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28 August 2020

What to make of Putin's TV interview?

Yesterday, Vladimir Putin made an implicit threat of military intervention in Belarus as a last resort to help President Alexander Lukashenko. This is consistent with our reading of Russia's foreign policy goals. Putin cannot afford a Maidan-type revolution in Belarus. Once people question the election results there, they will do the same in Russia too. Belarus is part of Russia's
Collective Security Treaty Organisation, and also of the Eurasian Economic Union. It is a military and economic satellite of Russia. Unlike in Ukraine, there is no significant debate in Belarus about closer ties with the EU. However, we think there is a risk, from Russia's perspective, that this might arise if Lukashenko were replaced by Svetlana Tikhanovskaya. 

Putin is not threatening an invasion. Instead, he has formed a special-operations force ready for deployment if needed. Putin told Russia that Lukashenko had asked for this and that he had agreed.

The announcement is clearly intended to intimidate Belarusian protesters, whom Putin referred to as extremist elements using political slogans. At the same time, Putin also acknowledged that the protesters had a case: they wouldn't be out on the street if there were no problems. Putin recognises, too, that Lukashenko's days are numbered. But he wants to keep Belarus close to Russia when Lukashenko goes. 

27 August 2020

Forget the E3. UK's foreign policy already realigning

We should watch out for an important policy shift in UK foreign policy. The UK has already aligned its policy on China away from the position of the EU towards that of the US. The same seems to be happening in respect of Iran. 

Tom Tugendhat, the conservative MP who heads the House of Commons' foreign-affairs select committee, voiced his support for a policy shift. He does not represent the British government, but he is very influential. Moreover, he is not your usual eurosceptic. He has been pro-Remain and worked closely with his German counterpart, Norbert Röttgen. 

In his article, Tugenhat criticises the UK government's decision to align with European allies in the UN security council on August 14, when the UK, France, Germany, Belgium and Estonia abstained on a motion to extend the UN arms embargo on Iran. Only the US and the Dominican Republican voted in favour. Iran's ambassador to the UN noted at the time that the vote showed the US' isolation in international diplomacy.

Tugendhat's point is that, once the embargo ends, Iran will be buying Russian and Chinese air defence systems and position them around its nuclear plants. The International Atomic Energy Agency confirmed that Iran had increased its low-enriched uranium stockpile, and taken other steps towards the development of nuclear weapons. Tugendhat is critical of Trump's diplomacy, but that does not deflect from the situation on the ground in Iran.

We read his comments not so much as pro-Trump, but as an attempt to re-align the UK position with that of the US irrespective of who leads the next administration. Joe Biden was a supporter of the Iran nuclear deal, but as this article explains, the position of his campaign on Iran is nuanced. It is not clear at all that he will simply revert Trump's policy on this issue and re-align with the Europeans. We don't think he will do so, either.

27 August 2020

France and Germany - good cop, bad cop towards Turkey?

France and Italy joined Greece and Cyprus in a military exercise in the eastern Mediterranean, a demonstration of force in the standoff involving Greece, Cyprus and Turkey. Recep Tayyip Erdogan pushed back, saying that Turkey will never make concessions on what they consider Turkish belongings in the east Mediterranean, the Aegean and the Black sea. Erdogan's rhetoric, which strikes a cord with the nationalist vibes at home, is part of the ongoing arm-wrestling with the Greeks over how to enter into negotiations over maritime borders. Tensions are likely to rise, as the Greek parliament prepares to approve a deal over maritime exploitation zones with Egypt which directly challenges a similar Turkish agreement with Libya. 

Germany is still in the mediator role between Ankara and Athens, though it seems vastly overwhelmed with the complexity of this diplomatic mission. Annegret Kramp-Karrenbauer urged eastern Mediterranean countries to reach a fair agreement to resolve regional tensions. France considers its own participation in the naval exercises as complementary to the German mediator role. This view is certainly not shared by the German defence minister, who yesterday told the press that the naval manoeuvres were not helpful in easing the tensions between Greece and Turkey.

26 August 2020

Maas' mission for dialogue between Turkey and Greece

Heiko Maas, Germany's foreign minister, went on a diplomatic mission to Athens and Ankara. What did he achieve? In the press conference after their meeting, both the Greek and the Turkish foreign ministers said they are open to dialogue but rejected each other's conditions. Turkey is open to dialogue but only without any strings attached, while Greece would not want to engage in dialogue under Turkish threat. So long as Turkey continues its exploration of disputed areas while Greece moves forward to ratify its maritime border agreement with Egypt, the chances of a successful mediation is low. Instead, the stand-off will continue with both sides issuing Navtex notifications to demonstrate their readiness to counter each other in the East Mediterranean sea.

Theoretically, no side has an interest in escalating into a full military confrontation. For Turkey the threat of a potential confrontation with the western world is significantly more effective both in its diplomatic bargaining and for rallying voters at home. Greece also can use this threat to test what exactly the EU means when it says it stands in strong solidarity with Greece and Cyprus. What makes the diplomatic process accident-prone is that strongly-worded rhetoric stirs emotions in both countries. 

Maas counts on dialogue to de-escalate, or at least to gain some time for the EU to get its act together. He expects the course of EU-Turkey relationship to be largely decided by the end of the year. Can Germany be the rational broker for a deal between Turkey and Greece? We have our doubts. The rhetorical confrontation is completely alienating for fact-oriented Germans. The FAZ reflects on this by writing that nationalistic emotions are in fact blocking a clarification of maritime borders in the disputed area. 

26 August 2020

Universal basic income - now subject to a vaccine-style test

A German NGO is funding a unique economic experiment that works like a vaccination test: a group 120 people will be given a universal basic income of €1200 per month for three years. The idea is to study what they will do with the money and how the universal basic income changes their lives.

We think such experiments may answer some of the lesser questions about a universal basic income, but not what we really need to know: how will it work on a macro scale? If a universal basic income were to replace the entire social safety net, as demanded for instance by the economist Thomas Straubhaar from the University of Hamburg, the impact would be very different from a scenario where it supplements existing benefits. A universal basic income in a country with a constitutional balanced budget rule like Germany would have to be funded by higher taxes. But Germany also has binding constitutional rules on taxation. So, it is not clear whether the combination of constitutional rules and policy even constitutes a feasible policy.

The NGO behind the experiment has an agenda: it supports the basic income and wants to dispel widely-held prejudices about it. This reminds us of scientific experiments funded by the pharmaceutical or tobacco industry. If the source of funding has an interest in a particular outcome of a study, chances are that the study will be biased in many subtle and not-so-subtle ways. We would be very surprised if this particular NGO concluded that the universal basic income was a thoroughly bad idea in the unlikely event that the experiment sprang a surprise. Remember: no empirical evidence in economics ever led to the abandonment of an economic theory. They exist in a universe of their own.

Our conclusion is that a pseudo-scientific test is the wrong way to go. The universal basic income is first and foremost a political choice, because it is about the redistribution of income. It is not an optimisation problem.

25 August 2020

What should the EU do about Belarus?

The Belarusian security services were striking back yesterday and starting to round up random protestors. We think the Belarusian uprising will end very soon. The return to the status quo ante gives the EU an opportunity to rethink its policy towards the country going forward. When Alexander Lukashenko rigged previous elections and suppressed protests, the EU and the US imposed sanctions. But these failed in the past, and will not succeed this time. If the EU truly wishes to push democratic reforms it should play on its strengths, trade and the single market, to create new leverage.

The European Council's assertion that it does not recognise Belarus’ election results is meaningless. So is the EU foreign ministers' threat of sanctions. As we have noted before, there is no bite behind the bark. The EU does not have the policy instruments to push for real change in Belarus in the short run.

The EU first imposed sanctions against Belarus in 2004, when it targeted five people believed to be responsible for the disappearance and presumed murder of two opposition politicians. Additional sanctions came in June 2011, after a wave of post-election violence. EU funding to the country fell from €185m between 2007 and 2013, to less than €90m in 2014-2017 due to deteriorating bilateral relations. The EU lifted sanctions against 170 individuals and four companies in 2016, following a relatively peaceful election process. Sanctions have done nothing to unseat Lukashenko or advance reform efforts.

We believe the EU should try a new approach by building on efforts undertaken through the eastern partnership, and opening its markets to more Belarusian goods.

The EaP is a joint initiative between the European external action service and six eastern European countries: Armenia, Azerbaijan, Belarus, Georgia, Moldova, and Ukraine. Created in 2009, it is focused on trade, economic strategy, and travel agreements. Trade is the most important of these. As Dzianis Melyantsou at the EUISS writes, joining the EaP required a remarkable balancing act from Belarus. After accepting Brussels’ invitation, the country made strenuous diplomatic efforts to reassure Moscow that its participation did not represent a re-orientation towards the west. Rather, it was seeking to eliminate trade barriers with the EU.

These plans hit a snag in 2011 when Belarus joined the Eurasian economic union, a Russia-led, EU-esque body with five member states from eastern Europe and central Asia. Membership in this union prevents Belarus from signing a free-trade agreement with the EU. Nonetheless, total trade in goods between the EU and Belarus has expanded considerably since the EaP launched, from €7.5bn in 2009 to €10.9bn in 2019. This is not peanuts: Belarus’s nominal GDP was $63.1bn in 2019.

But the benefits have been one-sided. Delayed negotiations and lack of clarity on export standards have prevented Belarus from expanding key exports like agri-food to the European market, even as the EU significantly increased its exports to Belarus. In fact, the EU has recorded a sizeable trade surplus with Belarus for over a decade. The surplus rose by 35% yoy in 2019 alone to hit €2.6bn, and between 2009 and 2019, the EU exported €32.3bn more goods to Belarus than it imported.

Melyantsou argues that expanding and diversifying its export base would help Belarus offset Russian influence, meaning the issue is bigger than trade flows – it is also about economic resilience. The EU itself recommended something similar in 2015, when the EEAS wrote a report calling for the abolition of textile import quotas and, significantly, suspension and lifting of sanctions.

Sanctions against Russia have failed to curb Vladimir Putin’s influence. They have been, and will continue to be, equally fruitless against Belarus. We’ve said before that the threat of sanctions may be more effective than sanctions themselves in the long run. But threats will not work if the targeted country has nothing to lose. Allowing more Belarusian goods into the single market would show that there is value in strengthening ties with the EU, and create an incentive to maintain those ties.

21 August 2020

Let's turn the clock back twenty years

We very much liked Tom McTague's article in the Atlantic, in which he makes the point that the golden age of western liberal capitalism was nothing of the kind. He compares the period from 1990 until about 2008 with the Roman empire just before decline set in. Both were beset by complacency. The seeds of their destruction had already been planted. McTague argues that the last thing the world needs is the illusion of a return to the status quo ante. On the day when Joe Biden accepted the Democratic nomination, this is a useful warning.

McTague's perspective is American, but we find the same complacency in Europe. The prevailing narrative is that Brexit and the little local disturbances in the eurozone will eventually go away. So long as politicians listen to economists and scientists, all will be well. That narrative sees Brexit not so much as a position to disagree with but as an illness of the mind. The patient will eventually come to their senses.

Eurointelligence readers will know that we have tried to argue against this narrative. Our view has been that financial globalisation was a deeply flawed process. So is European integration with a single currency but without a political union. The last thing Europeans need is a return to the status quo ante before the monetary union. But the current state is equally unsustainable. The lessons of the last ten years are: that there must be different stages of integration for different countries; that European integration cannot rest primarily on producer interests; that economic policy can only follow rules if supported by consensus; and that the whole does not equal the sum of the parts. That is not what people thought in the 1990s. 

20 August 2020

Muscle flexing in the East Mediterranean

The next weeks ahead of the EU leaders' summit on September 24/25 will be crucial for the EU's relationship with Turkey. 

Greece is lobbying on all channels now. Kyriakos Mitsotakis insisted yesterday that Turkey should stop its provocations and return to the negotiating table. He added that Athens and Ankara should refer their issues to the International Court of Justice (ICJ) in The Hague if dialogue won't yield any results. After a conference call with EU leaders, Charles Michel said there is full solidarity with Greece and Cyprus, and that all options are on the table. Whether they can agree on a joint reaction to Turkish provocations is less clear, though. Turkey can count on European divisiveness and get the most out of the situation while keeping up the pressure in the east Mediterranean. This is not about oil exploration as such, but to demonstrate that nothing in the region can happen without Turkey. Turkey seeks a controlled escalation, not a military confrontation. It will be up to Greece and the EU to define how far they can go and what price they settle for to achieve de-escalation.

Greece is most alarmed about the presence of Turkish military vessels between Crete and Cyprus. The Oruc Reis, sent out for seismic research, continued its activities this week in the disputed area accompanied by seven navy vessels according to satellite images posted on twitter by @ImageSatIntl. The Navtex informing other ships of their presence in this area expires on August 23. But this will not stop Turkey demonstrating its claims in the eastern Mediterranean. Last Saturday they issued a new Navtex for another ship called Yuvuz to explore energy resources off the shores of Cyprus. The government also announced that a third ship, the Kanuni, will be sent to the east Mediterranean. The pressure continues while at the same time their negotiator signals that they prefer dialogue. The question is under what conditions. 

The dispute over maritime borders has been going on for decades. Legally it relates to the UN convention on the law of the sea, which was backed by 170 states including all EU member states in 1982, but not by Turkey. According to this convention states have exclusive exploitation rights in a zone ranging up to 200 nautical miles or 370km from their shores. Dozens of Greek islands in the Aegean are hundreds of miles away from the Greek mainland but in sight of the Turkish coast line. The Turkish government refuses to accept the 200 nautical miles rule for those islands.

The negotiators have one month to find a way forward ahead of the EU summit with the threat of EU sanctions in their toolbox. Passing the subject on to the ICJ in The Hague is another threat of isolating Turkey. The question is whether at this point Recep Tayyip Erdogan still cares. For the EU to be effective, France and Germany need to find common ground first. Today's meeting between Angela Merkel and Emmanuel Macron is an opportunity to straighten out the differences between the two on how best to respond to Erdogan. We are not that optimistic, as it exposes deep-seated differences in foreign policy. 

19 August 2020

US Senate threatens German port operator with annihilation

The Germans have by-and-large not taken very seriously the threat of US sanctions against companies involved in Nordstream 2. The overwhelming expectation in Berlin is that the project will eventually go ahead. What is perhaps not fully appreciated in Berlin is that a change in the US administration won't make any difference to this whatsoever. The main sources of transatlantic tensions have nothing to do with Donald Trump but with a bipartisan majority in the US Congress.

FAZ has an interesting article by two German lawyers who explain how secondary sanctions work through network effects. Even if a company has no direct US business, sanctions would apply to anybody who deals with it, and to anyone who deals with someone who deals with such companies and so on. This applies to suppliers, but also to customers and especially to banks. This constitutes complete commercial isolation, which is highly effective in a networked global economy. The logical response for the EU would be to do the same, but those who are overdependent on goods trade find this unbearably hard to do. 

The concrete case in Germany concerns the Sassnitz port operator, which provides logistical support for the Nordstream 2 project. The company has now received a letter from US Senators threatening it with devastating consequences if it continues to defy US request to cease work for Nordstream 2. Even though the authors of the FAZ article consider the US behaviour incompatible with international law, they acknowledge that the so-called list of specially-designated nationals and blocked person, also known as SDN list, is a highly effective tool. If you get on that list, you are essentially cancelled. There is no appeals process. 

We disagree with the authors about their final conclusion: a call on Berlin and Brussels to protect companies subject to SDN-list threats. The affected companies don't need a bridging loan or even a subsidy. The sanctions kill their business model. The only effective response in our view is retaliation in kind: direct sanctions targeted at US companies active in Europe. And, at the same time, addressing the issue of an over-dependence on exports.

18 August 2020

A new wave of Covid-19 measures

Covid-19 cases are rising again across Europe, and so are the discriminatory measures to contain it. About 19 European countries have reached the critical threshold of more than 20 new infections per 100,000 over the past two weeks. The summer is not even over yet. Autumn is still far off with its potential for a second wave. Containing infections is re-emerging as a public policy priority, overriding the desire for a return to normality. Member states are already ramping up efforts to contain the spread of the virus. Travel restrictions and quarantines are being imposed, and testing regimes extended.

We are far from seeing a closure of borders as happened mid-March, but a growing number of countries are imposing various degrees of restrictions on cross-border travellers. The most spectacular was the UK giving travellers only 30 hours to return home from France and the Netherlands or go into quarantine for 14 days. In Germany, traveller coming from Spain except the Canary Islands will have to go into quarantine. 

The Baltic states are the strictest of all, imposing a 14-day quarantine on travellers from practically all other EU member states. Belgium, unsurprisingly, managed to end up with the most complicated rules of all, imposing travel restrictions by region rather than country. Romanians are the worst affected, as they seem to be on everybody's list for travel restrictions while they themselves impose restrictions only on travellers from Spain. 

Some smaller countries opted for more testing rather than self-quarantine. In Bulgaria everyone entering the country has to submit to a test, and could be turned away if the test comes back positive. Austria is testing everyone entering by car. But testing is expensive and staff-intensive. It is not readily available in any consistent way in larger EU countries like the UK. The new rules and the uncertainty they create will continue to discourage cross-border travel. They are also far from being coherent. Travellers from countries like Spain are to self-isolate in Belgium even if Covid-19 infections are much higher in cities like Antwerp. 

Those unilateral rules also risk becoming part of a reciprocity fight in diplomatic relations between EU member states. France immediately reacted to the British quarantine rule by promising to do the same in return. The logic is at the state level, with no consideration for the impact on the French who would then be forced to rush back home. This episode is a cacophony of uncoordinated measures that could become a source of new disturbances within the EU once again.