domestic debate over the past two years over that country’s vision of Europe’s future. This produced a consensus not only that Germany must do what is necessary to save the monetary union, but that deeper political union is desirable, too. Ms Merkel’s CDU party fleshed out this idea last November, adopting a resolution that called for the direct election of the European Commission president and a bicameral legislative system in which the European parliament would represent voters and the Council of Ministers would speak for member states. A more cohesive and democratically accountable EU is attractive to politicians across Europe, but it is open to question whether all member states would agree to such a political union. The history of European integration suggests that a more probable outcome is the emergence of an avant-garde group of countries that would set the pace while leaving the door open for others to follow. The EU long ago abandoned the idea that all members should proceed at the same speed along the road to integration. In any case, the overriding priority remains tackling the financial crisis. Even the finest architectural plans for Europe’s future will amount to nothing if the crisis inflicts irreparable damage on the bloc.

FINANCIAL TIMES WEDNESDAY MAY 9 2012

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The Future of the European Union

Developing joint policies is a slow and difficult job
Foreign affairs James Blitz considers the obstacles to common diplomatic and defence strategies

A single market Small steps, not big leaps
For an example of the sweat and tears required to advance the EU’s single market, look no further than the epic squabble over reforming the bloc’s patent system. The benefits seem clear: lower costs and a simpler life for entrepreneurs who must navigate the intellectual property regimes of 27 member states. Yet agreeing a unified EU system has taken almost four decades, and the talks are not finished. A breakthrough is close, but not certain. The most divisive issue – language rules – were largely resolved when 25 countries agreed to move ahead without Spain and Italy. Now all that is left is for Paris, Munich and London to resolve a six-month tussle over where the new patent court will be. A deal, which could come within weeks, will be hailed as proof of the EU’s determination to boost faltering economies by strengthening its single internal market. But the agonisingly slow progress on patents is an important reality check. As the single market – a grand plan to free the movement of people, goods, services and capital – approaches its 20th birthday, there will be no shortage of calls to tackle other bottlenecks. With Europe’s economy labouring under high debt and low growth, the project to remove barriers to open markets is a top priority and there is optimistic talk in Brussels about the initiative that José Manuel Barroso, president of the European Commission, calls the “crown jewel” of the EU. The trouble is there is little agreement over what finishing the single market entails. For some it means adding a more “social” dimension, for others it is liberalising markets or pooling more sovereignty. “Everybody thinks the single market is the answer but nobody knows what to do,” says one senior diplomat. “Nobody know where the biggest economic gains will come from. Full integration is impossible for many member states. Who would make political sacrifices for these uncertain gains?” There are other challenges. Calls are growing for more border controls, rather than fewer and protectionist pressures are rising. As Mr Barroso admits, economic crisis provides “a strong temptation to roll back the single market”. So what is the current situation? In some areas, such as goods the single market has matured against the odds. Some fiercely competitive sectors, airlines, for example, have outpaced regulators in bringing down market obstacles. This is not the case for energy, health or indeed telecoms, where national models and champions dominate. In other areas, opening up has only just begun. Services account for 70 per cent of the EU economy, but implementation of the services directive is proceeding slowly. Then there are the “new frontiers”. These include areas that are still almost entirely national – several sectors are excluded from the directive, such as digital services. Areas such as the internet economy will be a priority when a second single market act is unveiled this year. But political constraints mean reform will proceed in small steps, rather than big leaps and there are limits to what even the most pro-single market states will accept. Take telecoms: the existence of “roaming” charges to customers who use their phones abroad highlights that this is a national business. Before he became Italian prime minister, Mario Monti wrote a report calling for a “seamless regulatory space” and a pan-European regulator in charge of licensing and selling frequencies. Yet the sovereignty sacrifice, let alone the loss of revenues, is unacceptable to many states. Opening the healthcare market, which is also currently excluded, could bring substantial gains. But would the UK, champion of the single market but home of the state-run National Health Service, accept more competition of this sort? Michel Barnier, the internal market commissioner, is duly focusing on enforcement. “The priority is not to extend the services directive, but to ensure it applies in full to the sectors it covers.”

T

wo years ago, the implementation of the Lisbon treaty created some excitement that a new chapter was beginning in EU history, one that would see the bloc become a more coherent and weighty actor in foreign affairs and defence. After years in which member states sometimes appeared deeply divided over the diplomatic crises of the age – most notably the Yugoslav wars of the 1990s and the Iraq invasion of 2003 – the hope was that the EU would become more able to hold its own, for example, when dealing with the US and China. Two years on, opinions about the union’s progress on forging common diplomatic and defence strategies are mixed. It now has a foreign policy supremo in Catherine Ashton, a British former politician. It also has an “External Action Service”, a diplomatic corps that numbers more than 3,000, half of whom are posted in delegations round the world. The EU also has a huge aid budget that allows it to project influence in the world’s most troubled regions. However, the development of common policies is a slow and difficult job. While many smaller member states want “more Europe” when it comes to foreign policy, some of the bloc’s bigger nations – notably Britain and France – jealously

guard their role as world powers at the United Nations Security Council. Meanwhile, Europe’s reputation as an international military power is fading. In the throes of the economic crisis, many states are slashing military spending to try to balance national budgets. As a result, there are fears that, by the end of this decade, Europe will struggle to look after its own security at a time when the US is shifting its focus away from the Atlantic and towards the Pacific. Two years after she began as EU foreign policy chief, Baroness Ashton’s team has put together some diplomatic achievements. For example, the bloc has demonstrated the importance of its input, in what is arguably the biggest security problem of the moment: Iran’s nuclear programme. Baroness Ashton won praise for the way she led diplomats from six world powers in a first round of negotiations with Iran on April 14. At a more detailed level, the EU’s 27 members met at the start of this year to come up with a package of tough energy sanctions on Iran, despite the difficulties this has created for some member states, such as Greece and Italy. Acting as a bloc, the EU has also been able to put pressure on the Assad regime in Syria. It has also had an impact on other problems. In Somalia, its Operation Atalanta is playing a big role in fighting piracy and the union is attempting to forge a comprehensive approach to tackle the country’s political and economic difficulties. In the Balkans, the EU is play-

In Somalia, the EU’s Operation Atalanta is playing a big role in fighting piracy

Getty

ing a crucial role trying to widen dialogue between Serbia and Kosovo. That said, many would point to three large problems the bloc faces in forging a common foreign and defence policy. First, there are big institu-

‘The Lisbon treaty has triggered turf warfare between the European Commission and the External Action Service’
tional frictions inside the Brussels machine. “The Lisbon treaty has triggered a huge degree of turf warfare between the European Commission and the External Action Service,” says Thomas Valasek of the Centre for Euro-

pean Reform, a think-tank. “José Manuel Barroso, the commission president sees the EAS as something that needs to be fought rather than something that needs to be worked with.” Second, Europe is acting too slowly to maintain “hard power” and defence capability at a time of aggressive budget cutting. One of the biggest concerns of senior diplomats in the EU and Nato is that Europe’s national governments should pool and share military capabilities to avoid duplication. Britain and France, the Nordic states and the Benelux countries have taken some steps in this direction. But as one EU diplomat puts it: “The fact is, that while millions of euros are being saved sharing defence capabilities, tens of millions are being lost through budget cuts.” Perhaps the biggest problem,

however, is the eurozone crisis. “Europe’s reputation has taken a massive battering in the past two years,” says Mr Valasek. “Its members are not seen to have managed the crisis well. They are seen as bickering and selfish and that has damaged Europe’s reputation as a haven of responsibility and stability. “It is not an attractive model and that is becoming a burden on the EU’s ability to shape its neighbourhood.” Baroness Ashton’s staff would contest this. “We’re certainly not hiding behind the crisis,” says an aide. “EU foreign policy means putting more money into our neighbourhoods such as the Balkans and north Africa. We are certainly not seeing foreign aid being cut.” But for many people in the US and China, all talk about the EU for some time to come will be dominated by the travails of the eurozone.

Alex Barker

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FINANCIAL TIMES WEDNESDAY MAY 9 2012

The Future of the European Union

Problems point to path of closer embrace Clean power needs serious investment
Institutions Painful treaty renegotiation is needed to tighten eurozone economic rules, writes Jonathan Ford
When leaders of the 27 EU member states ratified the Lisbon Treaty three years ago, most of them fervently hoped it would be the last time for a generation that institutional reform would be on the agenda. The ratification sealed a painful eight-year effort to bring about a wide range of constitutional changes to deal with the expansion of the EU from 15 members in 2003 to its current size. Events, however, have confounded this hope. The sovereign debt crisis, which blew up almost before the ink on the treaty was dry, has exposed weaknesses in the Lisbon settlement. The exigencies of the crisis – and the need to hold monetary union together – have turned out to require more decisive policy making than the treaty allows. This has spurred calls for further institutional change. Angela Merkel last year led the way, saying that for monetary union to work, tighter integration would be needed. The German chancellor acknowledged it would be painful to reopen the institutional debate but argued it must not be shirked. “A community that says, regardless of what happens elsewhere in the world, that it can never again change its ground rules is a community that simply cannot survive,” she said. However, further reforms will not be easy to accomplish. The tortuous course of the Lisbon treaty (and the failed European constitution that preceded it) shows how difficult it is to get agreement about farreaching changes among 27 members – and that goes up to 28, when Croatia joins next year. This is compounded by the fact that the reforms are largely to deal with problems facing a subset of the bloc – the 17 countries that share the euro. Then there is the question of Britain. Since coming to power in 2010, the UK’s coalition government has introduced a law requiring a referendum on any EU treaty change transfer ing further powers to Brussels. Given the hostility of British public opinion to integration, most observers think this puts an EU-wide agreement beyond reach. The main reason to reopen the treaties is to beef up eurozone economic governance, giving the EU institutions, principally the European Commission but also possibly the European Court of Justice, the power to review the finances of member states and impose and enforce sanctions when they break the budget rules. Without these, there is a risk that the fiscal treaty signed this year by 25 of the 27 member states to shore up the eurozone will simply come apart, pitching the euro back into crisis. While the Belgian government recently accepted demands from the commission for deeper budget cuts, it is highly questionable whether bigger countries such as France and Italy would accept similar demands unless these were

‘A community that says, regardless of what happens, it can never again change its rules, cannot survive’
backed by real sanctions. But it is hard to see some EU members (especially non-euro countries) being willing to swallow the sort of changes Germany is pushing for, which would involve strengthening even more the powers of the commission on national budgetary matters. Not least, there is a ques-

tion of democratic legitimacy, which Berlin’s proposal for direct elections to the commission presidency only partly answers. The Lisbon treaty did pass greater powers to the European parliament but the “democratic deficit” remains a serious issue for the EU, highlighted by public apathy and low turnouts at European elections. The difficulty of achieving EU-wide treaty change has led some to wonder whether another approach is needed. In a recent book, JeanClaude Piris, a former head of the European Council’s legal service, proposed an alternative. This would be for an “avant garde” group of countries – broadly the 17 that form the eurozone – to embrace closer integration, while keeping the door open for others to join later. Such a subgroup might create its own institutions – a council for heads of government, a parliamentary body, and an administrative authority distinct from the commission, for example.

This would get around the problem – much discussed at the time of the fiscal treaty – of EU institutions applying rules that were only designed for a subset of member states. Arguably, Mr Piris’s vision goes with the grain of EU history, which has seen many “multi-speed” innovations – such as the Schengen border-free travel agreement. But it would pose many problems, not least the risk of a permanent split in the EU if the other states never caught up. Another worry is that the avant garde might become a voting bloc that influenced the mainstream business of the EU. Whatever the EU decides, institutional change is back on the agenda. If the euro is to survive, there need to be faster ways of responding to abrupt changes in financial and economic circumstances. How this is accomplished will have a profound effect on the character of the union.

Renewable energy Joshua Chaffin says spending on infrastructure and overhaul of markets are necessary to expand production
Since the start of Europe’s financial crisis, GreekGerman relations have been marked by growing acrimony. But if Greece’s Helios solar energy project succeeds, the two nations might provide a model for how Europe and the rest of the world can collaborate to benefit from safe, clean and affordable energy. The idea behind Helios, named after the sun god of Greek mythology, is that thousands of solar panels in the sun-drenched Mediterranean will soak up energy that can then be transported by transmission lines to power homes and factories in Germany. The project, which has become a favourite of the European Commission, the executive arm of the EU, is symbolic of optimism about renewable energy from sources including the sun, the wind and water. Günther Oettinger, the energy commissioner, said in Athens in April: “Renewable energy sources will play a major part in Europe’s long-term energy development.” The appeal of renewables over traditional fossil fuels is that they do not directly produce the greenhouse gases that are by-products of burning coal and oil and which have been linked to climate change. That is vitally important, because, among other things, the bloc has committed to virtually eliminating greenhouse emissions by 2050. Moreover, unlike natural gas, for example, renewables do not have to be imported from Russia. Thanks to generous subsidies, clean energy costs have come down. The EU is also hoping, as Mr Oettinger observed in Athens, that the developing industry will provide jobs and encourage innovation in a recession-bound continent. At present, renewables account for 10 per cent of Europe’s energy consumption – a share that the 27 EU member states have pledged to double by 2020. But their contribution could expand quickly, according to a long-term energy “road map” developed by Brussels policy makers last year. The point was to identify ways for the EU to meet its competing and sometimes conflicting energy goals. These involve leading the fight against climate change, while also limiting costs for industry and consumers and maintaining secure supplies. One landmark moment for sustainable energy was the commitment by EU leaders in 2008 to set a binding target for 2020. That gave industry the confidence to invest and encouraged national schemes that have helped fund solar panels on rooftops in Germany, Spain and Italy. The appeal of sustainable

No time for two central nations to squabble
Franco-German links Events have thrown into relief the cracks in a relationship that has always required work, writes Quentin Peel

energy grew after the disaster at the Fukushima nuclear facility in Japan. European nuclear executives had been talking about a renaissance in their industry, based on its low emissions and relative freedom from foreign suppliers. But the horror of Fukushima damped such talk. Germany, the biggest EU economy, shuttered seven older reactors right after the accident and decided to accelerate a phase-out of nuclear energy. In Italy, plans to launch a revival were shelved. The move away from nuclear to renewables has not been without problems. Germany, for example, has changed from big electricity exporter to sometime importer. Less nuclear power also means its grid is less stable – authorities narrowly averted a blackout in February that could have had consequences across Europe. Analysts also warn of rising prices. The biggest bills may be yet to come, because further growth in renewables will require huge investments in infrastructure and an overhaul of the continent’s electricity market. One challenge is building the transmission lines that will allow electricity generated by offshore wind farms in the North Sea to travel to Munich, for example. “Transmitting a big amount of power over a long distance is not easy,” says Jean-Michel Glachant, director of the Florence School of Regulation, which
Günther Oettinger, EU energy commissioner, hopes industry will bring jobs

F

or weeks, if not months, the political establishment and business community in Germany have been torn, anxious about the prospect of victory for the socialist François Hollande, who is now the French president-elect. Some feared the advent of a leftwinger in the Elysée palace would upset the Franco-German tandem in the middle of the eurozone crisis. But long-time observers in the government have been more sanguine, insisting pragmatism will prevail in Paris and Berlin, even if relations take a few months to get on an even keel. “Some people seriously think that François Hollande will be a very leftist and irresponsible president,” says Daniela Schwarzer a specialist in Franco-German relations at the German Institute for International and Security Affairs in Berlin. “There are others who know there have already been high-level contacts with [Mr Hollande’s] diplomatic adviser, who came to Berlin. [Mr Hollande] cannot afford to be irresponsible. He well knows he will be judged by the markets.” For Angela Merkel, the German chancellor, the challenge of Mr Hollande’s success is swiftly to come to terms with a new and potentially prickly partner, whom she snubbed during the election. From the start of the campaign, Ms Merkel had made it clear she was backing Nicolas Sarkozy, the incumbent and her

fellow conservative leader in the European People’s Party, although their personal relationship has never been very close. Ms Merkel declined to meet Mr Hollande in advance. In response, he distanced himself from the German emphasis on budget discipline as the most important step to solve the eurozone crisis. He focused his campaign instead on a call for less austerity and more growth – and renegotiation of the German-inspired “fiscal pact” to curb debt and deficits. Ms Merkel’s offer to campaign for Mr Sarkozy did not help and was put on hold when the former French president decided it might prove counterproductive with his voters. Indeed, having launched his campaign with a passionate plea for France to become “more German”, Mr Sarkozy dropped the idea in favour of a much more traditional Gaullist stance, questioning further European integration, and abandoning his pact with Ms Merkel that neither would seek to tell the European Central Bank how to conduct monetary policy. In German eyes, both French candidates were guilty of exploiting doubts and worries about European integration and the emergence of Germany as the dominant political force in the eurozone, in order to win a particular type of voter. Both expressed a classic French preference for interventionist and protectionist policies, and political involvement with the ECB that is strongly at odds with Germany’s insistence on independence for the bank. The reality of the FrancoGerman partnership has been constant struggles to reconcile differences, with both sides forced to compromise in order to reach a common European position. Thanks to the Elysée treaty, signed in 1963, the two have

François Hollande, the new French president, focused his campaign on calls for less austerity

EPA

forged close institutional relations, with ministries exchanging views, and regular meetings of the full governments, underpinned by a big programme of school exchanges and town twinning, among other things. “Franco-German co-operation is only important when we are not united, when we are capable of quarrelling,” says Claire Demesmay, specialist in Franco-German relations at the German Council on Foreign Relations in Berlin. The eurozone crisis has exposed the fundamental opposition between Germany’s insistence that the ECB must pursue an independent monetary policy focused on controlling inflation and maintaining a strong currency, and France’s belief – spelt out by both candidates – that the ECB should also have economic growth as part of its mandate. Although Ms Merkel and Mr Sarkozy papered over that divi-

sion, they never overcame it. Left-right political differences between Paris and Berlin have usually been secondary to personal chemistry between the leaders. Helmut Schmidt, the German Social Democrat chancellor in the late 1970s, had an excellent relationship with Valéry Giscard d’Estaing, the centre-right French president at the time. Helmut Kohl, a centre-right Christian Democrat, forged an even closer bond with François Mitterrand, the most recent French socialist president. Mr Kohl had a markedly more difficult relationship with Jacques Chirac when he was president in the 1990s, although both belonged to the same conservative camp. One exception to the rule of opposites mixing well was the relationship between Mr Chirac and Gerhard Schröder, the Social Democrat chancellor in Berlin from 1998 to 2005.

“We lost two years with Chancellor Schröder, because he thought the Franco-German relationship was ancient history,” says Sylvie Goulard, a French MEP. The two quarrelled over EU finances, and the Nice treaty and only patched up their relationship when they found themselves on the same side in opposing the USled war in Iraq. The other factor in bringing France and Germany back together in 2003 was the desire for a big celebration of the 40th anniversary of the Elysée treaty. The 50th anniversary of the same event may well help Ms Merkel and Mr Hollande: preparations are under way for celebrations in January, 2013. However, the concern in Brussels is that the eurozone crisis means neither nation can afford to wait that long.

specialises in European energy markets. The European Climate Foundation has estimated that the bloc’s transmission capacity will have to double by 2030, at a cost of €68bn between 2020 and 2030. That does not include the hundreds of billions needed for new generation projects. The cost would be lower if countries took a Europewide rather than a national approach. For example, locating projects where conditions are most suitable – wind in the North Sea and solar in the Mediterranean – as opposed to the current practice of going where the subsidies are highest. Financial support will also be harder to come by in an era of austerity. Mr Glachant is more optimistic about the prospects in Europe for shale, which has recently brought large quantities of gas to market in the US. Gas, which is less polluting than coal and oil, is also viewed as a way to address one of renewables’ toughest problems: unpredictability. As one commission official says: “There must be some kind of back-up when the sun is not shining and the wind is not blowing.” Gas-fired power plants can be turned on and off to accommodate the intermittent nature of the wind and sun. Still, policy makers puzzle over how to design a market where companies will be willing to invest in plants that will only be used occasionally.

Is Europe destined to become super Monaco, or superpower?
Guest Column
RADOSLAW SIKORSKI
If Marx had been right and political relations were determined by the economic base, the EU would be a superpower. We are the wealthiest market in the world, with half a billion rich consumers and an educated workforce. We account for the biggest share in international trade, have a vast combined military budget and we are collectively the biggest donor of international aid. But the economic crisis has brought home the fragility of the European edifice. There is no guarantee of a happy progression to an ever more prosperous, peaceful EU. Instead, we are looking at several possible outcomes. The first is disintegration. If the effects of the European Central Bank’s relief for the banking sector fizzle out and the financial crisis deepens, the risk of the eurozone’s collapse would become real – and if it were to disintegrate or shrink, the single market would be hard to salvage. The impoverished and still uncompetitive countries pushed out of Europe’s core would be tempted to hit back with competitive devaluations or even trade barriers. If trade policies renationalise, would labour mobility, or even the freedoms of the Schengen passport-free zone – already under pressure from populists across the continent – be exempt? If a sense of common future and pan-European solidarity erode, how soon before countries cease payments for common agricultural policy or cohesion funds? An EU in which community institutions atrophy would quickly slide into geopolitical irrelevance. The vacuum would be filled by a resurgent Russia and an assertive China. The second and more plausible scenario is drift. The EU retains its current shape. Member states take decades to repair their public finances. We cling to our standard of living by imposing external barriers but fail to regain global competitiveness. Reforms of the EU are delayed and community institutions continue to weaken. We acquiesce in comfortable decline. Europe becomes a continent-sized Monaco – a wealthy retirement home with a few tourist attractions. The third scenario, sometimes proposed as an alternative to the first two, is the imposition of utopian federalism: a unitary supranational state with a central government and single parliament. I call this “utopian,” but another word might be “impossible”. I cannot imagine the parliament of any member state, including Poland’s, voting for a treaty that would transfer national sovereignty to Brussels. There is also a fourth possibility – Poland’s proposal – of a permanent political union that preserves national powers in many areas. In a federal but not centralised Europe, matters of culture, religion, way of life, and principal tax rates would remain in the purview of member states. While respecting subsidiarity, integration would be strengthened in all areas where economies of scale apply: completion of the single market in services and internet trade, the implementation of a competitive energy market, joint protection of the EU’s external border so as to protect the Schengen freedoms within, and joint representation at the G20 and OECD. The European Commission should be firmly at the centre of decision making, so that decisions are the product of transparent discussions and not backroom deals. The posts of president of the commission and of the European Council could be merged and elected by the European parliament, or even more broadly. Only then would there be an EU president who could negotiate as an equal with the leaders of the US and China. Only then could we begin to punch internationally in proportion to our economic weight. A European political union would need a serious defence policy too: you cannot wield power in the world if your diplomacy can never by backed by force. Poland pushed for the development of a common security and defence policy during its EU presidency last year, but progress is too slow. The US is scaling back its military budget and reorienting its defence priorities to the Pacific: Europe has to assume greater responsibility. We need more co-operation and specialisation of defence industries. In compliance with the Treaty of Lisbon we should launch permanent structured co-operation. There is nothing inevitable about our decline. We still have reserves of strength and areas of excellence that are the envy of the world. But if we are to retain not just influence but leadership, drift is not an option and disintegration would be a catastrophe. Radoslaw Sikorski is Poland’s foreign minister

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