I was really glad to read this Opinion piece by Andrew Moravcsik,  Director of the European Union Program at Princeton in this week’s Newsweek, as it draws a neat conclusion on some of the stories I’ve brought up in this Blog over the last number of months. My very first blog for the FPA was entitled “Will economic protectionism divide the EU” back in February. Thankfully Moravcsik’s simple conclusion is that economic protectionism hasn’t happened and the economic crisis has actually further unified the Union.

The European Union has often acted in the past as the whipping boy for Member State politicans for  the effects of some of its unpopular but necessary policies. Therefore it is actually qute unbelievable that that the catostrophic effects of the worst economic crisis since the Great Depression has not weakened the Union and has actually had a unifying effect.  Many factors have affected this, including the radid informal March summit (on which I blogged)  where European leaders had to face each other and, in the process, collectively face away from intra-EU protectionism. However, a greater conclusion about the European Union itself must be drawn. As Moravcsik says “the crisis taught Europeans that if they want to protect their prosperity, there is no alternative to tighter policy coordination” - it appears that the EU has proved that it has an undeniable underlying logic for Europeans and it must be concluded that it will be providing solutions for economic, social & political problems for many years to come.

The EU's underlying logic means it will be around for years to come

When the French Finance Minister says that the EU needs to cooperate with the US,  that’s when you know the economic crisis is really devestating! Perhaps that’s a bit unfair to the French, as Ms. Christine Lagarde in part of the most pro-US Government  in French history, under Americophile President Sarkozy. But it would also be unfair to Ms. Lagarde who has spent years working in a US company before entering government. She made her remarks at her acceptance of the Transatlantic Business Award from American Chamber of Commerce. However, she probably did more for US perceptions of the Franch in her appearance on the Daily Show with Jon Stewart a number of months ago (it helps that her english is absolutely perfect).  In her award-acceptence, she stated that the EU & the US could share common ground on major economic issues and stated that ties had to rebuilt after a period of strain, much like a marriage.

 Christine Lagarde, French Finance Minister.

Next Wednesday negotiations will begin on a possible EU/Canada trade deal. A study has estimated that the deal  could bring real income gains of €20billion annually for both partners. Which only makes the absence of a similar EU/US deal more conspicious. In fact it is the increased protectionist feeling in the US that has blocked momentum toward such a deal. The EU already has a free-trade deal with Mexico, so if the Canadian deal suceeds the US will be at a distinct trade-disadvantage with the EU, in comparison to its nearest neighbours.  This matters for the US because the EU is its biggest export market. Traditionally in favour of such deals, Frank Vargo of the US National Association of Manufacturers has stated that it would be a mistake for the Obama administration to join negotiations between the EU and Canada because the groundwork has not been laid in Congress or among key stakeholders. This at a time when free trade deals with tiny Panama, Colombia & South Korea are currently stalled in the US Congress.

Indeed, the Financial Times has stated that stated that fears of such protectionist forces in its biggest export market have pushed Canada to negotiate this deal. The US, as teh traditional cheerleader for free trade, risks being left behind in a new global trend towards free trade to asuage the worst effects of the financial crisis.

 The future for free trade?

(May 13th : Here, the Canadian Prime-Minister suggests that Canada could become the EU gateway to North American markets, offering a more stable partner than the US).

Timothy Garton Ash asks whether Europe is divided and weak at the G20.  As I blogged before, there have been talks at an EU level between the participating G20 nations (UK, France, Italy & Germany) to try to come to a common position, but Ash argues that the lack of a strong united front will lead to a a G2 of the US & China.

The Friday conclusions of the European Council (the meeting of all EU Heads of Government or Heads of State) contained an an almost audible tone of defensiveness. The document was at pains to reiterate the huge amounts of money Europe was spending on economic stimulus. Only one sentence into the document and it read “Reviewing the considerable fiscal stimulus now being injected into the EU economy (over €400 bn)…”

Europe has been feeling pressure, most especially from the US administration, to contribute in a bigger way to global efforts at recovery through economic stimulus. So far, according to the International Labour Organisation, who have been tracking stimulus expenditure, 30 countries have announced stimulus plans which amount to 3.16% of global GDP (detailed word doc with figures here). The major plans include China’s €586 billion and the $700 billion Obama Stimulus plan (and 2 previous Bush plans which together add to almost a trillion dollars). As an aside, the whole debate on whether stimulus will actually work is considered by the Presdent of my alma mater, DCU here.

In contrast, the headline Stilulus Plan that was agreed at the European Council last Thursday was only €5 billion, leading to the below cartoon in the Irish Times which reflects a perception that the EU is not pulling its weight in reviving the Global economy.

Martin Turner of the Irish Times shows how the US see the EU’s Stimulus Plan (Irish Times).

French President Nicolas Sarkozy showed that policy divisions lie behind this disagreement when he stated “the problem is not about spending more, but putting in place a system of regulation so that the economic and financial catastrophe that the world is seeing does not reproduce itself. The Wall Street Journal identifies the undercurrent of this division between the US & Europe

For continental Europe, focusing on underregulation helps deflect blame for the crisis to the more lightly governed financial markets of the U.S. and U.K. The American push for more stimulus, in turn, shifts the blame to Europe for being too slow to respond to the ongoing economic slump.

The US is pressurising Europe to increase spending nonetheless and as I blogged before Obama sent this message with the Irish Prime-Minister from St. Patrick’s Day celebrations in the White House last Tuesday. Also last Tuesday Paul Krugman, an American economist and Nobel laurate was in Brussels expressing his concerns about the low levels of expenditure of the European (and the US) stimulus plans. Guenter Verheugen, the Enterprise and Industry Commissioner in the EU responded to Krugman’s statement, saying that “We think it is a little bit too early to judge whether the stimulus packages which we have produced are working or not.” For Verheugen, a German, an added concern is that member of the Euro-zone (those EU states that use the Euro) do not to exceed, 3% of GDP in debt which is part of the criteria for being part of the Euro-zone. The German fear, as laid out well by the Wall Street Journal is that “other countries will splurge and end up with more debts than they can repay. Then, the thinking in Berlin goes, German taxpayers will have to bail out spendthrift Italians and others.”

That is not to say that Europe is not contributing to global stimulus plans. As the EU made clear in the European Council conclusions it will be spending approximately €400 billion over 2 years, that is 3.3% of EU GDP which is roughly in line with the global norm of 3.16% mentioned above, the EU component of this spending is approxmately €30 billion. Obama’s plan on the other hand is 2.5 %  of US GDP spread over three years.

Europe also appears to have a different view of  how Europe can contribute to recovery. The European stimulus funds are  targeted to generate “new investments, boost demand, create jobs and help the EU move to a low-carbon economy”. The “global” aspect of this is the pledge to give €75 billion more to supplement the IMF’s funds contingent on reciprocation from the US/China.

During the summit, leaders expressed satisfaction with how Member-States had used spending plans to ameliorate the worst parts of the Global recession. Chancellor Merkel said in the German Parliament last Thursday that her nation “was doing more than most to support the world economy through higher spending and lower taxes”. She ended the summit by saying that “A competition to outdo each other with promises will not calm the situation” - Europe certainly looks like it will not be attempting to raise the stakes anytime soon.

European Commissioner Charlie McCreevy, has delivered a stinging criticism of the financial regulation system (over which the Commission, incidentally has significant oversight power). He accused them of having tolerated relaxed lending practices and the accumulation of unsustainable debt by households, individuals and companies. Mr. McCreevy said there would soon be Commission action regarding the regulation of hedge funds and private equities as well as limitation of Executive pay.

Internal Market Commissioner Charlie McCreevy
(Postscript on 28th Feb: I should have mentioend the High-Level Group on Financial Supervision in the EU, which was chaired by former Bank of France governor Jacques de Larosiere, published on Wednesday which made 31 recommendations on how to strengthen supervision of financial institutions and markets. You can read more details here. )

“EU leaders yesterday (22 February) agreed to back oversight of the world’s financial markets and products, including hedge funds, calling for a clampdown on tax havens as they forged a common position on global financial reform ahead of a summit of the G20 group of leading industrial powers in April.” (Euractiv)

One of the oddoties of the of the European Union is that each 6-months one Member-State takes over the running of one of the three main Institutions of the Union. Fom January to June this year, the Czech Republic will take over the running of the Council which brings together representatives of Member-States.  and whose approval is needed for any EU laws to be passed. A good comparison is the Senate in the US, however in the Council,  the Government represenatives meet secretly (this will be changed in the Treaty of Lisbon so that Council session when voting on legislating takes place will be made public, though sadly the deliberations and the exciting deal-making stuff will still remain secret).

Logo of current Czech Presidency

The six-monthly Presidencies often brings strange combinations to the head of EU policy-making, with ardent pro-EU integrationists being forced to take decisions with Eurosceptics. This has come to pass in spectacular style with the current Presidency of the Czech Republic. At the beginning of their Presidency they announced that their motto was that they would “sweeten europe” however, the same saying in Czech also means “we’ll give Europe a taste of its own medicine”. The Czechs then unveiled an art instillation called “Entropa” by native artist David Cerny which had not-so-flattering cartoon sculptures of all 27 Membr-States, including Bulgaria as  a toilet, Romania as a Dracula theme-park and France as a country totally shut down as it is on strike.

France is on strike: David Cerny’s “Entropa”

These incidents have, at least, inserted some life into the normally banal Presidency and have forced the EU to ask questions about itself. On Thursday last at the European Parliament, many many uncomfortable quesitons about democracy and accountability were posed by the Eurosceptic Czech President Václav Klaus resulting in boos and walk-out by some of the Parliamentarians when he compared the EU to soviet-dictatorships. He didn’t exactly try to reach-out to them when he later denied the legitimacy of the elected Parliament (he siad this to 750+ parliamentarians who will be facing an electorate of 500 million in June!).

Czech President Václav Klaus

Klaus believes that Czech Republic is better off without the EU and that it should instead concentrate on liberalisation and deregulation as a solution to current difficulties. The views of Klaus are greatly at odds with that of Václav Havel, the hero of the Velvet Revolution who brought the Czech Republic into the European Union. It’s also difficult to see how a small country like the Czech Republic can prosper and thrive in the liberalised markets Klaus perscribes without strong co-operation with its neighbours to mantian these markets and defeat the worst excesses of free-capitalism. Whether he likes it or not, the policies of Klaus will likely give rise to more rather than less integration in teh European Union and around the world.

A study carried out by an Economist in the European Investment bank says that Europe may never catch up with the US regarding spending on Innovation and research. The aim of the Libson Agenda to spend 3% of GDP on research by 2010 also looks like it may not be met.

The EU is beginning to fret about recent economic protectionist impulses by Member-States and the Czech Republic has decided to act, as they currently hold the 6-month EU Presidency. They have called a special summit of EU leaders for later this month to discuss recent Member-State “protectionist steps and statements”.

This is especially a response to moves and calls by French President Sarkozy to repatriate production of French cars from Eastern Europe (for example countries like the Czech Republic!). UK Prime-Minister Brown also had a protectionist moment in 2007 when he called for “British jobs for British workers”, one year later this has caused industrial unrest in England where workers have taken him at his word and demanded that British workers be given preference in employment, something that is illegal under European law.

What Prime-Minister Brown actually meant is a matter of debate, but there is no doubt that this this comes at the most unfortunate of economic times for the EU. There are already criticisms that the EU has been largely absent from the debate on the Economic crisis and Sarkozy and German Chancellor Merkel have called for co-ordination measures to be discussed at the special summit called by the Czechs.

These moves are to protect the EU’s precious Internal Market (often referred to as the Single Market) which is the cornerstone of the EU and guarantees the free movement of people, goods, services and capital in the EU. If this most basic and successful aspect of the EU starts being eroded, there is little chance that the EU can continue to credibly assert itself as an economic actor.

In a related (and somewhat surprising) move, normally conservative and insular Switzerland (which is not a member of the EU) agreed in a Referendum yesterday to keep their labour-market open to all countriesof the EU, specifically extending that right to the new EU countries - Bulgaria & Romania. By doing this, it rejected right-wing fears of waves of immigration decending on Switzerland from these countries. It also retained its special economic relationship with the EU. A positive sign in these worrying times for EU freedoms.