Brookings: Topics - France

Why Global Education Financing Must Be Part of Europe's Financial Transaction Tax Revenues for Development

Sarah O’Hagan and Rebecca Winthrop — Wed, 01 May 2013 14:17:00 -0400

As the financial transaction tax (FTT) becomes part of the European political landscape and moves its way through EU member-state legislatures, the use of a percentage of tax revenues for development – and specifically for basic global education needs— remains highly uncertain.

The 11 eurozone countries that got the green light from EU finance ministers in January to move forward with a coordinated tax on financial transactions could deliver as much as €35 billion for their national budgets. But the clear consensus shared by these 11 nations— which collectively represent two-thirds of the EU’s economy— on the timeliness and necessity of implementing such a tax now is not equally matched by a consensus on allocating part of the revenues to international development, let alone education. This is an unfortunate state of things given that the idea of using part of the revenues to support global development was a big reason for the huge social movement in support of the tax.

The backdrop to this uncertainty is the austerity agenda being pursued by many governments, in which foreign aid budgets are under pressure. As a consequence, foreign aid to global education risks falling faster than overall aid levels.

To date, only one of the vanguard countries in the FTT movement, France, passed its own FTT in mid 2012 and committed to allocate part of the revenues to development and climate finance. At the time, many called for 50 percent of FTT revenues to be dedicated to overseas development assistance and climate finance, but that figure soon dwindled to 10 percent, and ultimately 4 percent, for health and environmental projects. The ray of hope is that France has expressed its willingness for the EU FTT to also be partly allocated to development and climate finance, and is currently gathering support.

Civil society groups in France and in Europe generally are more effectively mobilized within the health and environment sectors, and are comparatively weaker on the education front. Yet given that global education is a sine qua non for successful economic development, it’s vitally important that global education activists in France and elsewhere not only mobilize within their countries to earmark revenues for development-- including basic education— but also collaborate across the larger European landscape to set a precedent for the use of financial transactions taxes around the world. An EU financial transaction tax for development could indeed put more kids in school and improve their learning outcomes in developing countries.

The European Union, via its member states and the European Commission, is among the largest donors to global education in the world. But the recent OECD Development Assistance Committee data release revealed a decrease in official development assistance for the second year in the row with significant cuts in countries like Spain and the Netherlands. And an agreement among EU heads of state at the February 8 European Council for the 2014-2020 EU budget is not going to fill this gap. In fact, the budget froze the portion earmarked for development at 2007-2013 levels, leaving the EU far from its commitments to reach 0.7 percent ODA/GNI by 2015.

Another worrying fact is that global education may not be a priority sector for the EU in many countries moving forward according to early word from several developing countries partners.

For low-income countries that simply cannot grow and improve their basic education systems without external financing, a decrease in aid flows without a compensating or greater infusion from innovative financing such as the financial transactions taxes, spells disaster. That is why, in addition to pushing donors to respect their commitment in developing countries to aid, the education community should do all it can to ensure that newly enacted financial transaction taxes allocate part of their revenues to global education.

If these examples are indicative of the way financing for global education has worked to date, they amply underscore the patchwork approach that even pieced together will still leave students in developing countries falling behind.

Authors

Sarah O’Hagan
Rebecca Winthrop

Image Source: © Darrin Zammit Lupi / Reuters

Crisis in Mali and North Africa: Regional Dynamics and International Priorities

Wed, 06 Feb 2013 10:00:00 -0500

Event Information

February 6, 2013
10:00 AM - 11:30 AM EST

Saul/Zilkha Rooms
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

France’s recent military intervention in Mali and the hostage crisis in Algeria have brought international attention to continuing instability in West and North Africa. The crisis has renewed focus not just on the region, but also on Europe’s approach toward Africa, American policies to combat extremism and the complex history and relationships that shape modern dynamics in the Sahel.

On February 6th, the Africa Growth Initiative at Brookings hosted a discussion on the crisis in Mali and explore how current affairs and priorities in France, the U.S., and West and North Africa have influenced recent events and the trajectory of the conflict going forward. Panelists included: Brookings Senior Fellow and Daniel L. Byman, research director of the Saban Center; Brookings Senior Fellow Mwangi S. Kimenyi, director of the Africa Growth Initiative; Todd Moss, vice president for programs and senior fellow at the Center for Global Development; and Brookings Senior Fellow Justin Vaisse, director of research for the Center on the United States and Europe. Margaret Brennan, State Department correspondent for CBS News, moderated the discussion.

Video

Time to Bite the Bullet on European Defense

Clara M. O'Donnell — Fri, 01 Feb 2013 00:00:00 -0500

Europe’s military spending is in free fall. As highlighted during a seminar organised by the CER in December as part of the FR-UK Defence Forum, the EU countries combined have reduced defence spending from €200 to €170 billion since the start of the economic crisis in 2008. In response, governments have signed up to a variety of new bilateral and multilateral initiatives. These are designed to limit the impact of budget cuts on their armed forces. But so far, the savings incurred pale in comparison. At the December discussions, participants estimated them at €200 to €300 million. Many sensitivities relating to national security make it hard for governments to implement collaborative defence efforts. But at a time when Europe’s neighbourhood is replete with instability and the United States is scaling back its own armed forces, Europeans need to do more to stem the damage to their militaries.

Notwithstanding their budget cuts, taken together EU states are still the second largest defence spenders in the world. And not all European countries are reducing the level of funding to their armed forces. According to a 2011 study for the European Parliament, Finland and Denmark have maintained military spending steady in recent years. Poland and Sweden have increased it.

But even prior to the economic crisis, most European countries spent less than 2 per cent of their GDP on defence – even though NATO members are in theory committed to devote at least that much to their militaries. And, according to the European Parliament study, most middle-sized European countries have cut their defence spending by 10 to 15 per cent since 2009. Some of the smaller EU states, including Latvia and Lithuania, have cut by more than 20 per cent. Britain is reducing its military budget by 7.5 per cent over four years. And according to Andrew Dorman from Chatham House, the actual reduction is nearly 25 per cent because the ministry of defence has many unfunded liabilities and has to unexpectedly pay for the replacement of the UK’s nuclear deterrent. France is expected to scale back its military once it announces its new defence priorities this year. As a result, US officials warn that Europeans will soon be incapable of deploying a mission like the one they sent to Libya in 2011.

European governments have acknowledged that closer co-operation between their armed forces could offset – at least partly – the impact of such large spending cuts. They have introduced some welcome measures. For example, last year, 14 countries agreed to buy surveillance drones for a joint NATO-run squadron. Eighteen states now take part in an EU network to facilitate maritime surveillance through information exchanges. Last April, Belgium and the Netherlands decided to co-operate in helicopter maintenance. In September, Bulgaria and Romania agreed terms to make it easier to police each other’s airspace. Britain and France are training together to develop a new joint expeditionary force. And the UK and other Europeans are providing logistical support to France’s deployment in Mali.

But governments remain wary of pooling military capabilities. They still fear that their partners may block their access to shared equipment if they disapprove of a particular operation. States also disagree on the best way to develop new military technologies. For example, the UK wants to acquire defence equipment with France bilaterally. But since President François Hollande has been in office, France has become increasingly keen to allow other European countries to take part in Franco-British procurement projects. Many countries are averse to committing to ambitious initiatives because they know that these can be costly in the short term – last year Britain notably abandoned its plans to adapt its aircraft carrier so that French planes could land on it, after realising how expensive the adjustments would be. Several EU states are loath to integrate their defence companies with those of other countries, as Germany illustrated when it refused to support the merger between BAE and EADS. Finally, governments do not want their defence firms to lose out on contracts. Many in France worry that several of the cost-saving projects proposed by NATO, including missile defence and the joint purchases of surveillance drones, favour US defence companies.

Europeans need to overcome some of these continued aversions to co-operation. Even though governments would prefer to avoid using military force, they might not have a choice. Several conflicts risk undermining stability in Europe’s southern periphery over the next few years – not least the partial take-over of Mali by Islamist militants, where French forces have already felt compelled to intervene, the civil war in Syria and a possible standoff with Iran. And Washington, struggling with its own budgetary constraints, wants its allies across the world to take more responsibility for their regional security.

President Hollande’s government can allay some of the French concerns about the lack of European industrial participation within NATO cost-saving initiatives. To do so, Paris could suggest projects to the alliance which involve equipment made in Europe. As a participant from the CER seminar has proposed, Berlin, London, Paris or Rome could sell some of their old fighter jets to countries in Central Europe which want to strengthen their arsenals cheaply.

As suggested by another participant at the December discussions, Europeans should buy cutting edge military capabilities only when it is necessary. Over the last few decades, the cost of defence equipment has grown exponentially. Even when their economies are stronger, European governments will increasingly struggle to arm their militaries. In some cases, national security will require governments to continue acquiring the most technologically sophisticated capabilities. But for less sensitive tasks, governments should explore cheaper equipment options and a greater use of civilian suppliers, for example in communications.

Finally, European governments must ensure that they do not duplicate their efforts to build the next generation of drones. European governments have long argued that it has been very inefficient for Europe to have three manned fighter jets programmes (Rafale, Eurofighter and Gripen). The duplication has prevented the various programs from benefiting from economies of scale, it has curtailed interoperability amongst European armed forces, and it has led Europeans to compete against each other in export markets.

Over the next few years, Europeans will decide how to develop unmanned combat aircraft and other sophisticated drones. It is still unclear how governments will proceed. France and Britain have announced plans to develop next generation drones bilaterally. EADS and Finmeccanica, Italy’s largest defence company, have floated intentions to do the same. And France has agreed to work on unmanned aircraft with Germany, too.

Under current spending trends, there is insufficient demand in Europe to support several competitive next generation large unmanned aircraft programmes. So Europeans must avoid several unco-ordinated efforts taking place simultaneously. EU countries could barely afford duplicating expensive aerospace programmes prior to the economic crisis. They definitely cannot afford it now.

Authors

Clara M. O'Donnell

Publication: Centre for European Reform

Thank the French, Don't Bill Them

Marvin Kalb — Fri, 25 Jan 2013 00:00:00 -0500

The French deserve our thanks for repelling Islamist advances in northern Mali. What they do not deserve is a Pentagon bill for the limited military support we have provided in recent days. Indeed, if it is true, as reported in the French media, that United States has withheld larger deliveries of military assistance until assured of payment, then Washington ought to be ashamed of itself.

In recent days, U.S. transport planes have begun moving French troops and equipment into Mali—two planeloads on Monday, one on Tuesday; and defense secretary Leon Panetta has assured French officials that more can be made available. But the painfully grudging American response to French appeals for help is embarrassing and unbecoming for a superpower supposedly in the vanguard of the struggle against global terrorism.

France is doing the heavy lifting in Mali, because Mali was a French colony and many Frenchmen still live there. It became clear a few weeks ago that Islamist radicals were moving into position to seize the capital city of Bamako. The pathetically inept government of Mali could do little to stop them and requested urgent assistance. The socialist French prime minister, Francois Hollande, though opposed to military intervention and besieged by economic crisis, sent planes, tanks and thousands of troops to Mali. Frenchmen were threatened, and he acted promptly and courageously.

At the same time, Hollande urged neighboring African countries to join French troops in the struggle against Islamist radicals, who for months had been imposing harsh sharia-type law upon northern Mali, amputating limbs, stoning citizens and destroying some of the country’s cultural heritage. Until the French acted, there was a strong possibility that Mali could shortly become an Islamist country governed by al-Qaeda in the heart of central Africa—similar to what Afghanistan was shortly before the 9/11 terrorist attack on the United States.

For this reason, the United States has been very concerned about the rise of Islamist fanaticism in Africa in recent years. Religious fanaticism tied to al-Qaeda terrorism make a very volatile, dangerous mix. The United States has even set up a small but elite force of troops and agents to help fight Mali-type insurgencies in Africa. Is this not the time to use it? One hopes, without fanfare, that it is being used.

The United States might have leaped to France’s support in Mali, but it did not. It limited its military assistance, making certain everyone understood that Washington would not send any troops to Mali; making certain, too, that the French understood that they would have to pay for the limited help they were getting from the United States.

After the wars in Iraq and Afghanistan, the United States has no appetite for further military adventures. In his inaugural address on Monday, president Barack Obama triumphantly proclaimed that “the decade of war” is over, meaning the United States has pulled out of Iraq, is pulling out of Afghanistan, and does not want to get into other wars. It needs a rest. The president has often spoken about the need for “nation-building at home.” That is an understandable position—the American economy is just now beginning to emerge from a deep recession, and the American people are tired. But the the United States remains the only genuine superpower in the world. Whether with joy or caution, it will be called upon to make difficult, controversial decisions. It cannot escape that responsibility.

Wars can be called those of choice or necessity. Either way, some may require U.S. military leadership—and certainly military help. Mali may be one of those wars. The French need American help, and they should get it: transportation, intelligence and even, if necessary, small numbers of special forces that are trained to get into a fight, accomplish their mission and get out. The French should get American help, but not the bill for the help; and they should be heaped with praise for taking on a tough task that no one else, including the United States, seemed ready to do.

Authors

Marvin Kalb

Publication: The National Interest

Image Source: © Joe Penney / Reuters

How China Views France’s Intervention in Mali: An Analysis

Yun Sun — Wed, 23 Jan 2013 13:25:00 -0500

Editor's Note: The opinions analyzed in this article are those from China, and are neither the views of the author nor of the Brookings Institution.

China’s response to France’s decision to send troops to fight against Islamic extremists in Mali is at most tepid and reserved. In the official statement by the Chinese Ministry of Foreign Affairs, the government merely “noted” the dispatch of troops by “related countries and regional organizations” without any explicit commitment to support the mission at its current stage. This has raised wide-speculation in the West that China is “free-riding” again in a West-led mission to stabilize a country infested with terrorist threats. Amongst the debate, it is important for the international community to clarify and understand China’s perspectives.

China strongly opposes being described as a “free-rider”. First of all, in China’s experience, foreign intervention does not always lead to more stability or better protection of Chinese interests on the ground. In the case of Libya, China saw the United Kingdom and France “abuse” the United Nations Security Council Resolution (UNSCR) 1973 to launch military interventions beyond the original scope of its mandate. The intervention led to more chaos, which combined with the regime change cost China $20 billion of its investments in Libya. Since then, China has been particularly cautious in agreeing to any UN Security Council resolution that would authorize a military intervention. This is part of the fundamental reason China cast three vetos of Security Council draft resolutions to authorize military intervention in Syria.

The example of China’s “free-riding” that is most often cited is the war in Afghanistan. Many view China, as a major superpower, not pulling its weight and unfairly enjoying the benefits of security from terrorism, while the U.S. and other countries continue to fight against the Taliban in Afghanistan. However, China’s view is that the war in Afghanistan was hardly motivated by the U.S. intention to protect China and other countries in the region. Rather, Beijing sees the U.S. war in Afghanistan as an advancement of American geostrategic influence— one that created major instability both in Afghanistan and in the South Asian region. Furthermore, Beijing argues that China’s strengths in Afghanistan are in post-conflict reconstruction in areas such as infrastructure development and economic investment. And this role of China has been recognized and welcomed by the United States.

China’s tepid response to the French intervention in Mali also originates from its concern about a potential abuse of the UN mandate, like what happened in Libya. In Beijing’s view, any legitimate international intervention must be based on a UN mandate. In the case of Mali, although France obtained the support of the UN Security Council members for the intervention, its mission is invariably different from the African-led International Support Mission in Mali (AFISMA) stipulated by the UNSCR 2085 that China agreed to. Indeed, China hopes that France will pull out soon and hand over the military responsibility to the African-led mission.

Other Chinese analysts have further attributed France’s intervention to Hollande’s desire to boost his image and popularity at home given the failure of his domestic economic policies.

China sees France’s motivation to intervene in Mali as hardly altruistic. Li Zhibiao, a researcher at the Chinese Academy of Social Sciences, highlights a suspicion that France is exploiting the diminishing role of Washington in Africa to expand its own influence. Other Chinese analysts have further attributed France’s intervention to Hollande’s desire to boost his image and popularity at home given the failure of his domestic economic policies. Furthermore, China also sees a double standard in France’s decision to dispatch troops since it disregarded a similar request for military assistance from Central African Republic. As one famous Africa analyst argues, “France’s action in Africa is motivated by its own interests and preference” and hence is not as glorious as it seems.

China is not particularly optimistic about the outcome of the French intervention in Mali. Many Chinese policymakers and analysts believe Mali will turn into France’s “Afghanistan”, dragging France into a prolonged conflict. Equally worrying is the potential retaliation from jihadists against France and other neighboring countries as manifested in the hostage crisis in Algeria, where al-Qaeda-linked militants kidnapped almost 200 hostages to demand a halt of French attacks and release of militants. Although the hostage crisis has been resolved, the fear for future attacks grows dramatically.

What worries China most about the French intervention in Mali is that it may “provide a precedent to the legitimization of ‘neo-interventionism’ in Africa.” He Wenping, a leading Chinese expert on Africa, points it out that although France upholds the flag of “fighting terrorism” in its decision to intervene in Mali, not all of the local opposition groups in Mali are actually terrorists. China sees this as particularly alarming because it legitimizes “fighting terrorism” as justification for foreign intervention in a civil war of a sovereign country. For Beijing, the precedent is a dangerous challenge to its non-interference principle, the foundation of China’s foreign policy.

Authors

Yun Sun

Image Source: © Joe Penney / Reuters

The Al Qaeda Menace in Africa

Bruce Riedel — Mon, 21 Jan 2013 00:00:00 -0500

France has taken up the challenge of defeating Al Qaeda’s new stronghold in northern Mali, its largest since the fall of Afghanistan in 2001. Paris has taken on a well-armed and well-funded group, Al Qaeda in the Islamic Maghreb, which poses a serious threat to Africa and the West. The US has a backseat role in this fight, but a big stake in the outcome. AQIM has already demonstrated it can strike back by taking hostages at an oil installation in Algeria; it may be capable of attacks in Europe as well.

AQIM was for long among Al Qaeda’s weaker franchises. Emerging from an Algerian terrorist group in 2006, it had some early success blowing up the United Nations headquarters in Algiers, but for most of its existence has been confined to kidnapping westerners traveling the remote deserts of Algeria, Mali, Mauretania and Niger as well as other criminal enterprises. It amassed a sizable war chest, more than $200 million according to Algerian sources, from the ransoms paid. Then it accumulated huge amounts of weapons from Libya after Gaddafi’s fall.

Last spring after a military coup in Mali, AQIM found a partner in a local jihadist group in Mali, Ansar al Dine, and together they swept out government forces from the north of Mali, before turning on a Tuareg independence movement, the predominant ethnic group in the north and initially a partner. AQIM and Ansar al Dine now control a vast Saharan stronghold the size of Texas.

Together, they began destroying the Islamic heritage of the fabled city of Timbuktu, much as Al Qaeda and the Taliban destroyed Afghanistan’s historical treasures in Bamiyan Valley the years before the 9/11 attacks. Jihadists from across Africa and as far as Pakistan are flocking to Mali for training, money and weapons.

Ansar al Dine is led by a former Tuareg rebel, named Iyad ag Ghaly, who was a diplomat for Mali in Saudi Arabia, 2008 to 2010. The Saudis expelled him for contacts with extremists in the Kingdom. His goals are probably mostly local, but he established extensive contacts with the AQIM leadership, helping negotiate release of foreigners kidnapped by Al Qaeda for years.

The combustible mix of AQIM, Ansar al Dine and Tuareg rebels is complex. AQIM itself has split in to factions with different leaders but the same general agenda. All are well armed, thanks to looting of the Libyan arms depots; indeed AQIM has acquired so many weapons from Libyan caches that it’s the best armed Al Qaeda franchise in the world today.

Almost all of Mali’s neighbors, except initially Algeria, are horrified at what’s taking place in the north. The Moroccan foreign minister told me recently the jihadist emirate is the greatest threat to regional stability in north and west Africa in more than over a decade. Today, AQIM is the fastest growing Al Qaeda franchise in the world. Based on previous experiences in Afghanistan, Iraq and elsewhere once Al Qaeda establishes a presence in a failing state it becomes difficult to root it out entirely.

So Paris, Mali’s former colonial ruler, stepped into the breach. This month it stopped an advance by the jihadists on the capital in Bamako. Now it’s attacking their bases in the north. The French know more about Mali than other major powers do. The French should – it’s their creation, an artificial state known as French Sudan with borders created by Paris created 1880. French intelligence has better insights into Tuareg and jihadi militants than the US or UK. But it also has baggage from the colonial era, with many Africans and Arabs resenting French interference.

Algeria, Mali's big neighbor to the north with the largest army in Africa, 150,000 strong, a defense budget of more than $10 billion annually, and extensive spy networks across the Sahara, is especially nervous about French actions. Algiers opposed NATO's role in Libya, blaming it for starting the Mali mess. But the Algerians did allow French fighter jets to overfly Algerian territory to bomb AQIM targets in Mali. In response, an AQIM affiliated force attacked a natural gas installation along the Algerian border with Libya,1000 kilometers away from Mali. The resulting carnage killed dozens of terrorists and hostages. It was also AQIM’s first attack on an energy facility in Algeria.

Ironically, the attack probably will push Algiers off the fence about the war. The generals who run Algeria, called collectively “le pouvoir” in Algeria, or “the power,” were reluctant to push AQIM out of Mali, fearing it would only move north to Algeria. Now they have no choice. Since Algeria is Africa’s largest country, with a GDP of $260 billion and a ruthless intelligence service, it can do more to fight AQIM than any other African country. The head of Algerian intelligence, Mohammad Mediene, has a long track record of eradicating terrorist groups using extreme methods. KGB-trained, rarely photographed, he has run Algerian intelligence since 1990 and is known for his professionalism and determination.

Washington can help with diplomacy in the UN and elsewhere. US Secretary of State Hillary Clinton weighed in with a visit to Algiers last year and Ambassador Susan Rice has secured UN blessing for fighting AQIM. The French will require munitions and logistic help in addition to the US drones and other surveillance assets already in use.

We can expect Al Qaeda to strike back even more desperately. The worst case would be a mass-casualty attack in France itself. French intelligence is monitoring the more than 5 million Algerian émigrés in the country. Al Qaeda Amir Ayman Zawahiri has called for a 9/11 in Paris since 2006. AQIM sleeper cells, if any in France, could be activated. France may also see more lone-wolf attacks like those carried out by an Algerian origin citizen in Toulouse last year.

The Al Qaeda stronghold in Mali is only one of the group’s new safe havens developed in the last year since the wave of Arab revolutions sweeping across the region. The so-called Arab Spring removed some of the old police states that ran the Arab world, but also removed many of the counterterrorist professionals like Mediene, creating failed states and lawless areas where local Al Qaeda franchises could take root and operate.

This is Al Qaeda 3.0, the third generation in effect, a more decentralized movement that’s learned from many of the mistakes of the earlier generations of Al Qaeda operatives. They’re more local in orientation and more willing to collaborate with other Sunni Muslim groups and operate without the Al Qaeda brand name. The Al Nusra front in Syria, for example, is a group that avoids the title to avoid outside attack.

The franchises still pledge their loyalty to Osama bin Laden’s successor, Zawahiri, who’s hiding in Pakistan. Zawahiri remains the unchallenged leader of Al Qaeda across the Muslim world, and his periodic public messages provide broad spiritual and strategic guidance to the movement.

Al Qaeda safe havens in Mali, Libya, Egypt’s Sinai Peninsula, Yemen, Iraq and Syria pose separate challenges and must be dealt with on their own merits. In each case the terrorists thrive because the local government is weak and lacks legitimacy. The French, Americans and others can help provide intelligence and weapons, but there’s little we can do to ensure good governance and political legitimacy. Hence, we’re in for a long fight.

Authors

Bruce Riedel

Publication: YaleGlobal

Image Source: © Eric Gaillard / Reuters

The Second Coming of France in Mali and the Challenges of Continental Leadership in Africa

Mwangi S. Kimenyi and Brandon Routman — Fri, 18 Jan 2013 14:08:00 -0500

Last week in Mali, Islamic rebel fighters went on an unanticipated offensive, expanding on the vast swaths of land they control in the country’s north. They began making inroads into the southern half of the country, taking the town of Diabaly, which is roughly 200 miles from the country’s capital, Bamako. Almost immediately, French troops were deployed to the country, and French aerial attacks began to pummel rebel fighters.

The objectives of the French incursion in the country are still not totally clear. If the French mean to take back all the territory that the rebels have gained, current efforts are probably insufficient. It is more likely that the French efforts are simply meant to be a stop-gap measure, to halt further losses and retake recently lost ground. Even with this more modest aim, the French will most likely have to make much larger and more long-term military commitments in the country. Recent statements by French President Francois Hollande and France’s pledge to dramatically increase the numbers of its boots on the ground attest to the likelihood of greater French involvement. When this intervention will come to a close is difficult to foresee.

It is similarly difficult to parse out what France’s broader interests in Mali are exactly. The intervention was partly billed in France as a humanitarian mission: Its purpose is to assist the country in resisting the imposition of the harsh form of Sharia law that the northern region has witnessed in recent months. Perhaps additionally, the intervention was to protect the thousands of French nationals inside the country. Expatriates in the town of Segou have been ordered to evacuate; although, at present, it appears that those in Bamako have not been give such orders.

The intervention was also touted in France as a security operation. An assortment of jihadist fighters call Mali home (and more have immigrated to the country in the past year). Al-Qaida in the Islamic Maghreb (AQIM), one of the main groups in the loose alliance of Islamic rebels now sweeping the country, was behind the Benghazi attack of Chris Stevens, the U.S. ambassador to Libya. On Wednesday, AQIM seized a gas facility in eastern Algeria where it has held dozens hostage and has demanded an end to the French military intervention in Mali. Clearly, France is taking these incidents seriously. Back in November, the French defense minister said “In Mali, it is our own security that is at stake … because if we don't move a terrorist entity will take shape which could hit … France … [or] Europe."

However, the degree to which French security interests are affected by the recent rebel advances is unclear. It would be rather simplistic and naïve to accept the position that France’s intervention is motivated by a desire to do good for the best interests of the Malians. Less discussed in the media’s attention on the topic have been the economic interests France has in the country. According to Katrin Sold, a member of the German Council on Foreign Relations, “France has interests in securing resources … particularly oil and uranium, which the French energy company Areva has been extracting for decades in neighboring Niger.” It is very likely that France is largely driven by economic interests and much less by preventing a humanitarian crisis. After all, there have been many worse atrocities in other former French African colonies, and such a heavy-handed response has not been forthcoming in those scenarios. Protecting the oil and uranium resources must have been pivotal to the decision to intervene in this case.

Admittedly, the crisis in Mali calls for some external intervention, and what is clear is that the Malian forces are ill-equipped to counter the threats that the rebels are posing. The country has not regained its footing after a military coup in Bamako last year. In fact, even previous to the coup, the country’s capacity to fight the rebels in the north was severely limited. It is perhaps unsurprising, therefore, that Malian President Dioncounde Traoré requested French assistance. France, for its part, has stressed the need to “Africanize” the fight in Mali, but so far, this has been difficult to do. A number of months ago, the Economic Community of West African States (ECOWAS) agreed to deploy a military force of more than 3,000 soldiers to the country, but the contingent was not forthcoming. The delay was caused by wrangling over logistical questions, such as how many troops each countries would send and who would pay for the costs of deployment. In the past week, however, support measures have been stepped up, and at present, Canadian and British forces are in the process of transporting soldiers from Nigeria, Senegal, Benin, Niger, Burkina Faso and Togo to the country. Nonetheless, some commentators remain doubtful: “A credible West African fighting force able to seize and hold territory in northern Mali can’t be assembled overnight or in a matter of weeks,” one security analyst, working for the global intelligence company Stratfor, has been quoted as saying.

Thus, while many Africans see the French intervention as yet another sign of the continued domination by former colonial powers, this “re-colonization” is in many respects a result of the failure of Africans to govern themselves and establish credible structures to deal with situations like the one in Mali. Unfortunately, such interventions by former colonial masters tend to create even deeper divisions in the countries concerned. Thus, while the intervention may result in short-run cessation of atrocities, in the long run, the country’s capacity to establish institutions that can adequately harmonize claims by different groups will be weakened.

What also seems to be lost in the discussions about the crisis in Mali, and indeed in many other African countries, is an understanding of the root causes of the crisis and the fact that, ultimately, no amount of fighting will resolve the conflict. Political solutions will be necessary in order to usher in relative peace and stability. This will invariably require addressing the economic grievances of those in the north, establishing a legitimate government in Bamako, and ensuring that elections in the country (which are planned to be held in April) are free and fair. With the country divided in two, and with violence a part of daily life, these tasks will not be easy.

Authors

Mwangi S. Kimenyi
Brandon Routman

Image Source: © Eric Gaillard / Reuters

IMF Concerned With the Pace of France’s Economic Reform

Domenico Lombardi — Tue, 08 Jan 2013 11:51:00 -0500

Editor's Note: This piece is translated and adapted from the piece "La pigrizia riformista di Hollande preoccupa il Fmi," which appeared in the Italian daily Il Foglio.

In an empty Washington, where holiday vacations had already begun, the International Monetary Fund published the annual surveillance report on France the Friday afternoon before the Christmas holiday. Breaking from its usual practice, the IMF did not give the press an advance copy of the report on embargo although it did organize a conference call to discuss the report. However, the conference call was held on December 26, a holiday in France. Why did this happen? The answer lies in the report itself.

Let’s start with fiscal policy. France’s budget deficit is much higher compared to other European countries hit by the crisis. In 2009, it was equal to 7.5 percent of GDP. By comparison, in Italy it was 5.4. By the end of 2012, the French deficit decreased to 4.5 percent and should reach 3.5 percent by the end of 2013, at which point the Italian budget is expected to be balanced. What’s more, French authorities have said that they require five more years, till the end of 2017, to balance their budget. The IMF prefers more neutral terminology, such as “medium-term,” so as to even eliminate any hint of a deadline. Certainly, France does not have the large public debt like Italy has. However, the trajectory over the last few years is perhaps more worrying. For the period 2009-14, the IMF projects an increase of more than 12 percentage points in France’s debt-to-GDP ratio.

Admittedly, the gradual fiscal consolidation may be more a strength than a weakness of President Hollande’s strategy, in that it protects the French economy from harsh measures that are, at least for now, unnecessary. The IMF has acknowledged as much, and goes even further when it notes that “a more measured pace of fiscal adjustment would be appropriate, but European and market imperatives have reduced fiscal space at this juncture”.

Halfway into the report, we finally find the two lines that represent the crux of the fund’s position and provide the metric by which it evaluates the current developments of the French response to the crisis: "With the risks of an imminent break up [of the euro] largely averted, policy priorities have shifted to the process of forging stronger financial and fiscal integration in the euro area and to domestic structural reforms to improve competitiveness and raise potential growth".

It is precisely on this point that the France of François Hollande is in grave difficulty. The sustained decline in the competitiveness of the French economy has translated into a reduction in the country’s degree of international openness of 9 percentage points compared to the eurozone average in the period 2000-10, as the report notes at the very outset. In other words, since France entered the eurozone, instead of benefitting from the greater trade opportunities, it has become more closed off—a true paradox that highlights the sustainability of the single currency in the absence of drastic reforms. It is not a coincidence, the fund duly notes, that the correlation between the French GDP and the global economy has weakened. In this context, it further adds, French multinationals have managed to maintain a competitive price level abroad, but at the cost of reducing profit margins, thereby compromising their respective capacities for investment.

While the IMF had hoped for a “competitiveness shock” reform package, Paris has responded with selective and incremental measures to be put in place gradually. On the whole, the Hollande presidency has yet to put forward a convincing reform agenda. And yet, experience teaches us that the first months of government are the most fruitful in terms of reform.

In 2012, France ranked 34 in the annual ranking of the ease of doing business compiled by the World Bank. This was a drop of two spots compared to the previous year. Though France ranked higher that Spain (44) and much higher than Italy (73), the country is quite a few places behind other eurozone countries such as Finland (11), Ireland (15), Germany (20), Estonia (21), Austria (29), Portugal (30), Netherlands (31), and Belgium (33).

Clearly, the IMF report will not go unnoticed among those German political circles already in dismay with what they perceive as a lack of commitment by France to a broad-ranging reform agenda. The “contract” that Germany implicitly undersigned with France (and with Italy)—so say some in Berlin—was for the former to give up its own monetary sovereignty in favor of the common currency and in exchange for the benefit of greater trade and economic opportunities in the reformed economies of the eurozone.

Instead, during the period 2000-12, the share of German exports in the countries of the eurozone diminished by more than 7 percentage points. That towards emerging economies (Brazil, Russia, India and China), on the other hand, increased by the same amount. According to Goldman Sachs, by the end of 2020, the shares of German exports in the eurozone economies will diminish by almost 12 percentage points, while those in emerging economies will increase by 20 points.

What to do? Some policymakers are asking in Berlin. A lot will depend on whether or not the shockwave imposed on Italy and Spain in the last year and a half continues to bear fruit in terms of reforms. If so, demands for Germany to retract the implicit “guarantee” that has so far spared market pressures on France may gain ground again in Berlin. If that happens, the near future could hold a new, unseen chapter for the euro crisis.

Authors

Domenico Lombardi

Image Source: © Philippe Wojazer / Reuters

Islam: The Long Way to Integration

Jonathan Laurence — Thu, 01 Nov 2012 00:00:00 -0400

Summary: In an interview with ParisBerlin Magazine, Jonathan Laurence discusses the differences between the French and German Muslim immigrants and the divergent ways in which the peoples and governments of those two nations have responded to the change in their demographics.

Download the interview in German here (PDF) »

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Islam: The Long Way to Integration

Authors

Jonathan Laurence

Publication: ParisBerlin

Image Source: © Thomas Peter / Reuters

France's Hollande Seeks Reset in Post-Arab Spring Maghreb

Jonathan Laurence — Wed, 03 Oct 2012 00:00:00 -0400

When crowds of protesters from Tunis to Cairo ignited what would become the Arab Spring in January 2011, it caught the government of then-French President Nicolas Sarkozy off guard. François Hollande, already campaigning to replace Sarkozy as president, saw an opening in Sarkozy’s initial hesitation and quickly promised to distinguish himself from his opponent’s “silence,” “incoherence” and “contradictory” diplomacy to restore French influence in the region. The demonstrations and uprisings in the Arab world allowed Hollande to draw attention away from the global financial crisis, where Sarkozy had staked his electoral argument for continuity, and toward North Africa, where France had lost both prestige and exports on Sarkozy’s watch.

Now president, Hollande will make his first state visit to an Arab country, Algeria, this December, marking the culmination of his effort to restore France’s standing in a region that is being actively courted by the United States and China. The visit also underscores the differences between Hollande’s approach to regional diplomacy and that of his predecessor.

Five years ago, Sarkozy came to power promising an end to “Françafrique,” shorthand for the cozy postcolonial relations between Paris and autocratic rulers in Northern and sub-Saharan Africa. However, Sarkozy demonstrated little interest in France’s former colonies and had no patience for their demands that Paris apologize and provide reparations for its colonial legacy. He hastily convened a Mediterranean Union under French leadership, but the project lacked clarity of purpose. The proposed union was half aspirational -- it included Israel -- and half realist, with figures such as Egypt’s Hosni Mubarak and Tunisia’s Zine El Abidine Ben Ali playing key roles. Sarkozy soon pivoted away from the Maghreb and invested in bilateral courtship of the Persian Gulf countries instead. After stumbling through the outset of the Arab Spring, he played a high profile and vocal role in catalyzing support for the NATO intervention in Libya last year.

Read the full article »

Authors

Jonathan Laurence

Publication: World Politics Review

Image Source: © Philippe Wojazer / Reuters

Europe’s Vital French Connection

Kemal Derviş — Wed, 12 Sep 2012 10:40:00 -0400

In the debates raging over the future of the European Union and the eurozone, Germany always takes center stage. It has the largest economy, accounting for 28% of eurozone GDP and 25% of the eurozone’s population. It is running a current-account surplus that is now larger than China’s – indeed, the largest in the world in absolute value. And, while weighted majorities can overrule it on some issues, everyone acknowledges that little can be done in the eurozone unless Germany agrees.

But the emphasis on Germany, though justified, should not lead to an underestimation of France’s critical role. France not only accounts for roughly 22% of eurozone GDP and 20% of its population – behind only Germany – but also has the healthiest demography in the eurozone, whereas the German population is projected to decline over the next decade.

At the same time, France’s critical role reflects more than its size. Indeed, in terms of influencing outcomes in Europe, France is as important as Germany, for three reasons.

First, France is an indispensable link between southern and northern Europe at a time of growing economic and financial division between creditors and debtors (a fissure that has begun to assume a cultural dimension). An active France can play a bridging role, leveraging its strong relationship with Germany (a friendship that is a pillar of the EU) and its proximity and cultural affinities to the Mediterranean.

France is “southern” in its current-account deficit, but “northern” in its borrowing costs (slightly above Germany’s), owing partly to inflows of capital fleeing the south, as well as to modest but positive economic growth. Moreover, there is no perceived “re-denomination” risk affecting French assets, given markets’ confidence that France will retain the euro. So, while France faces huge economic challenges, its northern and southern features permit it to play a proactive role in the European project’s survival.

French President François Hollande has already given a rather successful preview of this role, meeting German Chancellor Angela Merkel in Berlin on his first day in office, and, a month later, participating in a high-profile meeting with the Italian and Spanish prime ministers in Rome. Indeed, he took the lead in adding a “growth pact” to the “stability pact” that had been negotiated under Merkel’s leadership.

Second, France, under its new center-left government, must demonstrate that the “European model” of a market economy coupled with strong social solidarity can be reformed and strengthened, rather than abandoned – not just in Europe’s more pragmatic north, but also in its more ideological south. French Socialists will not renounce their traditional commitments; nor should they. But they now have the opportunity to contribute to the European model’s renewal.

Under Hollande, France’s Socialists favor achieving that renewal through a process of social dialogue that convinces rather than imposes, that focuses both on revenue measures and on boosting government efficiency, and that may adopt some of northern Europe’s more successful “flexicurity” policies, which combine greater labor-market flexibility with strong social protection. The reforms should also introduce much greater individual choice, permitting solutions to retirement, education, health, and lifestyle issues that can be more easily tailored to citizens’ specific circumstances and needs.

The government of Hollande and Prime Minister Jean-Marc Ayrault has strong majorities at all executive and legislative levels, giving it a rare opportunity to act. If it can renew the European model at home, it will be able to project that success much more widely, particularly in southern Europe, in turn reinforcing confidence and belief in the EU, particularly among the young generation. The French center-left must lead in conceiving a vision for Europe in which solidarity and equity reinforce long-term economic strength.

Finally, along with the United Kingdom among European countries, France retains more of a global role than Germany has yet acquired. While the United Nations Security Council is outdated in its structure, it still plays a crucial legitimizing role; and France, not Germany, is a member. In many other international organizations as well, France punches above its weight.

Similarly, while France exports much less than Germany outside the EU, many large French enterprises rival Germany’s in global reach and technical know-how. And French is still a global language. In other words, France not only is a link between Europe’s north and south, but also contributes substantially to linking Europe to the rest of the world.

Europe needs a renewed vision and effective policies to realize that vision. France’s Socialist-Green government can play a critical unifying role as Europeans confront their biggest challenge in decades. Its success will be highly consequential – not least for the political debate that will inform the outcome of Germany’s elections in 2013.

Authors

Kemal Derviş

Publication: Project Syndicate

Image Source: © Charles Platiau / Reuters

Will the Euro Survive?

Liaquat Ahamed — Mon, 20 Aug 2012 00:00:00 -0400

Editor’s Note: Liaquat Ahamed delivered this speech on the future of the euro at the 2012 Sun Valley Writers’ Conference. Ahamed, who is a Trustee of the Brookings Institution, won the 2010 Pulitzer Prize for History for Lords of Finance: the Bankers Who Broke the World (Penguin, 2009). Brookings President Strobe Talbott asked Mr. Ahamed to share his speech on the Brookings web site.

Europe is today at a critical juncture in its history. In the fourth year of a giant financial crisis that never quite seems to get resolved and keeps spiraling on, hundreds of billions of dollars of capital is fleeing the weaker countries. It is tearing the banking systems apart. It has driven several governments close to insolvency and default. The economy has reeled back into recession for the second time in three years. People are now talking about a lost decade. More worrying, some parts of the continent are in an actual deep depression. Unemployment in the so-called economic periphery of Europe—Greece, Portugal, Ireland, and Spain—has risen above 20%. In some parts youth unemployment is as high as 50%. These are Great Depression sort of numbers.

Not surprisingly this is bringing political turmoil. In the last year, 11 of the 17 eurozone governments have been rejected in the polls or fallen prematurely. Extremist parties, especially nationalist ones, are on the rise. Support for the euro in both the weak countries and the strong countries is eroding.

What is particularly scary is how impotent the authorities seem to be. Massive centrifugal financial forces are ripping through the eurozone. And yet, whatever the authorities try seems to have no impact. In the last two years, the leaders of the euro countries have held 19 summits; they have created a bailout fund of close to one trillion euros; the Greek debt has been restructured not once but twice, and a third makeover seems to be on the cards; the European Central Bank has sought to support the government bond market in various ways and pumped in three trillion euros into the banking system. Most recently they have agreed to use the centralized bailout fund to recapitalize the Spanish and Irish banking systems.

And yet nothing they have thrown at the problem has worked; indeed matters seem to be getting worse.

What is fascinating is that in commentary from this side of the Atlantic the overwhelming consensus is that the eurozone, as it is currently constituted, cannot survive. Whereas most Europeans—apart obviously from the British who are a breed apart—believe fervently that the euro will hold. When you point this out, Europeans will typically reply that this is because Americans don’t fully appreciate the political dimension of the single currency. To most Europeans monetary union is much more than just an economic arrangement. It is a reflection of a much deeper political commitment to an integrated Europe that has motivated the continent’s statesmen since the Second World War. And until you appreciate that, Europeans insist, you will never fully be able to understand what is going in Europe.

This paper tries to address three questions. First what led to the creation of the euro in the first place? Second how did it get into the mess that it is in today? And third, why has it been so difficult for the Europeans to dig themselves out of the hole they are in? It deals less with the pure economics of the situation, and more with the politics of the euro—and in particular the role and position of Germany.

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The idea of a unified Europe has been around for a long time. As far back as the18th century, one finds George Washington writing to the Marquis de La Fayette that “one day, on the model of the United States of America, a United States of Europe will come into being.” And already by the middle of the 19th century, visionaries like Victor Hugo had begun dreaming of a single European currency.

But it was only after the Second World War when the nations of Europe saw themselves squeezed between the two great superpowers, that the idea got any real traction. The right alignment of geopolitical forces was clearly a big factor behind the European idea. But essentially it was a small group of French and German statesmen who really gave life to the idea.

The initial architect was Jean Monnet. Born in 1888, he was the son of a cognac merchant and entered his father’s business at 16. He happened to stumble into international economics during the First World War when he was drafted to work on the challenge of getting Britain and France to cooperate economically. For the next twenty years he alternated between two quite improbable careers, on the one hand selling cognac, which sounds like a very pleasant and relaxing way of life, and on the other a high-flying career as an international financier and civil servant, including, by the way, a stint in his early thirties as the deputy secretary general of the League of Nations.

After the Second World War, he came up with a scheme that became known as the Schuman Plan. France was then the biggest steelmaker in Europe, but had no coal to speak of. Germany on the other hand had the largest coalfields in Europe. He proposed that France and Germany pool their resources in coal and steel. In this way Germany would be guaranteed a market for its coal, and France would be guaranteed a permanent supply of raw materials.

When he first advanced the idea, Monnet saw it as a defensive measure. In the immediate post-war period the French were not surprisingly deeply mistrustful of the Germans. But, ever practical, Monnet believed that a partnership with Germany would protect the French steel industry and thus restore prosperity to Northern France.

There was also an idealistic dimension. The hope was that the two countries, which had over the previous 80 years fought three terrible wars, would in the process learn to work with each other.

The European Coal and Steel Community did not in fact achieve very much in economic terms. But it provided the key psychological impetus for cooperation between the key nations of Europe and in 1958, under the Treaty of Rome, six of them committed themselves to creating a free trade zone.

Monnet was no Utopian. He understood that it was no easy matter to forge an economic federation out of a bunch of countries, all with different languages and customs and laws, many of which had been repeatedly at war with each other over the centuries. So his approach was to start small and then step-by-step to chip away at the obstacles to trade.

Monnet may have been the economic architect of the Common Market. But the credit for the political vision that an economic bond between the countries of the continent would not only bring prosperity but also peace in its wake belonged to two statesmen—Konrad Adenauer, the first chancellor of postwar Germany and General Charles de Gaulle of France.

Adenauer had been mayor of Cologne between 1917 and 1933. Dismissed after Hitler took power, he spent the years of Nazi rule as a private citizen, in and out of jail, including after the failed assassination attempt against Hitler in 1944. In 1949, at the age of 73, he became West Germany’s first chancellor, a position he held for the next 14 years. When he finally retired in 1963 at the age of 87, he was the world’s oldest elected leader.

As a Catholic from the Rhineland, the area of Germany both physically and culturally closest to France, he was deeply suspicious of the sort of Prussian militarism that had caused Germany so many of its problems and was acutely sensitive to the German responsibility for two world wars. As chancellor he decided not to oppose the indefinite division of Germany that occurred after the war, but instead to accept it and focus all his efforts on rehabilitating Germany in the eyes of the rest of Europe.

In 1958 he met Charles de Gaulle, and was totally captivated. De Gaulle was a larger-than-life figure. He had this wonderfully overblown view about the destiny of France and was infamous for his grandiose rhetoric —over the top statements like “France cannot be France without greatness.” He had also developed a rather epic view of himself, seeing himself was one of those handful of French heroes, people like Joan of Arc, Napoleon Bonaparte, or Clemenceau, called to greatness to save their country at a moment of national weakness.

For all de Gaulle’s grandiosity and bluster, he was actually quite a realist. He had been deeply marked by the constant military defeats to which France had been subject and recognized that on its own France would be condemned to be a second-rate power. But at the head of Europe it would have to be accepted as part of the first tier.

“Europe is the means by which France can once again become what she has not been since Waterloo: first in the world,” he declared.

For his part Adenauer saw the Common Market as a way for Germany to earn its way back into the community of nations. In the early 1950s, Germany was still occupied by foreign troops and still viewed as a problem country. Adenauer realized that by joining up with France and ceding some degree of sovereignty to Europe, Germany could restore its own legitimacy as a nation. He was also fully aware that German leadership within Europe was at that stage unthinkable. So he agreed to take a back seat and allow France to be in the driver’s seat. What made that acceptable was his admiration for de Gaulle.

That Franco-German partnership, with France behind the wheel and Germany providing the economic motor, was to provide the formula for the next 35 years.

In its first two decades, the European Common Market was an enormous economic success. Trade between the European countries increased fourfold, much of the impetus coming from the West German economic miracle. As a consequence countries within the community grew at double the rate of the countries like Britain, which did not join.

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While the European Community was remarkably successful in achieving free trade in goods and to a lesser degree services, its experience with money and currency was much more checkered.

In the early 1970s Europe was hit by a series of shocks including the oil price rise and the collapse of the Bretton Woods system of fixed exchange rates. For a variety of reasons, Germany was able to handle those economic shocks much better than the other members of the Common Market and it emerged as the unquestioned economic powerhouse of Europe.

With the anchor of the dollar gone and fearing the sort of instability that had led to the currency and trade wars of the 1930s, European countries decided to tie themselves to the deutschmark, the German currency. In effect the mark would replace the dollar within Europe. The driving force behind this arrangement, which came to be known as the European Monetary System, was again a Franco-German duo, Valery Giscard d’Estaing of France and Helmut Schmidt of Germany.

Their careers ran in parallel. They both came to power in May 1974, within 11 days of each other, and held office for almost the same length of time, 8 years in one case and 7 years. Each had been his country’s finance minister before becoming the head of government and both of them understood money.

Despite their different backgrounds—Schmidt came from a humble middle class family of teachers from Hamburg, while Giscard had somewhat aristocrat pretentions—they had very similar personalities, difficult men who did not suffer fools gladly.

The main push for the European Monetary System again came from the French. Throughout the late 19th and the first half of the 20th century, even though Germany had been the industrial giant of Europe, France had actually been the dominant country financially. For example, Paris had always been much more of an international financial center than Berlin and France had always had much larger gold reserves than Germany. By the 1960s all that had changed. France was now financially in second place within Europe. Giscard decided that the way to reestablish his country’s credibility in financial matters was to piggy-back off the German currency.

Schmidt’s motivation was almost the opposite. He was worried that German banks and insurance companies were becoming so dominant within Europe that a reaction was bound to occur. He conceived of the European Monetary System as a way to make German economic might less obviously visible.

Over time, however, the French became increasingly dissatisfied with the European Monetary System. By tying the franc to the deutschmark, France did get the benefits of German monetary stability. But it also meant that all decisions about interest rates in France were taken by a bunch of Germans in Frankfurt. And so the French began to push for full monetary union, run by a full European central bank, believing that monetary union would allow France to have its cake and eat it too—to get all the benefits of a German-style hard currency but with a seat at the table.

At this stage French and German attitudes began to diverge. Both sides embraced the need for a step-by-step approach, which has always been the hallmark of the European way of handling such issues. But at each juncture, France always seemed to want to take bigger steps than Germany. The Germans, supported by the Dutch and most central bankers, kept arguing that Europe was not yet ready for a single currency. The structure of the economies had to converge first. Once these fundamentals were in sync, then countries could think of fixing exchange rates and moving to monetary union. Whereas the French, supported by the Belgians and the bureaucrats in Brussels, believed that it was possible and necessary to force the pace somewhat. Take bolder steps, they argued, even if these seemed at the time premature. That would force changes in economic policy and bring about convergence faster.

By the late 1980s this difference had led to a stalemate. It all came to a head in 1989 when the Berlin Wall came down.

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Which brings us to the third great partnership between a German and a French leader, that between Helmut Kohl and Francois Mitterrand. Coming to power and in the early 1980s, both would end up as the longest serving leaders of their respective countries since 1870—Mitterrand for 14 years, Kohl for 16.

By virtue of the generation that they were born in, both were acutely aware of the intertwined and tragic histories of their two countries. Kohl had been born in 1930 in the Rhineland, close to the French border. He would take foreign visitors into the garden of his home there and show them the countryside around, and talk very emotionally about how the soil was soaked with the blood of French and German soldiers.

Mitterrand had been similarly marked by the war. Born in 1916, the year of the Battle of Verdun, he spent 18 months after the Fall of France in 1940 in a German prison of war camp. After twice trying to escape but being recaptured, he succeeded on his third attempt. But he often spoke about his experiences as a German prisoner of war.

They had contrasting personalities. With his jovial manner and provincial accent, Kohl liked to give the impression of being a good-hearted country bumpkin. He was constantly being underestimated and mocked in the press for his lack of sophistication. Mitterrand by contrast was the epitome of sophistication, an aloof intellectual who kept his cards close to his chest and developed a reputation for cunningness and opportunism.

Despite this and despite the fact that they did not share a common language—all their conversations had to pass through interpreters—they struck up a great friendship. There is, for example, a very poignant photo of the two of them holding hands at a memorial ceremony for the war dead of Verdun.

The fall of the Berlin Wall in November 1989 at first created a deep rift in their partnership. When it happened Kohl decided to grab history by the horns and, without consulting any of his allies, developed a plan for German reunification, which he then presented to the world. Mitterrand since 1981 had been predicting that the Soviet Union would fall apart and that Germany would be reunified. Nevertheless when it happened, it occurred so fast that he was taken completely by surprise. On learning about Kohl’s fait accompli, he supposedly threw a temper tantrum lasting several hours.

Over the next month there ensued a flurry of negotiations between the two leaders. Fearful that a united Germany would go off on its own and upset the European balance of nations, Mitterrand kept threatening to veto German reunification. Finally in order to get the French to accede, Kohl offered monetary union as a quid pro quo, arguing that this would guarantee that a united Germany would be irrevocably bound to the rest of Europe. And so the bargain was struck: the single currency in return for German reunification.

Monetary union was therefore a fundamentally flawed project from the start, pushed for all the wrong reasons. Neither Kohl nor Mitterrand had any clue about finance and allowed political considerations to trump economics.

From an economic point of view monetary union had two big flaws. First, such an arrangement only really makes sense in a large continental-size area like Europe if workers can move freely from areas of high unemployment to those where jobs are plentiful. That is essentially why monetary union in the U.S. works pretty well. Americans think nothing of moving from state to state. So, for example, when a housing bubble bursts in, say, Nevada, unemployment there may shoot up for a while—but, over time, workers will move out of the state looking for job opportunities elsewhere. By contrast, in Europe, workers are much more tethered to their local economies by linguistic and cultural ties. As a consequence pockets of deep unemployment can persist for years and even decades.

The second problem is that, in a single currency area, credit conditions are by definition roughly the same for all regions, which only makes sense if the member economies are at roughly comparable stages of development. Otherwise the one-size-fits-all credit policy can cause all sorts of problems, which in Europe it did.

The economic flaws were important. But even more significant for today’s situation was the fact that from the start the single currency was never popular with the man in the street in Germany. The deutschemark was a symbol of Germany’s postwar economic success and the public feared that abandoning it would sap German economic might. And it did not help that the Bundesbank, the German central bank, made no secret of being vehemently against the single currency. In fact most of the economic establishment was against the idea. In early 1998, as the deadline for the single currency approached, 155 German professors of economics signed a letter proposing that the whole scheme be put on the back burner.

On this side of the Atlantic, most economists, on both the left—people like Paul Krugman—and on the right—people like Marty Feldstein—were also deeply skeptical of the idea. But these criticisms were dismissed, especially in France, as self-serving rationalizations by Americans fearful that the euro would compete with the dollar as the world’s main reserve currency and thus undermine U.S. economic dominance.

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For all these sour predictions, the first few years of the euro were surprisingly trouble-free. Public finances in southern Europe were actually quite disciplined. Italy managed to cut its budget deficits, and though some creative accounting was involved, progress was very real. In places like Spain and Ireland, massive inflows of capital set off a boom, which allowed the government to pay down its debt to remarkably low levels. The big exception was, of course, Greece—but we did not know the extent of the problems at the time because it was systematically cooking its books.

The real problem was not in the public finances but in the one-size-fits-all monetary policy, which kept interest rates in the Southern Tier far too low during the good years. This in turn created a credit and real estate bubble in places like Ireland and Spain. Another effect of this boom was to drive up wages. So in the first decade of the euro, while the Germans agonized about how uncompetitive they had become, and went furiously to work restructuring their economy and restraining wages, the southern European countries were letting it rip. During the 2000s, labor costs in Germany rose 20%, in Italy by 40%, and in Spain they rose 60%.

As a consequence by 2008, the economies of southern Europe had become seriously uncompetitive and were really only being kept afloat by flows of money from French and German banks: money that would prove to be very fickle.

When the crisis hit in 2008, both the U.S. and the Europeans were determined not to make the same mistakes as the Japanese when faced with similar troubles back in 1990. So on both sides of the Atlantic interest rates were cut to the bone, though the Fed was a little quicker off the mark than the European Central Bank. Bank balance sheets were cleaned up and banks were recapitalized. Again the U.S. authorities acted with greater dispatch and more aggressively than the Europeans. And finally governments on both sides of the Atlantic attempted to jump-start their economies by allowing budget deficits to expand. In Europe this process was much more automatic because the social safety net there is more extensive than here. In the U.S., it took a big fight in Congress to put the same stimulus in place.

If the Europeans essentially followed the same playbook as we did, why then are they in such worse shape?

The financial crisis has uncovered the fundamental structural flaw of the euro system. In a downturn European economic policy operates in a completely perverse way. It actually works to make the weakest parts of the eurozone even weaker. The problem is that power is vested with the member states. As a consequence the economic response to a downturn has to occur largely at the national level.

Take Ireland for example. The cost of bailing out the Irish banks was about E70 billion. In the scheme of things this is not a lot of money. But Ireland is a small place: 4 million people with an economy the size about the size of Connecticut. Because the Irish taxpayers had to foot the whole bill, it ended up amounting to some 40% of their GDP, something like 70,000 euros per household. In relative terms it was the second largest bank bailout in history, only exceeded by what happened in Iceland. Had American taxpayers to bear a comparable burden, the cost here would have been $6 trillion. And not only did the Irish taxpayers have to come up with money for the banks, they also had to lay out had for their own unemployment insurance, all at a time when their tax revenues had collapsed.

To understand the effect of this, try the following mental exercise. Just suppose the cost of cleaning up the Nevada housing bubble, all those bad mortgages, and resulting bank losses, and unemployment checks had been left entirely in the hands of Nevada taxpayers. How do you think Nevada would have fared?

Like the U.S., where the epicenter of the housing bubble was concentrated in a few sunbelt states—Nevada, Florida, Arizona, California—the European economic disaster was similarly concentrated in a few countries, Portugal, Ireland, Spain, and Greece. Now, the U.S. economic woes are by no means over. But compared to Europe, we are in much better shape. And what has helped the U.S. is that its response to the downturn was largely federal, paid for through the federal budget. Neither Nevada nor Florida nor California nor any of the states that were badly hit had to cope with the crisis on their own. All the states chipped in. And the astounding thing is that it all happened quite automatically.

The political machinery kicked into gear and we had New Yorkers and Midwesterners paying for the mistakes of Floridian homeowners or bailing out a bank based in North Carolina or financing unemployment checks in Michigan. We did not have lots of op-eds decrying the inherent fecklessness of people in Reno or Miami Beach. We did not have demonstrations in the street. And we did not need 19 different summits of state governors to figure out how the burden should be shared.

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That brings me to my final battery of questions: How does Europe get out of this hole and will the euro survive?

Unfortunately I have no idea. No one has. It depends on too many imponderables: on how much economic pain the politicians of southern Europe are willing to impose on their electorates, on how much money the Germans can be persuaded to put on the table, and what they calculate the costs of a breakup to be.

But as you can tell from the tone of my remarks, I am pessimistic. The dilemma is that there is almost nothing that Spain, Ireland, Portugal, and even in some respects Greece, can do by themselves that will get them out of the hole they are in. All of them are caught in a vicious downward spiral where the only action available to them, which is to curb borrowing by taxes or cutting government expenditure, will deepen their recession, throw more people out of jobs, increase the bad debts of their already fragile banking systems and possibly even worsen their budgetary situations.

The solution to the euro problem will therefore have to come from some action at a European-wide level. And that will be largely decided in Frankfurt and Berlin.

There are three big hurdles that I see.

First the German diagnosis of the problem is totally at odds with what most of the others think. Without going into abstruse economic debates, the Germans basically believe that the problem arose because of failures in the way each of the southern European countries managed its economy. So they insist that the solution is for the southern Europeans to get their own house in order. Angela Merkel supposedly likes to quote Goethe: “If everyone just sweeps outside their door, the whole city will be clean.” It is a view that owes as much to moral philosophy, in particular the Lutheran stress on the virtues of self-sufficiency, than to any economic theory.

The opposing view is that the Europe is in trouble primarily because of systemic failures in the way the eurozone operated. Thus the solution lies in some form of collective European action.

As with almost all economic debates, there is some truth to both sides. The Germans are right that the southern European economies have been badly mismanaged. Greece had an egregiously corrupt government. Italy squandered an opportunity to reform itself. Others like Ireland and Spain were unlucky, short-sighted and foolhardy.

But those who argue that the euro had some fundamental systemic flaws that enabled all this bad behavior on the part of governments and banks are also right.

Because the Germans have such a different interpretation of the problem, they end up being the spoiler. Every serious proposal advanced to deal with the systemic issues—some form of burden-sharing through eurobonds, a European bailout fund for banks, more active use of the ECB to stabilize government bond markets, more aggressive monetary policy by the central bank—ends up being vetoed by an intransigent Germany. As a result, aside from its small group of allies, Finland, Austria and the Netherlands, Germany is becoming increasingly isolated in the European corridors of power.

The second problem is the conflict about money: who pays and how much. There is a very simple tradeoff. Southern Europe will only be able to grow if it can restore its competitiveness by some very painful and deep cuts in wages. The more money that Germany puts on the table, the less the required cut in the standard of living of the average Spanish or Italian worker. The Germans have a nightmare that they will end up in the sort of position that northern Italy is in, which has been transferring money to southern Italy ever since the unification of Italy 150 years ago.

The third problem, which is the biggest problem as far as I am concerned, is the erosion of commitment within Germany to the euro. As I have tried to describe in this talk, for the last 60 years German leaders, from Adenauer to Kohl, men who had lived through the Second World War and its aftermath, saw in the European project a way for Germany to atone for its sins and rehabilitate itself in the eyes of the rest of Europe. That is why they allowed themselves to be bounced by the French into a single currency that they did not really believe in. That generation of leaders is now gone. The new generation of Angela Merkel and Wolfgang Schauble grew up in a postwar Germany that is proud of German economic achievements and sees little reason to keep apologizing for the actions of its grandparents.

****

In 1953 the novelist Thomas Mann gave a speech to an audience of students in Hamburg. The central challenge confronting the country, he told them, was the deep mistrust of German intentions in the rest of Europe. As a result their goal should be to strive not for “a German Europe but a European Germany.” And thus, during the following fifty years the Germans assiduously avoided any hint that they sought continental primacy. They always tried to keep a low profile in Europe, to avoid the leadership position, leaving that role to France. And by the way the French were always happy to oblige.

Here is the great irony of the current situation. In the seventy years before Thomas Mann spoke, the main threat to European stability had indeed come from German attempts to dominate Europe. The continent now faces the opposite problem. The only hope for stability is actually for the Germans to step up to the plate and take on the mantle of leadership within Europe, with all the burdens and responsibilities that go with it. Frankly that goes against all the instincts of the generation that has grown up in post war Germany.

Economists do not have a great reputation for their forecasting ability. Understandably so. After all they seemed to have missed every single major crisis that we have had over the last four decades. This is one exception. In 1997 the American economist Marty Feldstein wrote an incredibly prescient piece in Foreign Affairs in which he argued that the single currency, far from cementing the European Union, would, in his words, “lead to conflicts over economic policies … that could reinforce long-standing animosities based on history, nationality, and religion.” He has proved to be right.

This crisis has thrown open a new faultline across Europe, between Germany and all the other major countries, especially France, Italy, and Spain. It is a conflict that is destined to remain with us for decades to come and will define the future of the continent.

Authors

Liaquat Ahamed

Publication: Sun Valley Writers' Conference

La capacité des Européens à façonner une relation stable entre l’État et l’islam est essentielle

Jonathan Laurence — Thu, 05 Jul 2012 00:00:00 -0400

Editor's Note: In an interview about his new book The Emancipation of Europe’s Muslims with the French newspaper La Croix, Jonathan Laurence argues that the European capacity to facilitate a stable relationship between the state and Islam is essential.

Professeur à Boston, Jonathan Laurence a mené, de 1998 à 2011, une étude comparative dans quatre pays européens sur la manière dont sont structurées les relations entre l’État et « la mosquée ».

Quels sont les enjeux de ces instances représentatives de l’islam pour les musulmans eux-mêmes et pour les États ?

Jonathan Laurence: L’institutionnalisation des relations entre l’État et la mosquée est aussi inévitable que souhaitable, des deux côtés. Plusieurs millions de personnes d’origine musulmane vivent en Europe : l’enracinement de leur culte dans les institutions locales et nationales est dans l’intérêt de tous. Une instance représentative est le complément naturel d’une pleine citoyenneté.

Par ailleurs, un État ne peut se passer d’un partenaire administratif légitime pour accorder à l’islam les mêmes droits – et le même contrôle – qu’aux autres religions. Retarder cette étape a des conséquences très concrètes : la multiplication des expressions religieuses dans l’espace public, qui peut alimenter la perception publique d’un échec de l’intégration et un cycle d’incompréhensions mutuelles.

Pourquoi avez-vous choisi ces quatre pays – France, Grande-Bretagne, Allemagne et Italie – pour votre enquête ? Quelles différences et ressemblances entre eux ?

À eux quatre, ils couvrent les principales sources de flux de migrants d’origine musulmane en Europe de l’Ouest. Tous observent chez eux la générosité de la Ligue islamique mondiale (créée par l’Arabie saoudite), mais aussi l’islam exporté d’Algérie, du Maroc, du Pakistan ou de la Turquie, ainsi que les trois grandes branches de l’islam politique actuel : le Tabligh, Mili Görus et les Frères musulmans. Et tous se sont dotés, au tournant des années 2000, d’un conseil représentatif de l’islam, certains plus décentralisés que d’autres, certains associant musulmans et personnalités qualifiées non musulmanes…

La plupart ont souffert d’instabilité chronique et de sous-productivité. Mais la faute est partagée : d’un côté, on demande aux organisations musulmanes à la fois de démontrer leur malléabilité face aux pouvoirs publics et de conserver la légitimité de la rue et, ce, alors qu’elles n’ont pas à être démocratiquement élues : aucun autre interlocuteur cultuel ne l’est.

De l’autre, l’État doute de sa capacité à avoir prise sur les branches les plus extrêmes et donc les exclut du dialogue. Il doit avoir confiance dans ses institutions qui, par le passé, ont déjà démontré leur capacité à «digérer » des mouvements radicaux, d’extrême gauche par exemple, et à accompagner leur évolution.

Quel bilan dressez-vous de ces expériences ? Quelles sont les raisons de leurs succès et échecs ?

Ces conseils ont déjà porté quelques fruits quant à la « domestication » et la banalisation de l’islam : de la nomination d’aumôniers pour l’armée ou les prisons à la création de formation pour les enseignants de religion à l’école ou à la signature de « chartes de valeurs ». Même si la formation locale des imams reste insuffisante, la préparation des candidats au départ de Rabat ou d’Ankara s’est répandue, tout comme les séminaires d’acclimatation à l’arrivée.

Toutefois, ces instances représentatives ne trouveront leur équilibre que si les États-nations démontrent leur volonté de filtrer les influences étrangères sur leurs citoyens. La « citoyennisation » de l’islam européen – qui est l’objectif – ne sera complète que lorsque les communautés locales parviendront à former et à payer leurs imams et à construire leurs mosquées.

En attendant, la solution relève plutôt de la logique du pansement : des accords diplomatiques perdurent entre États européens et pays d’origine pour importer mosquées et personnels religieux. Et les gouvernements européens continuent à sous-traiter les détails de l’observance religieuse aux représentants de l’Algérie, de Turquie, d’Arabie saoudite ou du Maroc, ce qui retarde le processus de création d’un « islam européen »…

Dans cette période critique de tumultes dans le monde arabe, la contribution des Européens à l’émergence d’une relation stable entre l’État et l’islam est capitale : « les absents ont toujours tort ».

Recueilli par Anne-Bénédicte Hoffner

Authors

Jonathan Laurence

Publication: La Croix

Why Is It So Hard for the French to Say Sorry to Algeria

Jonathan Laurence — Thu, 05 Jul 2012 00:00:00 -0400

As Algeria kicks off festivities for the 50th anniversary of its independence from France this week, all eyes are on the former colonial power's new president, François Hollande. Nine countries asked to join the party in Algiers — including the United States, which conveyed American gratitude to three-term President Abdelaziz Bouteflika for Algeria's "key role" in global counterterrorism and regional security. The French government sent no representatives to the opening ceremony, held in Algiers on July 5, but said that Foreign Minister Laurent Fabius would travel there soon to advance a late-summer visit by Hollande, raising expectations that a turning point is near in the prickly post-colonial relationship.

Some anticipate that Hollande could become the first French president to apologize formally for more than a century of colonization and hundreds of thousands of war dead beteen 1830 to 1962. Officials in Algiers say a full and frank apology is long overdue. Should they expect normalization of Franco-Algerian relations from a leader who billed himself in the campaign as "président normal" — in stark contrast to his predecessor, the frenetic Nicolas Sarkozy?

Hollande is the first French president with an explicitly post-colonial mindset. He was 10 weeks old when Algeria's National Liberation Front (FLN) took up arms against French occupation. His predecessor, Sarkozy, may be a year younger, but during his presidency he had no time for what he called "eternal repentance." And his party colleagues in parliament even passed a law praising colonialism's "positive role."

Hollande, on the other hand, has long been on conciliatory and friendly terms with Algeria. As a student, he interned in the French embassy there in 1978, and he returned to Algiers as a guest of the ruling FLN while he was Socialist Party secretary in 2006, where he was granted a lengthy meeting with Bouteflika. Two weeks after declaring his presidential candidacy in December 2010, Hollande returned to meet with the father of Algerian independence, Ahmed Ben Bella.

Read the rest of the article in Foreign Policy.

Authors

Jonathan Laurence

Publication: Foreign Policy

Image Source: Louafi Larbi / Reuters

The Mysterious François Hollande

Justin Vaïsse — Tue, 26 Jun 2012 00:00:00 -0400

Editor’s Note: This piece originally appeared in The Financialist

Not since Charles De Gaulle has a French president confronted an economic and international situation as tumultuous as the one faced by François Hollande. Hollande, who took over the presidency from Nicolas Sarkozy last month, is facing an unemployment rate in the double digits and a national debt that stands at 90% of GDP. In addition to his domestic challenges, Hollande finds himself at the center of a deepening European crisis, with Greece on the brink of collapse and most euro-zone countries in a recession. While the challenges facing the new president are enormous, there seems to be little consensus on how he will govern. This is largely because Hollande managed to capture France’s highest office while remaining a relatively unknown commodity. Even though he is now the most powerful man in French politics, many still wonder – who is François Hollande?

The new French leader’s electoral campaign does provide a few clues about the man and his politics. Throughout his campaign, Hollande wooed his left-wing electorate, while at the same time putting himself in a position to deliver on his promise to keep deficits under control. Take his rollback of Sarkozy’s pension reforms, which would allow French workers to retire at 60. This policy proposal is actually more of a modest tweak than a fundamental revamp, as it only impacts the few workers who have worked continuously for 41 years. Hollande also promised to hire 60,000 new teachers, a pledge that has deficit hawks concerned. However, the new president plans to pay for these new teachers through an equal reduction in the number of civil servants elsewhere in France’s sprawling bureaucracy. Finally, his famous campaign promise to institute a 75% tax bracket on the rich may include many exemptions and be temporary. Hollande’s platform shows that he campaigned as a Socialist, while making sure he could govern as a moderate.

Unlike his predecessor, Hollande is able to consistently stay on message. President Sarkozy would launch several new ideas and initiatives on any given week, to the point where people lost track of his core positions. By contrast, Hollande, even when his poll numbers dropped dangerously low and advisers urged him to change tack, stuck to his strategy of offering a “normal,” predictable presidency with just a few flagship reforms.

This consistency continued after the election, especially in his approach to the European crisis. Upon arriving in Berlin, only hours after his inauguration, for meetings with German Chancellor Angela Merkel, he spoke in favour of Eurobonds and a package of growth measures designed to pull Europe out of its economic rut. Days later, while attending the G8 meetings at Camp David, Hollande reiterated his stance for more spending. He did so again in Brussels during the first European Union summit.

His main proposals during the campaign led The Economist to label Hollande a “rather dangerous man” who would never implement the structural reforms advocated by a number of free-market analysts. However, a glance at his stable of economic advisers shows that they are not “dangerous leftists.” One example is Harvard economist Philippe Aghion, a known supply-sider keen on spurring long-term growth through innovation and ambitious R&D policies. Another example is Jean Pisani-Ferry, a former advisor to Dominique Strauss-Kahn, who is attuned to the need for France to restore its competitiveness. Of course, whether these advisors will be able to influence the president on ambitious structural reforms remains to be seen.

On European policy, Hollande has maximized his freedom of action. His choice to head up French diplomacy is former Prime Minister Laurent Fabius, who famously came out against the European constitutional treaty back in 2005. However, as foreign minister, Fabius will have little say over European policy and negotiations with Berlin, which will be directed from the Elysée and executed by pro-Europe figures such as Prime Minister Jean-Marc Ayrault and Economy and Finance Minister Pierre Moscovici.

These choices seem to confirm the personal image of Hollande as a strong believer in European integration. Hollande is known to be a disciple of Jacques Delors, the legendary head of the European Commission (1985-1995) who presided over a jump in integration with the creation of the European Common Market. Delors was also the Minister of the Economy and Finance who crucially urged President Mitterrand to take the necessary austerity measures so that France could stay within the European Monetary System in 1983.

Hollande’s deep support of the European integration project might answer the most existential question France will have to face in the coming years. Specifically, is France ready to accept European federalism as a solution to the euro-zone crisis? Berlin will not acquiesce to increased fiscal solidarity and common debt liability unless there is accompanying progress on integrated political structures – and Merkel is ready to fight for these structures. With Hollande, France – traditionally more protective of its sovereignty – might be more likely to play ball.

Read the full article at thefinancialist.com »

Authors

Justin Vaïsse

Publication: The Financialist

Image Source: Henry Romero / Reuters

Austerity and Growth in the Eurozone

Kemal Derviş — Thu, 14 Jun 2012 12:30:00 -0400

The German government’s reaction to newly elected French President François Hollande’s call for more growth-oriented policies was to say that there should be no change in the eurozone’s austerity programs. Rather, growth-supporting measures, such as more lending by the European Investment Bank or issuance of jointly guaranteed project bonds to finance specific investments, could be “added” to these programs.

Many inside and outside of Germany declare that both austerity and more growth are needed, and that more emphasis on growth does not mean any decrease in austerity. The drama of the ongoing eurozone crisis has focused attention on Europe, but how the austerity-growth debate plays out there is more broadly relevant, including for the United States.

Three essential points need to be established. First, in a situation of widespread unemployment and excess capacity, short-run output is determined primarily by demand, not supply. In the eurozone’s member countries, only fiscal policy is possible at the national level, because the European Central Bank controls monetary policy. So, yes, more immediate growth does require slower reduction in fiscal deficits.

The only counterargument is that slower fiscal adjustment would further reduce confidence and thereby defeat the purpose by resulting in lower private spending. This might be true if a country were to declare that it was basically giving up on fiscal consolidation plans and the international support associated with it, but it is highly unlikely if a country decides to lengthen the period of fiscal adjustment in consultation with supporting institutions such as the International Monetary Fund. Indeed, the IMF explicitly recommended slower fiscal consolidation for Spain in its 2012 World Economic Outlook.

Without greater short-term support for effective demand, many countries in crisis could face a downward spiral of spending cuts, reduced output, higher unemployment, and even greater deficits, owing to an increase in safety-net expenditures and a decline in tax revenues associated with falling output and employment.

Second, it is possible, though not easy, to choose fiscal-consolidation packages that are more growth-friendly than others. There is the obvious distinction between investment spending and current expenditure, which Italian Prime Minister Mario Monti has emphasized. The former, if well designed, can lay the foundations for longer-term growth.

There is also the distinction between government spending with high multiplier effects, such as support to lower-income groups with a high propensity to spend, and tax reductions for the rich, a substantial portion of which would likely be saved.

Last but not least, there are longer-term structural reforms, such as labor-market reforms that increase flexibility without leading to large-scale lay-offs (a model rather successfully implemented by Germany). Similarly, retirement and pension reforms can increase long-term fiscal sustainability without generating social conflict. A healthy older person may well appreciate part-time work if it comes with flexibility. The task is to integrate such work into the overall functioning of the labor market with the help of appropriate regulation and incentives.

Finally, particularly in Europe, where countries are closely linked by trade, a coordinated strategy that allows more time for fiscal consolidation and formulates growth-friendly policies would yield substantial benefits compared to individual countries’ strategies, owing to positive spillovers (and avoidance of stigmatization of particular countries). There should be a European growth strategy, rather than Spanish, Italian, or Irish strategies. Countries like Germany that are running a current-account surplus would also help themselves by helping to stimulate the European economy as a whole.

Slower fiscal retrenchment, space for investment in government budgets, growth-friendly fiscal packages, and coordination of national policies with critical contributions from surplus countries can go a long way in helping Europe to overcome its crisis in the medium term. Unfortunately, Greece has become a special case, one that requires focused and specific treatment, most probably involving another round of public-debt forgiveness.

But insufficient and sometimes counterproductive actions, coupled with panic and overreaction in financial markets, have brought some countries, such as Spain, which is a fundamentally solvent and strong economy, to the edge of the precipice, and with it the whole eurozone. In the immediate short run, nothing makes sense, not even a perfectly good public-investment project, or recapitalization of a bank, if the government has to borrow at interest rates of 6% or more to finance it.

These interest rates must be brought down through ECB purchases of government bonds on the secondary market until low-enough announced target levels for borrowing costs are reached, and/or by the use of European Stability Mechanism resources. The best solution would be to reinforce the effectiveness of both channels by using both – and by doing so immediately.

Such an approach would provide the breathing space needed to restore confidence and implement reforms in an atmosphere of moderate optimism rather than despair. The risk of inaction or inappropriate action has reached enormous proportions.

No catastrophic earthquake or tsunami has destroyed southern Europe’s productive capacity. What we are witnessing – and what is now affecting the whole world – is a man-made disaster that can be stopped and reversed by a coordinated policy response.

Authors

Kemal Derviş

Publication: Project Syndicate

Franco-American Relations after the Election of François Hollande

Justin Vaïsse — Tue, 22 May 2012 00:00:00 -0400

It would be unfair to blame the Americans for a lack of interest in the 2012 French presidential election: up until the last few weeks even the French themselves were not interested in it and for a long time it was feared that there would be massive abstentionism. The fact is that very few serious articles appeared on the subject in the United States, with little detailed reporting on the main candidates, for example, and where they did not recount slightly nonsensical tales (the idea that the Toulouse terrorist attacks "saved" Nicolas Sarkozy's campaign was particularly widespread, whereas a mere glance at the polls was enough to prove this to be wrong), they painted a depressing picture. It was a picture of France with a broken social fabric, entering a phase of denial of its own disastrous economic reality in a Europe plunging downwards, where the hard-pressed president was inciting xenophobia whilst playing on the class war to try to struggle out of his electoral difficulties. As for the socialist candidate, he was said to be leading the country towards suicide with his proposed higher tax bracket of 75%. Back in 2007 things were very different, the candidate Nicolas Sarkozy attracted media curiosity and ensured newspaper sales (as was the case in France), Ségolène Royal intrigued the U.S. public and America generally paid a great deal more attention to the French presidential race.

As if that were not enough, America is itself in the throes of the Republican primary campaign, such that many candidates use France and Europe as foils. Newt Gingrich stigmatizes Mitt Romney because he speaks French, like John Kerry, that other liberal from Massachusetts (even though Newt himself speaks French), and Romney accuses Obama of wanting to transform American into a second Europe, described as being “weak, socialist and object of pity and, compared with the shining American model, lacking inspiration”. As for Rick Santorum, he has declared that France has not supported the United States once on the international scene over these past twenty years—his way of attacking the supposed naivety of Barack Obama who declared, on meeting Prime Minister [sic] Nicolas Sarkozy, that France was the United States' best ally.

Actually, it is precisely this good Franco-American understanding which explains why the Administration, for its part, was not particularly inclined to see change. In short, it was voting Nicolas Sarkozy. This was not simply because it knew what it was losing should Sarkozy be defeated, without actually knowing what it could gain with François Hollande at the Elysée. It was also that Franco-American cooperation was, for four years, very good on most of the topics of importance for Obama. On Iran, Sarkozy had adopted Jacques Chirac's firm line, which went back to 2002, and hardened it still further—calculating that tougher sanctions would result in a compromise and avoid American or Israeli strikes instead of legitimizing them as had happened, more or less, in the Iraq case. In particular, he encouraged the Europeans to adopt tougher sanctions, thereby making the Administration's job easier, and giving it better arguments, vis-à-vis the Israelis, to continue the negotiation route—even though Sarkozy sometimes seemed to threaten Obama on his right, with a position closer to that of Congress and, particularly, the Republican Chamber of Representatives, than to that of the Executive, for example with regard to sanctions against the Central Bank of Teheran.

A very good level of cooperation was also achieved with the intervention in Libya in 2011, although this was not without friction, particularly during the first few weeks of operation. France did not want to see NATO involved, whereas from Obama's point of view, who did not want another American war in the Middle East, that was the best way of placing the United States in a backseat position rather than as a direct operational commander, as was the case from 19th March to the early days of April 2011. However, pressure from the United States and European partners, particularly Italy, got the better of French preferences and enabled the U.S. to "lead from behind" through the good offices of NATO, as Obama had wished, although he rejected this particular slogan. On Syria, Obama and Sarkozy also held the same line—Paris' overtures to Damas at the beginning of his mandate, which were not to the taste of the Administration, having ceased with the start of the demonstrations/repressions cycle in 2011—even though it is a policy that is highly constricted by the Security Council, realities in the field and Obama's wariness in this electoral year.

The return to NATO's integrated military command enabled, at the very least, a general appeasement of suspicions against European defense; here again the positions of the Obama administration and France have been very similar. It is David Cameron's British government that finds itself isolated, more Atlanticist than America, blocking on questions such as the CSDP operational headquarters, a breakthrough supported by the Germans and the Poles—with the Americans supporting anything that may contribute to maintaining European defense efforts. Over these past few years we have seen a weakening of the Anglo-American special relationship, struck by the disillusionment caused by the wearing down of British military capacity and specific frictions in terms of Iraq and Afghanistan, along with increasing skepticism regarding London's European strategy. If the United Kingdom becomes marginalized within the EU, as was the case in December 2011 with the European budgetary pact, it can no longer act as a trans-Atlantic bridge, as a representative of liberal Atlanticist sensitivity to balance the Franco-German couple—then what use is it to the United States?

Because, over and above good Franco-American bilateral cooperation on many Middle-Eastern or global topics, such as the G20 in 2011, Washington, adapting its approach to the transformations of European equilibrium further to the Euro crisis (weakening of Brussels, marginalization of London, ascension of Berlin) saw France as a useful counterweight to the deflationist tendencies of Angela Merkel. Obama and Sarkozy have found themselves aligned on numerous occasions during the crisis—in favor, for example, of a stronger firewall, of more direct and robust intervention by the ECB, of reflation etc.—and Washington relied on France to correct the depressive effects of the "German remedy". This is all the more important because Obama's re-election depends on the strength of the U.S. economy and the scenario most feared by his campaign team is that of a sudden relapse in Europe.

If François Hollande had any appeal with the White House before the election, it was exactly on this point. Nicolas Sarkozy, out of realism more than conviction, had to "stick" to Angela Merkel's positions on the European budgetary pact. As soon as the agreement was reached in December 2011, the socialist candidate announced his intention to demand its re-negotiation if he was elected, to add, he said, a clause on growth. However, since then, European activity forecasts have been reviewed downwards for this year (stagnation for the European Union and a drop of 0.3% for the eurozone, with many countries in recession), and most players and observers—markets, company bosses, European governments—have underlined the insufficiency of an approach based solely on budgetary discipline, and the need to avoid suffocating activity, which could re-start the euro crisis dramatically. With François Hollande rather than Sarkozy at the Elysée, he was seen as more likely to obtain a new European agreement, perhaps in the form of an additional protocol aimed at supporting growth, from Angela Merkel, and support from conservative leaders such as Mariano Rajoy who avoided him during the campaign, and also with the help of the SPD, which Merkel needs in order to ratify the Pact. That, of course, was something which was viewed very favorably by the White House.

Moreover, the socialist candidate took care to send reassuring signals to Washington in March, through the intermediary of two of his close allies, Jean-Yves Le Drian (President of the Brittany region and head of defense questions for the campaign, and who has since been appointed Minister of Defence) and Jean-Pierre Bel (President of the Senate). He announced continuity on the Iranian and Syrian questions, as well as with regard to NATO. Although François Hollande was opposed to complete reintegration of military command in 2008, and announced he would ask for a cost / benefits assessment of this initiative during his first few months as president should he be elected, he never intended to call it into question and envisage another withdrawal. The defense budget will not be subject to any kind of brutal cuts, although it will contribute to the deficit reduction. A new White Paper, said the candidate, will be written to take account of developments in the American posture, as announced in the new American strategic review published in January 2012.

With regard to promises made by the candidate which could impact American interests head on (more than Sarkozy's positions), François Hollande insisted on the method he would follow. Capitalizing on the irritations created by French diplomacy of the last few years which was sometimes viewed as being unpredictable, even impulsive (from the position taken in favor of the Palestinians at the UN and the vote at UNESCO on this subject in the autumn of 2011, through to the surprise announcement of an early withdrawal of troops from Afghanistan after the death of four French soldiers in January 2012, many French initiatives have been taken without consulting Washington), he has highlighted his "anti-Sarkozy" features: he will be transparent and predictable for his partners.

This is how he intended, he announced during the campaign, reduce friction on the two matters that were really causing a problem for the Obama administration: Afghanistan and anti-missile defense. It is true that François Hollande announced long ago that he would begin the withdrawal of combat troops from Afghanistan as soon as he was elected, to ensure that it became effective before the end of 2012 – i.e. two years earlier than the agreement made with NATO and a year earlier than the date announced by Sarkozy (Defence Secretary Leon Panetta also announced in February that American soldiers would move from combat to training activities in 2013). Even though logistics problems risk making this a difficult promise to keep in any case, it poses a real problem for the administration – a modest military problem, but a real problem from the point of view of the Atlantic Alliance. Similarly, the candidate expressed his skepticism with regard to Obama's anti-missile system (Phased Adaptive Approach), for both budgetary and strategic reasons (at least partial challenging of the nuclear dissuasion strategy which is already very expensive) and even though the anti-missile defense strategy was adopted as being one of NATO's core missions at the Lisbon summit in 2010. Through his emissaries, candidate Hollande assured the administration of his desire not to put Obama into difficulty at the NATO summit in Chicago on 20th & 21st May, an important moment in his own campaign for re-election in terms of international affairs.

However, it would appear that these gestures of goodwill were not sufficient to counterbalance the White House's preference for continuity. On 12th April, ten days before the first round, Obama authorized the diffusion in France of the first few minutes of his videoconference with Nicolas Sarkozy, during which he declared "I admire the tough battle you are waging," to which Sarkozy replied optimistically but non-prophetically, "We're going to win, Mr. President … You and me". Barack Obama would have done well to abstain from this type of gesture: it was doubtful that it would win many votes for the French president, whereas it would clearly displease his socialist competitor, the favorite in the polls, and his staff. It was doubtless his own personal loyalty to Nicolas Sarkozy which won over in the matter, although it was known that the two men were not close and that their relationship, excellent in political terms, had never reached the degree of trust and personal proximity that Sarkozy had wished.

Now that François Hollande has been elected, what is Washington's reaction? Obama tried to catch up on lost time by being one of the first to call François Hollande on the evening of 6th May. A few days later, he sent two French-speaking Francophile representatives, Phil Gordon (Deputy Secretary of State for Europe and Eurasia) and Tony Blinken (Vice President Biden's security advisor), not only to talk about subjects of dispute, like Afghanistan (where a compromise quickly came to light), but also for an overview of international matters. Of these subjects, it is of course the euro crisis that continues to be of most concern to the White House, in view of the uncertainty that weighs on the Greek situation. As predicted, Obama has leaned towards the new European consensus in favor of growth, embodied by François Hollande. In Seattle, on 10th May he declared that if Europe was in a difficult position it was because it had not taken the decisive reflation measures that he himself took in 2009—a declaration that ignores the specific aspects of the American situation, where it is much easier (and more necessary) to increase the budget deficit in times of crisis than it is in Europe, in view of the sustained investment flow and explicit support for its government from the US central bank.

It is no surprise, in these circumstances, that the bilateral meeting between Obama and Hollande on 18th May was not only cordial (70 minutes interview, of which 20 minutes in strict one-to-one discussions: it was a case of making up for lost time), but also served to demonstrate the convergence of views between the two presidents in terms of the Euro crisis, in favor of a changed balance between discipline and reflation. Similarly, the G8 summit at Camp David, begun that very evening with a dinner and continued the following day, resulted in a communiqué which clearly put the sights on growth (whilst mentioning, of course, the importance of fiscal consolidation). Of course Obama cannot go too far: he cannot isolate Angela Merkel, and he cannot appear to interfere with the Europeans, or teach them a lesson when the United States has neither the financial nor the political resources to intervene decisively in the Eurozone crisis. It is true, however, that in order to preserve his chances of re-election, he is naturally inclined to give priority to reflation rather than austerity in order to avoid the nightmare scenario of a brutal downfall of growth in Europe, which would contaminate the United States over the summer. There can be no doubt, therefore, that for the first few months of François Hollande's mandate, who is in a key position to reach a European agreement of this kind, Obama will remain an ally of the French president—to the point that "Sarkozy the American" may soon be forgotten.

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Justin Vaïsse

Publication: Robert Schuman Foundation

Image Source: Jason Reed / Reuters

A Plan for Euro Bonds Revisited

George L. Perry — Tue, 22 May 2012 13:01:00 -0400

France’s new president François Hollande is expected to push for jointly-issued eurozone bonds this week, a move German Chancellor Angela Merkel is likely to oppose. The political resistance to backing the bonds of other member nation is understandable. But so is the resistance to foreigners dictating a nation's fiscal policies. A well-designed system for euro bonds would provide strong incentives for responsible fiscal actions over the long run and greatly reduce the likelihood of that special assistance if needed in the future. The proposal I offered in 2010, “A New Plan for Euro Bonds,” does this.

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