America’s Tripolar Approach to Europe

Presidents Nicolas Sarkozy of France and Barack Obama of the United States are reflected in a mirror during a bilateral meeting in Caen, June 6, 2009
Presidents Nicolas Sarkozy of France and Barack Obama of the United States are reflected in a mirror during a bilateral meeting in Caen, June 6, 2009 (White House/Pete Souza)

In the latest edition of The National Interest, Robert D. Kaplan contests the prevailing narrative of American decline, pointing out that militarily, the United States will remain the world’s sole superpower for decades to come. He outlines a grand strategy that would maintain American supremacy through diplomacy moreover; one in which France, Germany and Poland play a key role.

Despite efforts to revitalize NATO yet again, the reality is that absent a major crisis, the alliance won’t ever be the extension of American foreign policy that it was during the Cold War.

Moreover, while the relative importance of individual states may decline in the course of globalization, “powerful countries will still help determine the course of war and peace in coming decades,” Kaplan predicts. Read more “America’s Tripolar Approach to Europe”

G20 Reaches Accord on Economic Indicators

The finance ministers of the world’s twenty largest economies managed to reach agreement toward reducing global trade and currency imbalances in Paris this weekend.

Most nations in the G20 agreed to improve coordination of economic policy but China and the United States have been diametrically opposed on a number of issues. While the Americans want China to faster appreciate its currency, Beijing has opposed including exchange rate and currency reserve criteria in economic indicators, fearing domestic unrest if Chinese exports decline.

A compromise was reportedly reached after softening criteria on current account surpluses. Interest payments for China’s foreign currency reserves would not be included in the calculation of the account balance which measures trade and capitals flows in and out of a country.

While China has let the value of the yuan increase in recent years, it has simultaneously been buying up American dollars to keep their own currency cheap. This allows Chinese exporters an advantage over foreign competitors on the global market.

China has pointed at the Federal Reserve’s policy of quantitative easing as a cloaked method of driving down the exchange rate of the dollar and artificially enhancing American competitiveness. Many developed nations worry that the fiscal crisis in the United States could eventually trigger another financial panic. Public debts and deficits as well as private debt levels will therefore be included in the indicators.

The question now is to decide how to assess the agreed upon indicators and what to do whenever a major imbalance is identified.

While China and Russia previously agreed to reduce their dependence on the American dollar, Brazil and Canada supported proposals to include the yuan in the International Monetary Fund’s basket of special drawing rights this weekend which seen as a step toward making the Chinese a reserve currency.

Most G20 members feel that their central banks have become too dependent on the dollar and favor an extended role for special drawing rights. Beijing does not allow foreigners to freely buy yuan however — another method of protecting the value of its currency.

The French, who chair both the G8 and the G20 this year, also plan international action to curb the volatility of food and fuel prices as inflation soars.

The World Bank reported earlier this week that food prices had reached “dangerous levels,” estimating that up to 44 million people have been reduced to poverty since last summer as a result of mounting commodity costs.

French president Nicolas Sarkozy has argued that speculators need to be reined in to prevent food prices from spiking but the root problem is scarcity.

Prices reached a record high in 2008, causing riots and protests across the developing world. Last year, severe weather conditions in some of the world’s largest food exporting countries damaged supplies, inflating prices almost 20 percent compared to the year before.

Flooding hit the planting season in Canada and destroyed crops of wheat and sugar cane in Australia. Drought and fires devastated harvests of wheat and other grains in Russia during the summer, prompting Moscow to ban exports.

There was little division among the G20 conference on implementing extra safeguards for the world’s major banks. Within two years, bank capital and liquidity rules should be enhanced while stress testing is set to become regular practice.

G20 Divided on Monetary, Trade Policy

While the finance ministers of the world’s twenty largest economies meet in Paris this week under French tutelage for the first time, divisions among the G20 nations remain profound. Chairing the top economies of the world is French president Nicolas Sarkozy who, up for reelection in 2012, is counting on international success to bolster his popularity.

France assumed the presidency of the G20 earlier this year and aims to curb the volatility of food and fuel prices while gradually reducing the world’s dependency on the American dollar. Monetary and trade policy differences continue to set the agenda however as China and Germany, both net exporters, are recovering while the United States remain mired in recession.

American president Barack Obama unsuccessfully urged his fellow G20 leaders to continue their economic stimulus programs in the summer of last year. The July summit in Toronto, Canada agreed to slash budget deficits instead. Germany in particular has been championing austerity over high deficit spending.

At November’s summit in Seoul, Germany, along with China, resisted American efforts to mend global trade imbalances.

Ahead of the meeting of government leaders in South Korea, American treasury secretary Timothy Geithner complained that, “For too long many countries oriented their economies toward producing for export, rather than consuming at home — counting on the United States to import more of their goods and services than they bought of ours.”

Germany is booming because of a recent surge in exports while China fears that any slowdown in economic expansion could unleash its internal forces of discontent. That is also why it has resisted calls to let its currency appreciate more steeply.

As the Seoul summit was unable to forge consensus, France has been tasked to find agreement on determining the “indicative guidelines” of the global balance of trade. The French don’t expect to find that agreement during the upcoming ministerial meeting however.

“China exports and saves, Europe consumes and the United States prints money and consumes. Is that a balanced model?” Christine Lagarde, France’s economy minister, wondered on Monday.

She voiced not only the concerns of Europe but of China which has pointed at the Federal Reserve’s policy of quantitative easing as a cloaked method of driving down the exchange rate of the dollar and artificially enhancing American competitiveness.

While Lagarde hopes to reach agreement on setting trade indicators next Saturday, “it’s not a drama” if the G20 ministers do not, she professed. “France has the luxury of time,” at least until the end of this year.

It is not only the Fed’s expansionary monetary policy that worries policymakers from Beijing to Frankfurt. As the United States are likely to continue to set record deficits for the rest of this decade, Chinese and European central bankers have reason to fear high inflation.

Last month, European Central Bank president Jean-Claude Trichet publicly criticized the notion of only considering “core inflation,” which excludes food and energy costs, as the Federal Reserve has been doing. The world’s three most powerful central banks are unlikely to agree on common action to curb inflation when they convene this weekend as each each faces vastly different economic challenges at home and is subject to different mandates.

While the world’s major economies are currently unwilling to compromise on questions of exchange rates and fiscal consolidation, France is trying to win support for its quest to end high volatility in food and fuel prices by improving the transparency of inventory data and limiting speculation in financial markets. Brazil, Canada and the United States, all major food producers, are critical. No substantive moves on reform are expected until the G20’s agriculture ministers meet in June.

Europe Doesn’t Want Germany’s Rules

Many eurozone members balked at a joint Franco-German proposal to eliminate policy differences and enhance European competitiveness at a summit of government leaders in Brussels this weekend.

Germany was long hesitant to foster economic union, fearful that it might introduce welfare provisions after the French example in all of the eurozone. Fiscal crises in Greece and Ireland however have convinced the more conservative Germans that they can’t have a currency union without a higher degree of harmony in economic policy.

Both France and Germany advocate raising retirement ages across the eurozone, abolishing the indexation of wages to inflation, harmonizing corporate tax rates and instituting a “debt brake” that limits the ability of national governments to borrow on financial markets.

The proposals are a reflection of both countries’ strong commitment to preserving the euro. France and Germany are the largest economies in Europe and their leaders have repeatedly pushed for European treaty reform that would semi-automatically trigger sanctions for countries that plunge too deep into the red — despite resistance from deficit countries in the Mediterranean to such schemes.

Those southern states need to push through economic reforms in order to boost competitiveness — lowering tax rates, decreasing labor costs and preparing their pension and welfare regimes for the twenty-first century. They are already heavily indebted however and bracing for spending cuts, prompting mass labor demonstrations in Greece, Italy and Spain last year.

During unusually heated debates in Brussels, Belgium, Portugal, Luxembourg and Spain objected to the wage indexation proposal while Austria criticized plans to raise the pension age across the continent. Austrians take wide advantage of early retirement provisions, and, along with France and Luxembourg, the country has one of the lowest effective retirement ages in the eurozone.

Countries outside of the currency union moreover, notably Poland, were afraid that the German reform effort could undermine the single market, further separating those members that carry the euro from those that do not.

European Council President Herman Van Rompuy agreed that all 27 European Union members should be consulted before major economic reforms are enacted. Two additional summits of government leaders are scheduled for March.

The Far Right’s Revival in France

One of the things that was taken out of the 2007 French presidential election was the collapse of the far right (the Front national or FN), the same far right which five years earlier had shocked the world and France by placing second in the presidential race with 16.9 percent of the vote. Its poor 10.4 percent showing in 2007 was followed by a drubbing in subsequent legislative elections and an equally weak showing in the 2009 European elections.

It has rightfully been said that Nicolas Sarkozy took a lot of the far-right vote in 2007 with his tough law and order platform and populist rhetoric. It helped him with working-class voters, many of whom had supported the FN in 2002 despite their left-wing roots.

Following the party’s collapse, which put it on the verge of bankruptcy and forced it to sell off its headquarters in an affluent Parisian suburb, the far right was buried. Sarkozy and the traditional right had permanently integrated most of the FN’s electorate, and it would collapse following the inevitable retirement of its historical lider maximo, Jean-Marie Le Pen.

It turns out that the far right was buried far too early and the party that passed for dead or at least moribund four years ago is roaring back with a vengeance. Read more “The Far Right’s Revival in France”

European States Seize Pension Funds

While most countries in Europe are bracing for spending cuts, some governments are hard pressed to implement austerity measures. Multibillion euro pension funds are a convenient source of revenue for politicians who don’t want to cut back on public spending or privatize welfare services.

Across Europe, pension schemes are organized either by the state or by semiprivate institutions that are heavily regulated. Every month, European workers set aside part of their income for their retirement except they are saving not for their own golden years but financing directly the retirement of seniors — hoping that, by the time they retire, tomorrow’s working generation will foot the bill. Read more “European States Seize Pension Funds”

France, Germany Pledge to Defend Euro

French and German political leaders this week reiterated their commitment to defending the euro and financial stability in the eurozone. “Our determination is total,” said President Nicolas Sarkozy at a joint Franco-German cabinet level meeting on Friday.

Whereas Sarkozy pledged to “do what it takes,” his German counterpart, Angela Merkel, was more specific. She said to oppose enlargement of the European Financial Stabilization Facility, which was first used for the first time two weeks ago to bail out Ireland.

Ireland renewed fears of Europewide debt crises last month and was forced to tap into the multibillion euro rescue fund that was set up by European leaders in the wake of the meltdown in Greece this spring.

Expansion of the fund is “not a question,” said the chancellor who pointed out that the Irish required less than 10 percent of the total stability package. Read more “France, Germany Pledge to Defend Euro”

Can Sarkozy Save His Presidency Next Year?

After a little cabinet reshuffle last week, French president Nicolas Sarkozy is gearing up to take on the presidency of the G20 for the next year. Since the world’s largest economies failed to agree to balancing trade in Seoul this month, Sarkozy is hoping to push for international financial reform and boost his popularity at home in the process.

Sarkozy is facing tough reelection prospects as the opposition socialists have been on the rise since early this year when they won impressively in a string of local elections. Although the president was quick to abandon laissez-faire economics in the wake of the crisis, his overtures to the left have now come to an end as well. Sarkozy ousted the centrist ministers from his cabinet to replace them with conservative heavyweights including Michèle Alliot-Marie who, in 2007, considered challenging Sarkozy for their party’s presidential nomination. As foreign minister, she may well take the center stage in the coming year when France simultaneously chairs the G8 and the G20.

Sarkozy decided to keep François Fillon as prime minister who is far more popular than the president himself right now. The more conservative character of his new cabinet however along with the implementation of clearly right-wing policies in recent months suggest that the president is more concerned about a possible challenge from the right than one from the left.

Former prime minister Dominique de Villepin announced to run independently this summer and has fiercely criticized Sarkozy’s government for supposedly pursuing populist policies. He alleged on French radio in August that most cabinet ministers at the time were “unhappy and uncomfortable” with the president’s national-security strategy. Another former prime minister and sitting senator, Jean-Pierre Raffarin, expressed similar concern with Sarkozy’s “drift to the right” and what he described as “ridiculous” security policies, including the expulsion of Roma from France.

More recently, the president’s unwavering push for pension reform may have strengthened his image as a solid, law and order, slightly authoritarian leader but it came at the expense of necessary support from moderate voters who are now leaning to the left.

One potential challenger from that direction is Dominique Strauss-Kahn, a socialist party stalwart and currently the head of the International Monetary Fund. He is one reason for Sarkozy to try to keep the IMF out of European bailouts, financial rescue efforts and the rewriting of international finance rules.

Whether Sarkozy will manage to break the gridlock and persuade surplus economies as China and Germany to submit to a rebalancing of world trade as desired by the Americans and other slow growth economies, is difficult to tell. Despite rumors of personal animosity, he has fostered a close working relationship with German chancellor Angela Merkel. Together they have pushed for stricter financial regulation; European treaty reform in order to penalize countries that plunge to deep into the red; and together, they are attempting to draw Russia closer into the European sphere.

Possibly the greatest impediment to any global trade accord remains China’s refusal to appreciate its currency which keeps Chinese exports cheaper than they would be if the yuan were allowed to float. Sarkozy may try to foster consensus between China and the United States on this issue. President Hu Jintao’s visit to Paris earlier this month was undoubtedly designed to test the waters on the Chinese front.

International success will lend the embattled president renewed prestige at home but it can’t solve all of his problems. France maintains a high budget deficit and while Sarkozy’s government has promised to slash almost a hundred billion euros in spending, it has also vowed to avoid unpopular increases in income, corporate and value-added tax rates. Raising the retirement age has been a step in the right direction but France’s pension system needs far more comprehensive reform in order for it to survive financially into the second half of this century. The French economy is showing signs of recovery but unemployment remains high at 10 percent compared to neighboring Germany. Photo-ops with fellow world leaders can’t hide those facts.

Britain, France to Pool Military Resources

Faced with severe budget cuts at home, Britain and France agreed today to work more closely together in the realm of defense. At a bilateral summit in London, Prime Minister David Cameron said that he and President Nicolas Sarkozy had opened a “new chapter” in the relationship between the two countries.

As a result of necessary austerity measures, the armed forces of France and the United Kingdom have been preparing for spending cuts for several months. The British military will be hit particularly hard as the Conservative-Liberal government intends to balance the budget by 2015. James Pritchett summarized the consequences last month.

The headline grabbing details include a loss of 5,000 personnel for both the Royal Navy and the Royal Air Force. The Army will lose even more, 7,000 to bring the numbers of soldiers from all arms and services to 95,000. Defense projects will be scrapped, along with a number of fleets of vehicles, including the iconic Harrier jump jet of Falklands War fame. Against much expectation, the two CVF aircraft carriers will be built but one may be sold.

The French meanwhile are postponing a number of programs, including an order for fourteen Airbus A330 Multi Role Tanker Transport (MRTT) aircraft and the Ceres satellite surveillance system, in an effort to cut €3.5 billion in defense spending over the next three years.

In anticipation of these measures, rumors of Britain and France teaming up on defense have circulated since this summer. Read more “Britain, France to Pool Military Resources”

European Council Divided on Treaty Reform

German chancellor Angela Merkel listens to British prime minister David Cameron during the G8 conference in Muskoka, Canada, June 25
German chancellor Angela Merkel listens to British prime minister David Cameron during the G8 conference in Muskoka, Canada, June 25 (The Prime Minister’s Office)

European leaders met in Brussels on Thursday to discuss tighter budget regulation for members of the eurozone. France and Germany have teamed up to try to change existing treaty and create a permanent system aimed at averting sovereign default.

Europe has been pondering tougher budget rules since the financial crisis nearly bankrupted Greece and forced other nations, including Italy, Ireland and Spain, to plunge deep in the red this summer.

The existing Stability and Growth Pact which has been in force since 1997 places limits on deficit spending and debt and allows members that are in violation of these rules to be fined. Even though many countries, France and Germany included, have waved the rules several times during the past eleven years, no one has ever dared enact to sanctions yet.

The European Commission proposed to sanction eurozone members last month to alleviate national leaders of the burden.

The Commission’s proposal divided Europe along now familiar north-side lines with Germany and the Netherlands in favor and France and Italy leading the no camp from the south. In their trilateral meeting with Russian president Dmitri Medvedev two weeks ago, Chancellor Angela Merkel and President Nicolas Sarkozy apparently agreed to compromise, with the French insisting that national governments have the final say in any sanctioning regime.

Merkel has since suggested that Europe may need to revise existing treaty in order to accommodate stricter budget rules. Her coalition partners, the liberals, are especially adamant about punishing fellow eurozone states that submerge themselves in debt. Her proposal to temporarily strip countries that run high deficits of voting rights met with strong opposition from both the Brussels establishment and many of the chancellor’s European colleagues. European Commission President José Barroso characterized the plan as “unacceptable” and “not realistic” while speaking to reporters shortly before the summit commenced.

Finland and Sweden have cautiously expressed support for tougher rules while Britain, though opposed to transferring more power to Brussels, is unlikely to block proposals if they only affect the eurozone. But besides France, which agreed to back the Germans in exchange for their support for watered down sanctions, few member states have warmed up to the prospect of revising the Lisbon Treaty which took many years of painful process, including several failed referendums, to enact. The European Commission is similarly wary of having to renegotiate one of the union’s farthest reaching of agreements in recent memory.

Germany wants all changes in force before 2013 when the EU’s temporary mechanism for handling debt crises expires. In May, in order to save the euro, member states gathered €750 billion in stabilization funds in conjunction with the International Monetary Fund. These billions in loan guarantees can be made available when another eurozone member after Greece is threatened with bankruptcy.

There is also discord on raising Europe’s budget for the next fiscal year with the British and Dutch most vocally opposed to spending more money on Brussels — even though the item is not officially on the agenda. Austria, the Czech Republic, Denmark, Finland and Sweden have also voiced concern although together, these countries are three seats short of a majority in the Council to effectively block the budget.