Which Direction for the European Union?

Most observers were surprised when the European Union named Belgian Prime Minister Herman Van Rompuy as the first full-time EU president on Thursday. While the much-hyped candidacy of former front-runner Tony Blair had been unofficially declared dead several weeks ago, observers had been expecting a higher-profile person to fill the position. Perhaps more surprising was the decision to name Baroness Cathy Ashton to the post of High Representative for Foreign Affairs and Security Policy. 

The selection of Van Rompuy and Ashton for two of the most important positions in the new European Union structure led to widespread criticism. Daniel Cohn-Bendit, co-president of the Green Party, described the choices as “dreary” and “insignificant,” an assessment echoed by British Liberal Democrat MEP description as “not very exciting.” Told of Ashton’s selection, former Italian Prime Minister and European Commission President Romano Prodi said, “Ashton? Who is she? I haven’t heard of her.” (The Systemic Change in Business and Politics blog, on the other hand, offers a fairly positive assessment of the choice).

While Ashton and Van Rompuy dismissed their critics, there seems to be a general consensus emerging that the selection of two relatively unknown politicians for key posts in the new European Union demonstrated a lack of ambition and undermined the ability of the EU to exercise real power and influence on the global stage. But the choices also seem likely to entrench the power and influence of José Manuel Barroso, the President of the European Commission.

The choices appear to have been the result of an effort to avoid a protracted political battle over the posts and to instead project consensus to the world. But as Gavin Hewitt notes, in the context of EU politics, consensus often translates as “the person that is least objectionable” or “the lowest common denominator.”

Charlemagne’s Notebook blog at the Economist offers a great assessment of what the choices mean for the position of the European Union in global politics, observing

I am told that a decisive factor at tonight’s meeting was the desire to achieve a consensus on the decision, and not risk a vote that could have exposed a divided Europe. But I think it also means that today’s European leaders have little ambition to use the EU to talk to the world, at least not at the highest level. Instead, they know their voters want to use the union as a “Europe that protects”, a Europe that makes the world go away.

In short, a European Union oriented toward domestic rather than global issues.

But there also appears to be a great deal of uncertainty about how political power will actually be exercised in the new European Union. The approval of the Lisbon Treaty was intended to make the EU more efficient and increase the role of the Parliament and the Council, the two branches of the European Union directly accountable to the people over the unelected Commission. But, if the composition of the new European Council is any indication, real political power in the European Union will continue to reside not in the elected parliament, and not in the new presidency, but in the Commission, the bureaucracy of the of the European Union. In this sense, despite the adoption of the new constitution, little appears to have changed.

China and the US: A Case of Mutual Dependency?

There’s been a lot of interesting discussion about President Barack Obama’s Asian tour this week. And I don’t mean the controversy over whether or not the U.S. President should bow to the Japanese Emperor (though if you’ve been watching the domestic news media, you’d be hard pressed to realize there were any other issues at stake).

Far more important has been Obama’s visit to China. While the U.S. government has shied away from the more controversial topics (perhaps forced to do so by the more than $1 trillion in U.S. treasury bills currently held by the Chinese government, notes Stephen Walt). It also failed to win any concessions on the major issues it has hoping to address (again, not a surprise).

The most interesting story, though, was noted by John Cassidy at Rational Irrationality. Cassidy wrote,

Speaking at a conference in Beijing just hours before Air Force One arrived, a top Chinese financial official attacked the Federal Reserve, and, by extension, the rest of the American government for stoking another speculative bubble, which could have disastrous consequences for the global economy…Liu Mingkang, China’s top banking regulator, said the Fed’s policy of keeping interest rates artificially low “is boosting speculative investments in stock and property markets and will pose new, real and insurmountable risks to the global recovery and particularly to the recovery in emerging markets.” In particular, Liu said, the Fed’s cheap-money policy was encouraging investors to borrow heavily in dollars and then use the money to buy higher-yielding investments in other countries, such as stocks, bonds, and real estate. This “huge carry trade” was having a “massive impact on global asset prices,” Liu insisted.

Cast in this light, the United States and China appear to be in a situation of mutual dependence. The United States depends on China to purchase Treasury bills, essentially financing the day-to-day operations of the U.S. government. But China already holds more than $1.6 trillion in dollar-denominated assets, primarily U.S. treasury bills. Any decline in the value of the U.S. dollar undermines China’s position as well.

The debate over the value of the renminbi is one part of a much bigger debate over the broader regulation of the global economy, as Arvind Subramanian observes at Baseline Scenario. Efforts to resolve the financial crisis in the United States (by maintaining loose monetary policy(glossary)) drive capital into emerging markets, including China, where returns on investment are greater.

We certainly appear to be living in interesting times…

Hunger and Public Policy Revisited

When Amartya Sen published his groundbreaking book, Hunger and Public Action, he challenged the prevailing wisdom about the reasons for hunger. Conventional wisdom (which continues to dominate discussions of hunger even today) was that the primary cause of hunger in the global south was overpopulation. The theory, dating back to Thomas Malthus’ analysis in the early 1800s, rested on the assumption that population growth would necessarily outstrip the ability of humanity to increase food production, leading to widespread hunger. In the nearly two hundred years since Malthus’ published his argument, there has been widespread hunger, massive famine, and other calamities. But Malthus’ argument remains problematic. In the vast majority of cases, food remains available during famines. In general, the problem has not been one of underproduction—of a lack of food availability—but of access to the food produced. Even during the worst of famines, food remains available for those who can pay for it. Sen’s work highlights this apparent paradox in through his use of the concept of “entitlement,” which he defines as “the set of alternative commodity bundles that a person can command in a society using the totality of rights and opportunities that he or she faces.” In the context of famine and hunger, then, what is important is not the amount of food produced, but the ability of individuals to secure access to the food that is available. (Georgois Altintzis offers a critical engagement with Sen’s argument, highlighting some of the challenges it has faced since the early 1980s but concluding that it continues to offer a good explanation of food crises sparked by trade shocks, wars, crop failure, erratic weather, and sanctions).

Blogging for Oxfam, Duncan Green offers another take on Sen’s argument, drawing attention to a recent report by the NGO ActionAid published a “Hunger Scorecard,” in which they rank 29 developing countries in their success in addressing hunger. Brazil, China, Ghana, Vietnam, and Malawi fall in the top five, with Sierra Leone, Pakistan, Haiti, Burundi, and the Democratic Republic of the Congo rounding out the bottom five. The striking point in their analysis, however, is less the individual rankings than the common themes they draw from the most successful countries. According to ActionAid’s analysis, the most successful countries

• Reject the conventional wisdom of free market economics, instead asserting a central for the state in agriculture, in particular by supporting small farmers (through access to credit, research and extension services, technology, income or price supports, etc.
• Balance policy support between commercial agriculture for export and production of food for domestic production.
• Encourage a more equitable distribution of land by engaging in land reform efforts.
• Establish basic social protection measures.

In short, the most successful countries appear to establish policies that encourage domestic production by small farmers while simultaneously attempting to guarantee food entitelements.

Time for the Tobin Tax?

In August 1971, as President Richard Nixon was struggling to bring the United States off the gold standard, the economist James Tobin proposed that any new system of currency exchange should include a small tax on transactions. The tax would, in theory, provide greater stability in exchange rates [glossary] by limiting speculative flows, which, according to Dani Rodrik, have “doubtful social value yet eat up real resources in terms of human talent, computing power, and debt.”

Although the tax was never adopted at a global level, it has reared its head from time to time, including in the aftermath of the 1997 Asian financial crisis, and as a potential funding mechanism for both development aid and for the United Nations system. Most recently, Brazil imposed a 2% tax on currency inflows into the country in an attempt to limit the appreciation of its currency, the real.

At a meeting of the G20 finance ministers this weekend, British Prime Minister Gordon Brown proposed a new tax on international financial transactions to offset the costs associated with the rescue of banks during the global financial meltdown. The proposal represents a shift in policy for the Brown cabinet, which had previously opposed similar proposals by France and Germany as too difficult to manage. But according to Brown, the new proposal would not be a tax but “an insurance fee to reflect systemic risk or a resolution fund or contingent capital arrangements or a global financial transaction levy.” Brown argued that,

It cannot be acceptable that the benefits of success in this sector are reaped by the few but the costs of its failure are borne by all of us…There must be a better economic and social contract between financial institutions and the public based on trust and a just distribution of risks and rewards.

The proposal, which received a cold reception from both U.S. Treasury Secretary
Tim Geithner and Russian Finance Minister Alexei Kudrin, bears remarkable similarities to a criticism leveled by hedge fund manager George Soros in an interview with the Financial Times last week.

But the G20 has been struggling to develop a new system of financial regulation to prevent another global economic crisis. Despite a number of vague commitments to rethink their economic policies and establish stricter regulations governing the financial sector, little real progress has been made. Meanwhile, as the Economist’s blog points out, protectionism is on the rise and trade disputes between the United States and China are intensifying.

Perhaps it is time to think about more radical changes. A Tobin-style tax on global financial transactions could easily raise billions of dollars. A German proposal to impose a 0.005% tax on international financial transactions, for example, could generate between €20 billion and €30 billion per year. A more aggressive tax (say of 0.01%) could easily generate more than the cumulative official development assistance (ODA) budget of all developed countries (currently estimated to be around US $100 billion) while simultaneously limiting the negative impact of hot money on developing economies. Sounds like it might be time for the Tobin tax.

The Berlin Wall Remembered

November 9 marks the twentieth anniversary of the collapse of the Berlin Wall and the end of the Cold War. While 100,000 people are supposed to turn out at the Brandenburg Gate to celebrate the anniversary in Berlin,  a number of memorials are available online. Timothy Garthon Ash has an excellent review essay on the New York Review of Books website exploring the events that led to the wall’s collapse,  and Foreign Policy has published its list of the top five myths about who brought down the wall.  (FYI: It wasn’t Ronald Reagan; It was the bravery and steadfast resolution of the people of Eastern Europe). The German news magazine Der Speigel has an excellent photo essay on the rise and fall of the wall.

Does Canada Need a New Head of State?

Prince Charles, who will likely become the symbolic role of head of state [glossary] of the United Kingdom when his mother, Queen Elizabeth II, passes, is visiting Canada this week. His eleven-day visit, which began on Monday in Newfoundland, will take him across Canada, from the Maritimes to Ontario, to Canada’s Pacific coast, and back to Quebec and Ontario for Remembrance Day ceremonies before returning to the United Kingdom.

But Princes Charles faces some challenges during his visit. On his first day in Canada, Charles called on Canada to exhibit greater leadership in the climate change debate. The Canadian government, currently headed by Conservative Prime Minister Stephan Harper, has been criticized for its foot-dragging on the climate change debate.

The visit comes at a time when the British monarchy in general and Prince Charles in particular face growing unpopularity in Canada. Like many former British colonies, Canada’s political system separates the ceremonial position of head of state and the position which yields real political power, head of government, [glossary] into two separate posts. In the United States, the two offices are fused into a single position, the president of the United States. But in Canada and many other former British colonies, the ceremonial position of head of state is occupied by the reigning British monarch (currently the Queen Elizabeth II), who is represented in Canada by the Governor General, Michaëlle Jean. The head of government is the Prime Minister, who is chosen by the parliament.

But according to recent polling data, the British crown facing declining popularity in Canada. While Rosie DiManno criticized Canadian Prime Minister Stephen Harper and Governor General Michaëlle Jean for their poor protocol during Charles’ speech in Newfoundland, most Canadians appear to be apathetic about the whole visit. According to the CBC, while 80 percent of respondents agreed that the monarchy had an important place in Canada’s history, more than 60 percent felt the constitutional monarchy at the heart of Canada’s political system was outdated. The Societe St-Jean Baptiste, an organization pushing for sovereignty and independence for Francophone Quebec, went even further, demanding that before he would be welcomed in the province, Prince Charles apologize for a litany of British offences, including acts of “cultural genocide” committed against Francophone Canadians during British colonialism. Based on the polling data, a plurality of Canadians (41%) would prefer to see Charles passed over for his son, Prince William, rather than succeed Queen Elizabeth himself, while a minority (31%) believes he should be king.

The polling data suggest that Canada’s political system may be in for reform in the future. Does an independent, ceremonial head of state have a role to play in the political system? In many states, such a position exists and often plays an important role. In Belgium, King Albert II lacks any real political power but has played a central role in efforts to maintain the fragile unity of the country amid efforts to divide the country along linguistic lines. In Germany, the President performs a largely ceremonial function, while real political authority is vested in the Chancellor. Japan maintains its Emperor, Luxembourg has its Grand Duke, and the Netherlands its queen, all reminders of the historical legacy of the monarchy and important cultural references for the people. But the model used in many states of the British Commonwealth is unique insofar as the head of state is not a national of the country itself. Can a British King serve as the ceremonial leader of Canada? It’s a question many Canadians seem to be asking.

The Limits of Sovereignty and Territorial Integrity

Salva Kiir, the president of autonomous government of Southern Sudan, on Sunday moved toward full independence for the region. Southern Sudan has been an autonomous region within Sudan since 2005, when a peace treaty was signed between the government in Khartoum and rebels led by Kiir and others. Prior to the singing of the treaty, the oil-rich region had seen decades of civil war.

At a special church service to pray for peace, Kiir said that anything less than full independence for Southern Sudan would leave southerners “second class citizens” in their own land. In the speech, Kiir said,

When you reach your ballot boxes the choice is yours. You want to vote for unity, so that you become a second-class (citizen) in your own country, that is your choice…You would want to vote for independence, so that you are a free person, in your independent state, that will be your own choice. And we will respect the choice of the people.

Kiir’s comments follow a story released on the Government of Southern Sudan Mission to the United States’ website which described the current situation as “too deformed to be reformed.” Kiir’s comments (and broader statements issued by the government) are likely to increase tensions between the central government in Khartoum, which would like to see Southern Sudan remain part of the country, and those pushing for full independence.

The question of regional autonomy is always a difficult one in international politics. National governments have long hesitated to undermine their territorial integrity [glossary]—witness statements issued regarding Basque separatists in Spain, Flemish in Belgium, Tibet in China, the Hmong in Laos, the Tamils in Sri Lanka, the Movement for the Emancipation of the Niger Delta in Nigeria, and the Kurds in Iraq, Iran, and Turkey. More than one-third of the states in Africa face at least one group pushing for autonomy or independence, reflecting the artificiality of the historical borders on the continent. In each of these cases, the national government resists—often with force—efforts to establish autonomous regions or independent states by the separatist movement. In some cases, the push for autonomy or independence results from differences in cultural, ethnic, or national identity. In others, such as the current situation in Southern Sudan, identity politics becomes tied up in resource conflicts, making resolution of the crisis more difficult. And where the strength of the government is already challenged, the stakes in the standoff between the national government and the independence movement are even greater.

The Battle for the EU Presidency

A battle is brewing for control of the European Union. At stake, according to some, is the very future direction of the organization.

Pending final approval by the Czech Republic, the last EU member still to ratify the Lisbon Treaty, the European Union will have a full-time president. The post will have some real powers, similar to those possessed by the head of government. But equally importantly, the new president will essentially operate as head of state, the symbolic figurehead of the European Union. The choice of who will occupy that position therefore is therefore important.

Until recently, former British Prime Minster Tony Blair appeared to be the undisputed frontrunner. Blair is a widely known figure who enjoys strong support by the British government, has close ties to the United States, and could operate effectively in an international context.

But the United Kingdom has traditionally been one of the more Euroskeptic members of the European Union. In addition, his friendship with former U.S. President George W. Bush, his support for the Iraq War, and his close ties to the United States undermine support for his candidacy among some EU members. Belgium and Luxembourg have already indicated that they would not support a Blair presidency; France and Germany have withheld their assessment for now.

In this context, Jean-Claude Juncker, Prime Minister of Luxembourg, has thrown his hat into the ring. Junker is seen to be much more pro-Europe. But this could also be his downfall, as some of the EU member states may not want a president who pushes too hard for further integration. The United Kingdom would likely veto his presidency. Indeed, this may be his very plan; to advance his own candidacy as a way of sinking Blair’s, allowing a third (compromise) candidate to come to the fore.

The politics of choosing a new EU president will be interesting to watch over the next several months. If nothing else, the battle over who will become the EU’s first full-time president exposes some key divisions within the EU.

Towards New Economic Thinking

George Soros, the controversial hedge fund manager, announced on Monday that he would be donating $50 million to finance the establishment of the Institute for New Economic Thinking. According to Soros, the Institute would bring together some of the leading contemporary economists to challenge the dogma of free-market fundamentalism.

According to Soros,

There’s been a pretty widespread recognition by professionals that something is fundamentally wrong in the prevailing doctrine about financial markets, that you need a new understanding that this whole idea of efficient market hypothesis, rational expectations theory, is totally devoid of reality, and so there is need for new thinking.

The new Institute has already assembled an impressive advisory board, which includes Jeffrey Sachs, George Akerlof, Kenneth Rogoff and Joseph Stiglitz as well as public commentators such as Anatole Kaletsky and John Kay.

Although not necessarily a central focus of the new Institute, Soros is particularly interested in what he calls a “general theory of reflexivity,” the theory that markets tend to influence perceptions of reality, and that these perceptions in turn feed back into markets. This theory helps, according to Soros, make sense of bubbles in financial markets, where increasing rates of return outpace any realistic foundation in sound market analysis.

This could represent a welcomed change to the study of economics, which has increasingly been preoccupied with models and theories that lack any basis in the real world. As Joseph Stiglitz observed, “The financial crisis has caused a moment of deep reflection in the economics profession, for it has put many long-standing ideas to the test. If science is defined by its ability to forecast the future, the failure of much of the economics profession to see the crisis coming should be a cause of great concern.” Part of this failure certainly rests in the faulty assumptions on which many economic theories rest. Perhaps Soros’ initiative will add a new (and welcomed) layer of complexity to the field of economics.

McDonalds and De-Globalization

The only three McDonald’s restaurants in Iceland became the latest victims of the global economic crisis. According to an AP report, all three restaurants will close next week due to rising costs. The three franchise operations are required, according to their franchise agreement, to purchase and import all of their supplies from Germany. But the financial meltdown in Iceland—and the dramatic decline in the value of the krona, Iceland’s currency—combined with high tariffs on imports have led to a spike in operating costs for the restaurants. Indeed, according to the restaurants’ managing director, Magnus Odmudsson, operating costs have doubled over the past year, making it impossible for the restaurants to remain competitive.

According to the Big Mac index, Iceland already has the third most expensive Big Mac in the world, retailing for 650 krona ($5.29), falling behind Norway ($5.79) and Switzerland ($5.60). To meet the higher operating costs, Odmudsson said prices would have to increase to 780 krona ($6.36), a level which would make the restaurants uncompetitive.

The decision to close operations in Iceland represents a reversal of McDonald’s trend of increasing international operations. McDonalds currently operates in 119 countries on six continents. But the expansion has been controversial. In France, McDonald’s has been the target of protestors who claim that the chain restaurant undermines French cuisine, while in India, it faced lawsuits for allegedly using beef fat in the production of French fries. And earlier it was forced to trim operations in countries like Bolivia, where operations were not profitable.

The current global downturn presents new challenges for McDonald’s and other multinational corporations. Currency instability, a rise in protectionism, and an increasing preference for locally produced goods. This shift hardly represents a dramatic shift away from the process of globalization that has defined the global political economy since the end of World War II. But it does present, in a clear way, the challenges transnational operations face in an increasingly interconnected global economy.