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Policy Insight | Balkan and Eastern European Comparisons. Building a New Momentum for the European integration of the Balkan and Eastern European associated states | CEPS

This study, prepared by CEPS, brings us a comparative picture of progress among the Western Balkan and EaP EU associated countries. It reveals solid and converging similarities of development and achievements in the EU south-eastern and eastern neighbourhood region.

It raises new questions about EU policy convergence in the region. Are we ready to deploy EU Western Balkan integration instruments to the EaP countries that are ready to accept them? Will the EU be ready to respond in like manner and with the same policy instruments to the two very similar converging groups of countries aspiring to the same strategic goal of EU membership? Now is the time to answer these questions.

This study reveals the essential similarities between these groups of countries and offers bold new ideas for how the EU can incentivise Trio countries further with EU instruments. Incentives, or benefits, are suggested that can work not only for the Western Balkan region, but also for the Trio of EU-associated countries. A range of models for building a New Momentum for closer association and integration with the EU or, as I call them, the EU antechamber membership models, is discussed, along with related conditions and policy benefits. The EU has a historic and geopolitical obligation to assist our partners on their path towards full membership of the EU.

Find the full publication here

 

A brown or a green European Central Bank? by Dirk Schoenmaker | Bruegel

The European Central Bank portfolio is skewed towards the brown economy, reflecting a bias in the market. Can and should the bank deviate from the market allocation?

Climate change is a hotly debated issue in the European Central Bank’s ongoing strategy review. While ECB president Christine Lagarde and her colleagues at the centre favour robust tools to tackle climate change, most national central bank governors (like their colleagues at the US Fed) seem to be against including climate considerations in monetary policy. The core question is: should the ECB continue to accommodate the bonds and bank loans of carbon-intensive companies as assets or collateral, or should it reduce them?

Facts

In its quantitative easing programme, the ECB buys corporate bonds in proportion to their availability on the market. Carbon-intensive companies, such as oil and gas companies and car manufacturers, are typically also capital intensive and thus issue more corporate bonds. By taking assets proportional to the market, the ECB’s asset portfolio is skewed towards high-carbon companies relative to low-carbon companies. The carbon intensity (defined as carbon emissions divided by sales) of the ECB’s corporate bond portfolio is 57 percent higher than the average carbon intensity of EU companies. This large carbon bias makes the ECB a brown central bank.

By accommodating high-carbon corporate bonds, the ECB improves the liquidity of these bonds (just as it improves the liquidity of low-carbon companies’ bonds) thereby lowering the cost of capital for high-carbon and low-carbon companies equally.

Mandate

Could the ECB address its carbon bias? There are broadly speaking three routes. First, the ECB’s primary mandate is price stability. If the ECB does establish that climate change has an impact on future inflation (eg through rising food prices due to droughts), it should be vigilant and prepare an appropriate monetary response to ease potential inflation pressures. Although the inflation impact of climate change seems to be remote, it is already part of the ECB’s monetary policy work to monitor this. Moreover, better modelling of the climate risk impact on monetary policy does not address the carbon bias in the ECB’s monetary policy operations.

Second, the ECB’s legal mandate states that it “shall support the general policies in the EU, without prejudice to price stability”. This refers to the ECB’s secondary goals. The transition to a low-carbon economy is a cornerstone of the EU’s general economic policies. The European Green Deal has a target of curbing carbon emissions by at least 55% by 2030.

The ECB can support the EU’s climate policy by cutting carbon emissions in its asset and collateral portfolio for monetary policy purposes. This second argument is the most compelling, especially were the European Parliament and Council to declare that the EU’s climate policy has priority within its general economic policies over the next decade(s).

Third, the ECB could include a climate risk assessment in its monetary policy operations. High-carbon companies are more exposed to rising carbon taxes, which increases the risk of write down for these companies. The haircut on collateral of high-carbon companies can then be increased. Again, risk assessment is already included in the ECB’s collateral framework. Moreover, climate risk is a major issue for the ECB’s supervisory and financial stability tasks. A climate stress test of the Dutch banking sector, for example, indicated that losses could amount to 4%-63% of core capital for a €100 to €200 per ton carbon tax.

In sum, the climate change debate in monetary policy is first and foremost about the ECB’s allocation of monetary reserves to high-carbon companies. The question is then which approach could reduce this allocation?

Tilting

There are several ways to reduce the over-allocation to high-carbon companies. These range from excluding the most carbon-intensive companies or dealing exclusively with low-carbon companies to tilting the portfolio towards low carbon. We developed a methodology to tilt the asset and collateral base for monetary policy operations towards low-carbon assets. For assets, tilting would relate the relative share of a company’s securities inversely to its carbon intensity. The ECB would then over-weight low-carbon companies and under-weight high-carbon companies in its asset portfolio. For collateral, an additional haircut could be directly related to carbon intensity. The ECB would then apply an additional haircut to high-carbon assets in its collateral framework.

A medium tilting approach can reduce carbon emissions in the central bank’s corporate and bank bond portfolio by over 50%, offsetting the current carbon bias. Our paper shows how this can be done without unduly interfering in the smooth conduct of monetary policy. A key element of a tilting approach would be that the ECB would remain present in the entire market for eligible assets, which guarantees that monetary policy gets into “all of the cracks” of the economy. Tilting only increases the share of low-carbon assets at the expense of high-carbon assets, but does not exclude high-carbon assets.

So, a first step in tilting would turn the ECB from a brown central bank into a carbon-neutral central bank. A follow-up step could turn the ECB into a green central bank, aligned with the EU’s emission reduction targets.

Concluding

If the ECB were to take on the challenge of greening its monetary policy operations as a secondary goal, it would be of utmost importance to do it fully independently. The ECB could adjust the eligibility criteria for assets and collateral in a general way, using a transparent and objective indicator, such as carbon emissions. The ECB should refrain from favouring specific projects or setting sectoral targets, which are issues for government policy.

Recommended citation:

Schoenmaker, D. (2021) ‘A brown or a green European Central Bank?’, Bruegel Blog, 24 February

Debt cancellation by the ECB: Does it make a difference? | Europp – LSE Blog

Featured image credit: European Central Bank (CC BY-NC-ND 2.0)

Earlier this month, several major newspapers published a letter from more than a hundred economists calling for the ECB to cancel the government debt it holds. Paul De Grauwe argues that even if the ECB did cancel this debt, nothing of substance would change economically for national governments.

The recent publication of a proposal made by more than a hundred economists to cancel the government debt held by the European Central Bank has reignited the discussion about the role of the central bank in supporting the government. The question that many ask themselves is whether this proposal is to be taken seriously. In order to answer this question, it is good to go back to the basics of fiat money creation.

When the central bank buys government bonds, say in the context of quantitative easing, it substitutes interest bearing government bonds for monetary liabilities (the money base typically taking the form of bank reserves). In the old days, these liabilities of the central bank were not remunerated. For around the last ten years, however, central banks have fallen victim to lobbying by the banks and have started to remunerate these bank reserves. Nothing in the statutes of the central banks forces them to do so, and they could quickly reverse this policy. In fact, over the last couple of years major central banks have been applying negative interest rates on these bank reserves, indicating how easy it is to reverse the remuneration policies.

At the moment when the central bank buys government bonds, it creates “seigniorage”. This is the monopoly profit arising from the creation of money. This “seigniorage” is transferred to the national government budget in the following way: the government pays interest to the central bank which now holds the bonds, but the central bank returns this interest revenue to the government. Thus, when the central bank buys the government bonds, de facto, the government does not have to pay interest any longer on its outstanding bonds held by the central bank. The central bank’s purchase of government bonds is therefore equivalent to debt relief granted to the government.

What happens when the government debt held by the central banks is explicitly cancelled? I will argue that economically nothing of substance happens.

As long as the government bonds are on the balance sheet of the ECB, these bonds do not exist anymore from an economic point of view. This is so because, as I argued earlier, when a government bond is on the central bank’s balance sheet, a circular flow of interest payments is organised from the national treasury to the central bank and back to the treasury. So, the burden of the debt for the national government has become zero. The central bank can cancel that debt (i.e. set the value equal to zero) thereby stopping the circular flow of interest payments. This would not make a difference for the burden of the debt. Put differently, the profit of the money creation has been transferred to the government at the moment of the purchase of the bonds by the central banks.

What happens when the bonds that are kept on the balance sheet of the central bank come to maturity? The ECB has promised that it would buy new bonds to replace those that come to maturity. Again, no difference with outright cancellation. Thus, as long as the government bonds remain on the balance sheet of the central bank, it does not make a difference from an economic point of view at what value these bonds are recorded on the balance sheet of the central bank. These can be recorded at their face value, their market value, or they can be given a value of zero (debt cancellation): from an economic view this does not matter because the government bonds on the balance sheet of the central bank cease to exist.

What matters is the size of liabilities of the central bank. This is the money base that has been created when the bonds were purchased. As long as the money base is kept unchanged, the value given to the government bonds on the balance sheet of the central bank has no economic consequence. If these bonds were to be set equal to zero (so-called debt cancellation) the counterpart on the liabilities side of the central bank would be a decline in equity (possibly becoming negative). But again, this is of no economic consequence. A central bank issuing fiat money does not need equity. The value of equity on the books of a central bank only has an accounting existence.

Thus, debt cancellation is fine, but it is equivalent to no-debt cancellation as long as the bonds are held on the balance sheet of the central bank. The problem may arise in the future if inflation surges and if the ECB wants to prevent the inflation rate from exceeding 2%. In that case it will have to sell the bonds, so as to reduce the money base (and ultimately the money stock). If the bonds are still on the balance sheet (because they have not been cancelled) the central bank will sell these. As a result, they will be held by the private sector and the burden of the debt of the governments will increase because the interest paid on the bonds will go to private holders who do not return it to the treasuries.

If the bonds have been cancelled, they cannot be sold anymore and the central bank will have to reduce the money base in another way. It could issue its own interest-bearing bonds in exchange for the outstanding money base. But this means that the central bank will have to pay interest in the future. As a result, it would transfer less profit to the treasuries. Again, no (or little) difference with outright cancellation.

The conclusion here is that if the ECB wants to keep inflation at 2%, it does not make a difference whether it cancels the debt or not today. In that case if inflation surges beyond 2%, it will have to reduce the amount of outstanding money base by either selling government bonds or issuing its own interest bearing bonds, thereby taking back the seigniorage it granted to the government when it bought the bonds.

Things would be different if the ECB were to allow more inflation in the future; in other words, if it decided that it will do nothing when inflation exceeds 2%. Then it would not have to sell the bonds (or issue its own bonds). In that case, the higher inflation would reduce the real value of the government debt that is not on the balance sheet of the central bank, and that was issued during the last few years at very low interest rates. The government would gain. But note again that this gain would accrue to the government whether or not the debt was cancelled.

Who would pay for this inflationary policy? The investors. Nominal interest rates would increase, thereby reducing the price of the long-term bonds that these investors were foolish enough to buy at negative or zero interest rates.

Two last comments. First, the hundred-plus economists proposing debt cancellation have created the illusion that debt cancellation reduces the debt and therefore allows governments, unburdened by old debt, to issue new debt to finance great projects. I have argued that the debt relief occurs at the moment of the bond purchases by the central bank and not when the central bank puts the value of these bonds equal to zero on its balance sheet. The illusion is to think that you can have debt relief of the same debt twice.

Second, except if at the moment of the debt cancellation governments force the ECB to cancel its commitment to an inflation target of 2%, future increases of inflation will necessarily force the ECB to reduce the amount of money base thereby undoing the debt relief it organised when it bought the debt. Thus, as long as the ECB remains committed to its inflation target, explicit debt cancellation is likely to only reduce the debt burden temporarily. Only if the ECB reneges on its inflation commitment will debt cancellation permanently lower the government debt burden. But somebody will then pay for the inflation tax. One may still argue, however, that some more inflation is worth the price for permanently reducing the government’s debt burden. Maybe this is what the hundred-plus economists had in mind.

Next Generation EU: How the EU’s Covid-19 Recovery Fund should be implemented | LSE Europp Blog

How can the resources made available through the EU’s Covid-19 Recovery Fund be used most effectively? Drawing on a new study, Riccardo Crescenzi, Mara Giua and Giulia Sonzogno write that it will be necessary for national governments to mobilise resources through the involvement of relevant stakeholders. To reduce the probability of implementation delays, projects should bypass regional governments in those states where delays are more likely, with citizens given direct involvement in the process through participatory procedures led by central governments.

The stability and prosperity of the European Union hinges on its ability to provide timely and effective measures to repair the damage caused by Covid-19 and prepare a better future for coming generations. Member states are now looking to the EU to provide coordinated answers and solutions to their citizens’ plight through its ambitious multi-billion euro recovery plan, also known as Next Generation EU. The use of common resources to foster recovery in all member states offers a unique opportunity to reinforce cohesion, resilience, and transformation in the EU.

However, the value added by EU membership is increasingly assessed in relation to the timeliness and effectiveness of public choices. In a recent statement in front of the European Parliament, Christine Lagarde (ECB President) indicated that “it is essential that the Next Generation EU funds are disbursed quickly and used to support structural reforms and growth-enhancing investment projects.” If Next Generation EU efforts to foster an inclusive recovery prove untimely or ineffective, Euroscepticism will be the natural answer for dissatisfied EU citizens.

Therefore, a key question for EU policy making is: which difficulties might hamper or delay the implementation of Next Generation EU? How can they be mitigated? These questions are relevant for all EU member states, but they are particularly pressing in those states that have a long history of implementation delays and slow absorption of EU resources. These states are often – as in the case of Italy – among the largest prospective recipients of Next Generation EU funds. Therefore, their failure to implement the plan in a timely manner would have major implications for the credibility of the entire EU-level initiative.

Predicting success

In a recent study, we addressed precisely these questions through an evidence-based approach to EU policy design and implementation. Our study looks at EU Cohesion Policy as a laboratory to explore what types of actions and projects, in principle, might be able to trigger the quickest response to Covid-19.

Since the 1980s, the EU’s Cohesion Policy has mobilised over 300 billion euros in seven-year budget cycles and its objectives and tools are very similar to those outlined in Next Generation EU. From its very inception, Next Generation EU has been associated with EU Cohesion Policy in public discourse, and the very first recovery actions promoted by the Commission were deployed under the regulatory and financial framework of Cohesion Policy in March 2020.

Credit: Shutterstock

By leveraging unique administrative data on all individual projects funded by EU Cohesion Policy for the 2014-2020 programming period in Italy, we identified those projects that more closely resemble the objectives, functions and nature of future Next Generation EU interventions. We also uncovered the characteristics of these projects that are systematically associated with timely implementation. This makes it possible to ‘predict’ what types of projects – based on recent practical experience – are more likely to offer timely and concrete results while serving the new overarching objectives of the EU recovery plan. If timely implementation is not a sufficient condition for a successful intervention, time delays will certainly be part of any assessment of the initiative that researchers and citizens will be pursuing in the future.

This analysis makes it possible to depict the ‘ideal’ profile for Next Generation EU projects that have the capacity for prompt implementation. We can identify characteristics to be replicated (those associated with a lower probability of delays) or avoided (those associated with higher probability of delays) in order to provide projects with a timely implementation (as a precondition for a positive impact).

The ideal profile for Next Generation EU projects

Next Generation EU projects should be developed by the central governments of each member state in close cooperation with the EU and with the direct non-intermediated involvement of stakeholders and citizens active on the ground. Where possible, projects should be led by citizens with precise objectives and responsibilities (when beneficiaries are not personally visible and well-identified, e.g. in the case of regional public bodies, a lack of commitment and accountability can prevent success).

Projects that require multiple beneficiaries to work in collaboration with each other are not recommended, and neither are projects that require the coordination of multiple territorial areas in their implementation. Collaborations between different actors and/or different jurisdictions, identified as a tool for boosting networks, learning proximities and knowledge spillovers, can be effectively pursued at a later stage, when project implementation is already consolidated.

In translating resources into projects, it is crucial to look for a perfect match between the supply and demand side of the policy: central government should engage in a fruitful direct dialogue with stakeholders from the very beginning of the policy design process. The overarching EU-wide objectives of Next Generation EU should be kept aligned with the genuine, contemporary needs of the local economy through well-designed, centrally-managed participatory practices involving relevant stakeholders.

This evidence does not mean that regional governments (or other intermediate governance bodies) should be excluded from the implementation of Next Generation EU. On the contrary, we propose a two-stage implementation approach whereby regional governments can play a key role in the recovery strategy, after central governments have kick-started the process in a timely manner with a direct ‘alliance’ with relevant stakeholders on the ground.

The initial direct implementation of Next Generation EU should ideally be coupled with intensive capacity building programmes aimed at reinforcing administrative capacity and efficiency while introducing modern managerial practices and simplification in the regions. After the initial stage of capacity building and urgent structural reforms (at both the national and regional level), the mobilisation of stakeholders – outside the blockages of local interest groups and the rent seeking behaviour of local incumbents – together with the reinforced capacity of sub-national governance bodies will ensure the smooth implementation of the second stage of the programme.

Clear ex-ante conditionalities on institutional and administrative capacity (including the use of e-government and simplified procedures) could regulate differentiated access to the second stage (and the associated funds) by each regional government or municipality. This two-stage approach would reconcile a timely implementation with the strategic contribution of sub-national governments and administrative bodies to the success of Next Generation EU.

The full text of the research can be downloaded from the LSE’s Institute of Global Affairs


Note: This article gives the views of the authors, not the position of EUROPP – European Politics and Policy or the London School of Economics. Featured image credit: Shutterstock

Policy Insight | Vaccines: How to use market-based incentives to ramp up production | CEPS

The EU’s procurement strategy is clearly failing. A major supplier, AstraZeneca, has just announced major delays in its delivery schedule while the pandemic continues unabated. But this is not the only case of delays in vaccine delivery: other companies have also announced that they will not be able to stick to their schedules.

How did it come to this?

The EU negotiators made two mistakes:  first, they concluded their contracts much later than other big buyers (in the case of AstraZeneca, three months after the UK). With these early orders, the companies could confidently start to prepare for increased supplies to the UK, considerably earlier than doing the same thing for the EU. Moreover, the EU haggled for a low price, which created an incentive for companies to serve first those who ordered first (and paid more). Finally, the EU refused to take over any of the liability the company might incur if the vaccine were to have serious side effects.

The second mistake the EU made was to conclude contracts with vague delivery targets specified in quarters, not months or weeks. It is understandable that the companies themselves could not accept binding delivery targets for a totally new product. The contracts thus stipulate only that the companies should make their “best reasonable efforts” to deliver on schedule.

The redacted version of the contract with Curevac contains an “estimated delivery schedule” by quarter (with the exact time line redacted). This ‘estimated’ delivery schedule is anyway of little value since paragraph 1.12.2 states that in the event of a delay, all the company must do is explain the reasons for the delay and submit a revised delivery schedule. Furthermore, the contract states that “Parties agree that doses will be delivered if and when lots are released and not necessarily at the end of a quarter.” Given that a delay by one or two months has a massive knock-on effect for society this vague agreement is clearly insufficient. The contract with AstraZeneca has even less detail on what remedial action could be taken. This is not surprising: Astra/Zeneca agreed to provide the vaccine “at cost”.  One cannot expect much of an effort from a company that has promised not to ‘profit’ from production and has to absorb all liability risk.

This lack of enforcement of the delivery schedule or economic incentives to deliver early has an important implication: with a constant price per dose, the companies have no incentive to step up production to the maximum because they would not be compensated for the additional costs. In a standard adjustment cost model, which usually assumes that the cost of ramping up production quickly increases more than proportionally, a profit-maximising firm would opt for a gradual increase in production capacity – which then results in back-loaded deliveries. The rate of increase chosen by the firm will of course depend on the delivery schedule. The more elastic the delivery schedule, the slower the increase in production capacity. As the delivery schedule of the EU is non-binding, it is not surprising that companies find reasons to slow down the increase in production.

But this is somewhat by the bye. The EU is now sitting on contracts that stipulate a low price, or even a ‘no profit price’ for a large quantity; but only ‘best effort’ promises of timely delivery.

However, something could still be done.

The EU should offer to pay AstraZeneca or Pfizer-BioNTtech an additional premium for any doses delivered early. Given the extraordinary cost for society of the continent-wide lockdowns, this premium should be very high. A dose delivered three months early could well be worth hundreds of euros to society, while the cost is much lower. According to a recent study every additional vaccine delivered in 2021 could have a value to society of over €2,000.

The value to society of a delivery now, not one quarter later, is thus easily more than 100 times higher than the approximately €15 or less that companies receive today (in the case of Pfizer – even less in the case of AstraZeneca). It would thus be worth offering a very large premium for early delivery.

If the premium is only offered for delivery before April or May of 2021, companies might hesitate to take the risk of rapidly stepping up new production capacity, but that may be addressed. A new sliding price scale, starting with a multiple of the original price but going down over time, would reduce the risk of missing a fixed timeline and give the companies a strong incentive to ramp up production. The additional funding would also allow the companies to contract other pharmaceutical companies to use their production capacities and their qualified personnel, thereby reducing their risks and making good use of all available specialised resources.

Incentivising quick production would be much more productive than the empty threat to take the vaccine producers to court. The additional cost of boosting vaccine supply for Europe might run into a couple of billions of euro, but this would be a lot less than the cost of a longer lockdown of important parts of the EU’s €14-trillion economy, the cost of school closures and, last but by no means least, the cost of lives.

Read the original article here

Policy Insight | EU-Russia relations and Europe’s global profile Learning the language of power | CEPS

Relations between great powers have worsened in recent years, prompting High Representative Josep Borrell to assert that the European Union must learn to “use the language of power”. When it comes to the EU’s relations with Russia in particular, the need for such a language has become evident. Borrell’s trip this week to visit his counterpart Sergey Lavrov takes place amid major protests over Alexey Navalny’s poisoning and detention, prompting calls for a tougher European approach towards Moscow. However, a shifting global landscape ensures that Russia will remain both a challenge and a partner for a more strategically conscious EU.

Post-war Europe has traditionally been conceived as a peace project based on shared values and a rejection of geopolitics. Nonetheless, a power-centric conception of Europe is the inevitable by-product of EU expansion. The uniform norms that Brussels has sought to promote now find themselves in tension with the diverse geographic space that the EU occupies. For all the talk surrounding the “geopolitical” character of the von der Leyen Commission, the EU has already been a de facto geopolitical actor for years, bordering the post-Soviet space since 2004 and seeking to attract newly independent states towards its regulatory orbit through the Eastern Partnership since 2009. In other words, EU norms applied beyond the borders of the 27 may not be geopolitical in intent, but given the realities of European geography they are geopolitical in effect.

The conflict over Ukraine was caused in no small part by competing visions of what constitutes a legitimate pan-European security order. Dreams of a ‘Greater Europe’ from Lisbon to Vladivostok have since faded amid reciprocal sanctions and mutual recriminations. This highlights the need for a new paradigm to govern the EU’s relationship with Russia.

The ‘interim’ paradigm that has guided the EU’s approach to Russia since the onset of the Ukraine crisis, based on the Mogherini principles first adopted in 2016, appears to have run out of road, even as military and political dynamics continue to impede the advent of a new framework for relations. EU-Russia ties remain hostage to the situation in eastern Ukraine and the need to achieve full implementation of the Minsk agreements. Meanwhile, the promise of “selective engagement” has largely failed to produce a substantive roadmap for cooperation, despite the growing trend towards a world framed by a bipolar Sino-American standoff, in which neither Brussels nor Moscow has an interest.

This stasis owes itself partly to the consolidation of a European economic and security order around the EU and NATO that has left Russia outside the Euro-Atlantic area’s core political community. Moscow has compensated for its exclusion by attempting to secure recognition of its great power status through the deployment of hard power and disruption. EU criticism of Russia’s assertive behaviour has proved ineffectual at persuading Moscow to change course, given the secondary nature of such criticism when compared with questions surrounding Russia’s place in Europe’s political and security architecture.

Russia’s role as the country that inaugurated today’s era of great power rivalry in 2014 highlights the need for an EU approach that incorporates the “language of power”. In many respects, Moscow currently looks past Brussels and prioritises the dynamics of its rivalry with Washington, considering the EU to be little more than an outgrowth of American power. The Russian leadership has settled into a view that sees the ‘liberal international order’ as little more than a front for the projection of Western power and norms. There is therefore little reason for the EU to profess that its aims do not relate to the realm of power. Brussels would be better equipped to pursue its interest of a stable (albeit not always amiable) relationship with its Russian neighbour if it engages under terms more understandable to Moscow – a more candid approach that could also help to put the EU’s relations with China and the United States on a more equal footing.

However, the EU is also unlikely ever to possess fully the same capabilities as a Westphalian state. For Brussels, speaking the language of power is first and foremost about learning to navigate an increasingly rivalrous world in a way that secures its core interests and ups its global profile, gradually growing its ability to exercise influence on issues of strategic significance to the future of world order. This is a fight for which Brussels is better equipped, given the central role occupied by geo-economics and international institutions in the emerging great power rivalry, both of which play to EU strengths. To that end, the EU should pursue two courses of action vis-à-vis Russia.

First, the Eurasian Economic Union (EAEU) should be incorporated into the EU-China Connectivity Platform. This would provide a forum for dialogue that tacitly acknowledges the instrumental and secondary nature of technical disagreements over EU-EAEU harmonisation when compared with Russia’s quest to be treated as a ‘respected equal’. Moreover, it would encourage Brussels to adopt a more strategic and comprehensive approach to Eurasian affairs. This trilateral grouping would allow all parties to emerge as winners: Russia’s great power aspirations would be legitimised at little cost to the EU, pressure on countries in the shared neighbourhood to ‘choose’ between rival regulatory orders would be reduced, and China would be granted a wider Eurasian platform through which to advance its Belt and Road Initiative.

Such a move could sidestep the difficulties associated with Belarus’s non-membership in the WTO, as it will not involve the formal negotiation of a free trade agreement. It would also offer a model for a limited economic rapprochement with Russia, whose greater value is the platform that it offers for sustained engagement, not dissimilar to the logic underpinning non-preferential trade agreement signed by China and the EAEU in 2018. The initiation of a dialogue that is strategic in substance but technical in guise is also unlikely to upset US-EU relations in any significant fashion. This proposal would also avoid a return to the failed romantic ‘Lisbon to Vladivostok’ imaginary by instead emphasising the integrated character of an emerging Eurasia, while also taking a step towards transcending the current ‘interim’ paradigm for EU-Russia relations through the juxtaposition of ‘high-level’ dialogue with strategic implications alongside existing ‘lower-level’ working groups on issues such as the environment, health, food and aeronautics.

Second, given continued and likely abiding disagreements over the crises in Ukraine and Belarus, Brussels should shift its focus towards identifying shared EU-Russia interests on extra-regional issues. This would allow the EU and Russia to find new avenues to cooperate – including with third parties such as India – on an area where their interests more clearly overlap: their common desire to avoid a world framed by US-China zero-sum competition, which jeopardises the rules-based international order on which Brussels relies and to a certain extent threatens Moscow’s place in the pantheon of great powers. These efforts would centre on an EU-wide approach to engaging with Russia, contrasting with Emmanuel Macron’s proposed rapprochement where intra-European consultation was initially lacking, and should be undertaken by the European Commission over the short term in an exploratory capacity. The possible rise of Armin Laschet to the German chancellery and re-election of Emmanuel Macron to the French presidency could imbue the initiative with greater substance and momentum at the member state level over the medium term.

The ongoing Ukraine crisis has generated heavy EU investment in Ukrainian politics and civil society. It has also raised sensitive questions pertaining to how Russia perceives the boundaries of its national community. The result has been a protracted standoff between Brussels and Moscow that even the worst pandemic in a century has failed to arrest. Recent disputes over Russian political interference, the protests in Belarus and the poisoning of Navalny – occurring against the backdrop of an already fragile and strained continental order – go to the heart of debates over European values and security. The pursuit of extra-regional cooperation could provide a means through which to counterbalance these tensions without giving Moscow a ‘free pass’ over its actions in Ukraine, while also creating opportunities to increase the EU’s impact in theatres where Russia’s diplomatic and strategic presence is an established fact.

Given the speed with which the US-China rivalry has engulfed global geopolitics during the pandemic and the uncertainty surrounding Vladimir Putin’s political future, Brussels cannot afford to wait for change at the top in Moscow to pursue its global interests. These two initiatives will not provide for a complete EU-Russia reset, given the unresolved nature of Russia’s place in Europe, the persistence of clashing interests in Eastern Europe, and the continuation of Moscow’s rivalry with Washington. But taken together, they offer a path for Brussels to emerge from this decade as a more strategically engaged global player in a world of competing powers, capable of buttressing the international order that underpins its internal workings as a rules-based system.

Read the original article here

Policy Insight | From self-doubt to self-assurance. The European External Action Service as the indispensable support for a geopolitical EU | CEPS

Image credit: www.vecteezy.com/

The rivalry and contestation of today’s world should be reason enough for the European Union to act as a cohesive force, if only to avoid being outmanoeuvred by major powers. Yet EU countries and institutions are still struggling to set aside their differences and focus on the common interest.

The 10th anniversary of the European External Action Service is an opportune moment to take stock of its contribution to creating a more active, coherent and visible EU foreign policy. Despite its significant achievements, the Service still suffers from a lack of buy-in from member states and other parts of the EU administration.

This study reappraises the EEAS’ actual and potential mission in the coming years, considering the dynamic ecosystem within which it functions. Distilling key lessons from the first decade of the Service’s operation, the report sets out 30 recommendations to address the identified shortcomings. It aims to assist the EEAS’ purpose of forging a distinctly European brand of diplomacy, by upgrading its operation to allow it more flexibility to think, propose and act, more agility to factor in a rapidly changing international landscape, and more determination to play a leading role.

The Service could indeed make much more of its core assets, especially the integrated approach, the diversity of its in-house diplomatic expertise, a formidable network of delegations around the world, and a single intelligence analysis capacity, among others.
In doing so it would better serve the common interests of the European Union and truly fulfil its objectives in external action.

This report is the fruit of intense research cooperation between CEPS, SIEPS and the Friedrich Ebert Stiftung.

Download the full report here

Policy Insight | Anti-Money Laundering in the EU. Time to get serious | CEPS

Between 2 and 5% of global GDP is thought to be laundered every year, whereas only 1.1% is recovered. Anti-money laundering encompasses combating tax avoidance, the financing of terrorism, human (and human organ) trafficking, state-sponsored and corporate bribery, and the proceeds from drug-trafficking and other illegal activities.

Banks and other ‘obliged entities’ complete thousands of suspicious transactions reports on a daily basis yet only a handful are followed up on by financial intelligence units (FIUs). This could be due to lack of capability, capacity or even political direction. Meanwhile, the breadth and means to launder money have also increased, facilitated by technological progress. Unfortunately, the current anti-money laundering regulations have brought little success.

This report sets out the following key recommendations for a new approach to the fight against money laundering.

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Policy contribution | The geopolitics of the European Green Deal, by M. Leonard, J. Pisani-Ferry, J. Shapiro, S. Tagliapietra and G. Wolff | Bruegel

Image credits: European Union

The Green Deal will redefine Europe’s global policy priorities; as such, it is a foreign policy development with profound geopolitical consequences

The European Green Deal is a plan to decarbonise the EU economy by 2050, revolutionise the EU’s energy system, profoundly transform the economy and inspire efforts to combat climate change. But the plan will also have profound geopolitical repercussions. The Green Deal will affect geopolitics through its impact on the EU energy balance and global markets; on oil and gas-producing countries in the EU neighbourhood; on European energy security; and on global trade patterns, notably via the carbon border adjustment mechanism. At least some of these changes are likely to impact partner countries adversely.

The EU needs to wake up to the consequences abroad of its domestic decisions. It should prepare to help manage the geopolitical aspects of the European Green Deal. Relationships with important neighbourhood countries such as Russia and Algeria, and with global players including the United States, China and Saudi Arabia, are central to this effort, which can be structured around seven actions:

Help neighbouring oil and gas-exporting countries manage the repercussions of the European Green Deal. The EU should engage with these countries to foster their economic diversification, including into renewable energy and green hydrogen that could in the future be exported to Europe.

Improve the security of critical raw materials supply and limit dependence, first and foremost on China. Essential measures include greater supply diversification, increased recycling volumes and substitution of critical materials.

Work with the US and other partners to establish a ‘climate club’ whose members will apply similar carbon border adjustment measures. All countries, including China, would be welcome to join if they commit to abide by the club’s objectives and rules.

Become a global standard-setter for the energy transition, particularly in hydrogen and green bonds. Requiring compliance with strict environmental regulations as a condition to access the EU market will be strong encouragement to go green for all countries.

Internationalise the European Green Deal by mobilising the EU budget, the EU Recovery and Resilience Fund, and EU development policy.
Promote global coalitions for climate change mitigation, for example through a global coalition for the permafrost, which would fund measures to contain the permafrost thaw.

Promote a global platform on the new economics of climate action to share lessons learned and best practices.

Read the full publication here

Analysis | Democratic backsliding as a collaborative project: Understanding the links between Fidesz and Law and Justice, by A. Holesch and A. Kyriazi | Europp – LSE Blog

[Copyright: European Union]

The Hungarian and Polish governments have frequently been accused of backsliding on democratic standards and the rule of law. Drawing on a new study, Adam Holesch and Anna Kyriazi argue that a much overlooked factor in this debate is the extent to which both governments have collaborated in their efforts to revise democratic institutions and norms.

Hungary and Poland have registered a sharp decline in democratic quality over the last decade. According to Freedom House, there has been a continuous fall in democratic indicators in Hungary since 2010, and in Poland since 2015. In 2020, Freedom House demoted Hungary to the status of a ‘transitional or hybrid regime’ and Poland to that of a ‘semi-consolidated democracy’. In both countries, a methodical dismantling of the institutions and norms sustaining democracy has been orchestrated by right-wing nationalist governments: Fidesz in Hungary, and Law and Justice (PiS) in Poland.

Figure 1: Freedom House democracy score in Hungary and Poland from 2010-2020

Note: Figure compiled by the authors using the Freedom House Nations in Transit reports. A lower score indicates a lower level of democracy.

In a recently published study, we argue that these two processes have not simply coincided in time, but have, in fact, intersected: Hungarian and Polish political leaders have systematically relied on each other to keep their backsliding projects going, even in the face of strong countervailing pressures. We argue that while it is domestic factors that put a state on a path toward backsliding, international cooperation can contribute to maintaining this trajectory.

Hungary and Poland’s ‘backsliding coalition’

The most consequential use of the Hungarian-Polish coalition was to reduce the EU’s sanctioning power. For this to succeed, the two partners took advantage of the design of the EU’s rule of law framework, above all the Article 7 procedure, which requires unanimity in the European Council as a precondition to take any meaningful sanctions. Even though the affected member state loses its voting rights under this procedure, the veto of only one other member state government can halt the process.

Consequently, whenever the Hungarian and Polish governments have faced the possibility of severe consequences for breaches of the rule of law, they have resorted to reassuring each other of a protective veto. For example, as soon as potential sanctions were threatened against Poland’s PiS-led government by the EU in 2015, Hungarian Prime Minister Viktor Orbán was quick to declare that ‘it was not worthwhile for the EU to think about imposing any sanctions on Poland, as this would require full agreement, and Hungary will never support sanctions against Poland.’

Indeed, PiS and Fidesz politicians have consistently shielded each other against EU actions every step of the way, both through discourse and actions (e.g., voting in the European Parliament). What is less well-remembered is that the liberal Civic Platform (PO) party of Donald Tusk supported the Fidesz government in the early 2010s, perhaps failing to grasp the full extent of Orbán’s backsliding ambitions. In 2012, then Prime Minister Tusk defended the Hungarian government against EU criticism, saying:

‘Hungary is not only our friend but a country in a similar situation as we are. It is in the interest of Warsaw that Brussels does not treat the “new countries” of the Community as younger, poor brothers. And does not discipline them like school kids, when – in its opinion – they are starting to depart from European values.’

Learning and domestic legitimation

Beyond mutual support at the EU level, the two coalition partners have relied on each other in different ways, adjusting their cooperation to their specific interests and opportunities. One form of this is learning. Above all, Law and Justice was eager to learn from Fidesz. As early as 2011, following the party’s loss in that year’s parliamentary election, PiS leader Jarosław Kaczyński famously claimed that he was ‘convinced that one day, we will have Budapest in Warsaw.’ Once in power, PiS adopted practices and tactics that echoed those taken by its Hungarian counterpart. The most relevant were attacks on the rule of law, and specifically independent courts, but PiS also drew influence from ‘reforms’ pursued by Fidesz in the fields of media control and the electoral process.

The other prominent form is domestic legitimation. Given that Hungary was the frontrunner in the backsliding process in the EU, the Fidesz-led government was particularly interested in strengthening its legitimacy in the domestic arena. When sympathetic right-wing Polish politicians offered praise and support for the actions taken by Fidesz, often in joint appearances, speeches or interviews, these gestures were showcased by the Hungarian government as evidence that its measures were not only perfectly legal and justified, but also desirable. Such symbolic acts, typically accompanied by evocative political discourse, were then fed into the Hungarian pro-government media and disseminated to the public.

Nevertheless, the existence of this backsliding coalition does not presuppose that the two partners use it in the same way, nor that they agree on every policy issue all of the time. There are instances where there has been a conspicuous failure to support the other partner, such as when the Hungarian side refused to vote against Donald Tusk’s second term as European Council President, and PiS was left alone in fighting the nomination. The Hungarian government’s entanglements with Russia (mainly, but not only in the field of energy) have also been a source of discontent on the Polish side.

Key drivers

Both the Hungarian and Polish governments have promoted an identity-based narrative to justify their collaboration, namely, the trope of historic Hungarian-Polish ‘friendship’ between two likeminded nations. It is indeed true that there are some commonalities and intersections between the political histories of the two countries, expressed stereotypically in the phrase: ‘A Pole and a Hungarian, two good friends, they fight and drink together’. But both governments have constructed and disseminated a vastly overstated version of this purported bond, making ‘friendship’ the most recognisable discursive element of the Hungarian-Polish coalition. This makes for a powerful narrative to be mobilised against the EU, as the following quotation from a speech delivered by Viktor Orbán in 2019 makes clear:

‘When Poland is attacked from Brussels, the attack is against the whole of Central Europe – and us Hungarians. To empire-builders who seek to cast their shadow over Central Europe, we have this to say: they will always need to reckon with the strong bonds between Poland and Hungary.’

In truth, ideology, interests and institutions are much better placed than identity to explain this coming-together. The backsliding coalition was born out of the ambitions of political leaders who espouse similar ideologies and who have found collaboration useful for their projects. Despite the identitarian and value-based discourse that they often deploy when they refer to their relationship, its use has been quite opportunistic, especially on the Hungarian side. The EU’s own decision-rules have, to some extent, driven coalescence dynamics, too, as the requirement of unanimity for adopting any meaningful sanctions incentivises the construction of a narrow pact rather than broader support for one’s cause. This leaves us with a question: could backsliding coalitions become a permanent feature of the EU’s multi-level structure?

For more information, see the authors’ accompanying paper in East European Politics