New EuropeJune 8 - 14, 2008 OPINION 3 AIRGRAM The guessing game intensifies on McCain and Obama foreign policy approachesW ith the end of the US Democratic cies around the world. Senator McCain has Israel lobbying group meeting in Washington, soldier and POW) to claim sufficient justifica- Party’s long, captivating and historic clearly absorbed important advice from the where he noted that Jerusalem would remain tion for needing to watch China’s military primary season last week, many “internationalist wing” of the Republican Party Israel’s “undivided capital.” This will be hard buildup carefully. He has issued veiled warn-international observers have intensified their on this point. We will need to see how his cur- for Senator McCain, also strongly pro-Israel, ings about the need for China to show selfscrutiny of the basic dynamics of the fall elec- rent advisers and potential post-election to top. restraint in relations with its Asian neighbors.tion campaign, focusing on the inevitable appointments balance this line of thinking with On Iraq, the differences are well known: Development Assistance: The outlook isanalysis of what’s in it for them. This can not be the strong “my way or the highway” approach- The proud, early war opponent (Obama) will not particularly bleak here, as one needs toavoided. Remember, the US elections are es of the Bush Administration, especially in its take on the battle-hardened McCain, who sup- remember that the Bush Administration rapid-about everything, everywhere, not just Iraq and first term. A good use of the US Government’s ports energetic completion of the nation- ly increased foreign aid in the 2001-2006 peri-the US economy. The paradox is that only “public diplomacy” mechanisms by either can- rebuilding effort now that he thinks he sees od and the US remains the world’s largestAmerican citizens can vote. One can debate didate can do a lot to improve global misper- positive results emerging. The election cam- provider of Official Development Assistancefor volumes about whether this assertion is jus- ceptions about American intentions. The prob- paign focus on Iraq will unfortunately create (ODA,) providing USD 23.5 billion in 2006.tified by the US share of the world economy or lem is that the Bush Administration has had to an incentive for combatants there to demon- Prospects are good for ODA growth to contin-the global security system, but the fact is, the use these tools to showcase US policy on lower strate that US policy is failing, probably ue, unless the US economy falls into a deeper-US elections do matter to almost all citizens of priority issues where the US is relatively open through increased civilian casualties. On Iran than-expected trough. The question is whetherthe planet. to dialogue (some examples: anti-trafficking, last week we saw some reformulation of Sen. aid will continue to be heavily channeled to the Readers will have seen plenty of early global health concerns, minority rights,) since Obama’s previously open position on meeting usual recipients: Iraq, Afghanistan, Israel,assessments by now. Will either candidate real- it cannot point to meaningful consultations with Iranian leaders. Now this meeting would Egypt, or more broadly to respond to dramati-ly deliver a kinder, gentler “American pres- with allies on the strategic policies that Wash- require careful consideration. Meanwhile, Sen. cally changing global conditions. Presidentialence” in international affairs? Given the Bush ington is still developing unilaterally, McCain has focused on challenging Iran’s flexibility is constrained by heavy Congression-Administration’s track record, we should instead calling that “American leadership.” ongoing atomic weapons programme. al interest; the result is a negotiated allocationexpect that both candidates will easily succeed Below we offer some early observations of EU: Both candidates have promised to of assistance resources. Africa had alreadyhere. Senator Barack Obama’s (Democratic the candidates’ approaches to key thematic increase coordination with allies, reducing been receiving large increases under the BushParty) statements seem to include a reference and regional issues: somewhat the major source of transatlantic Administration and this should continue.to “consultations with allies” in almost every Middle East: Both candidates are compet- tensions. Senator Obama’s critical remarks on Climate Change: Time will fill out theinstance, but Senator John McCain (Republi- ing hard to generate new pro-Israel statements trade-related issues, which may have been pri- details of Senator Obama’s position, but herecan Party) has also noted his strong intention each week. Of course they both need support mary campaign rhetoric, leave some observers is one area where Senator McCain broke earlyto do better than the Bush Administration in from America’s Jewish voters in key large worried that trade disputes will be excessively on with the Bush Administration and has advo-terms of advance consultations. This is not a states, including their considerable financial politicised in an Obama administration, espe- cated American adoption/accession of thehard problem to fix; the real issue is how each and organisational resources (normally pro- cially when combined with a Congress con- Kyoto protocol. It is unclear how deeplycandidate will address the inevitable differ- Democratic Party,) but readers should also trolled by Democrats. We expect less friction McCain will confront his core constituencyences that emerge in consultations and remember that in most of mid-America’s with the EU from both US candidates on cli- (industrialists) about fairly absorbing thewhether allies develop a sense that they are “Bible Belt,” political and ideological support mate change policy (see below). increased costs of reducing greenhouse gasimportant stakeholders in a combined for Israel is very deep-rooted. Last week’s news China: On the China front, Senator emissions.approach to global problems by the democra- was Senator Obama’s statements to a pro- McCain has the Vietnam War experience (as a Haps Borgen
New EuropeJune 8 - 14, 2008 OPINION 5BANKING NEW EUROPEWhere banks went wrong: the SUBSCRIPTION ORDER FORMorigins of the sub-prime crisis Annual subscription fee (52 issues) EU ation dphot 350, Others ation dphot 395 MAILING & INVOICING DETAILSW hile shocks from the perspective, simplifying Basel US sub-prime crisis II, structuring credit rating Name:____________________________________ continue to ripple agencies or reinforcing loaning Position: __________________________________through the global economy, standards boils down to edge Company: ________________________________speculation has ploughed tinkering and won’t fundamen-through mortgage pastures to tally help solve or prevent the Address: _________________________________greener fields, namely food next credit crunch, he conclud- ________________________________________crops, sowing further casualties. ed. In the absence of a simple City: ________________ Post Code: ____________In a conference session on and structured national supervi- Country : ________________ VAT No. ___________financial market turbulence at sory system, regulatory overlapthe Organisation for Economic proves disastrous. Tel. : _______________ Fax: _________________Co-operation and Develop- Before leaving the market E-mail Address: ____________________________ ANA/EPA/LUCAS DOLEGAment (OECD) Forum on Cli- to absorb the consequences ofmate Change, Growth and Sta- its mistakes or deciding to bail PAYMENT DETAILSbility in Paris on June 4, Adrian out the financial sector to save Check to New Europe enclosedBlundell-Wignall, Deputy markets from collapse, theDirector of Financial and Head of Financial Stability at Please charge my credit card:Enterprise Affairs at the OECD OECD Secretary General Angel Gurria attends the Council meeting at the Czech National Bank, Jan __ VISA __ Eurocard __ Diners __ Master __ AmExstated that the organisation’s the OECD headquarter in Paris, June 4, 2008, on Outreach, Reform Frait, said Czechoslovakia had Number: ________________________________latest studies calculated banks and the Economics of Climate Change found a way to prevent “applesworldwide lost USD 400 billion from rotting and infecting the CVC No: ________________________________in the credit crisis. US banks lost According to the ILO, the faulty institutional framework, barrel.” “We just asked the (The 3 digit number on the back of the credit card)USD 90 billion, but “will actual- number of severe financial when it comes to lending stan- banks: why do you want to buy Expiration Date: ___________________________ly have to generate double the crises since the 1990’s is 10. This dards or corporate governance, such risky securities? Do you Card Holder: ______________________________money lost to overcome the recurrence is indicative of sys- was just a symptom of the factor know what is in these financial Date: _____________ Signature: ______________credit crunch and get back on temic factors underlying recent at the origin of today’s solvency products?” Asking financialtrack,” said Wignall. turmoil rather than a punctual crisis: regulatory overlap. institutions to reconsider their As western banks struggle one, such as the current account “Something happened that sud- choices is perhaps what theto recapitalise, an understand- imbalance incurred by irrespon- denly accelerated securitisation founder of flexicurity, the Dan-ing of what caused the crisis sible policy, suggested Susan at the end 2004. From 2004- ish prime minister of the 1990’s,remains convoluted. George, Board Chairwoman of 2007 there was a 160 percent Poul Nyrup Rasmussen, said Reflecting on the source of the Transnational Insti- upsurge in securitisation com- he had in mind when he said Fax to + 32 2 5390339 785the crisis, the Director for the tute.“Perverse incentives are at pared to the USD eight billion that free markets should be or mail to Avenue de Tervuren 96,Centre for Transitional the root of this last crisis,” worth of mortgage that had complemented by robust finan- 1040 Brussels, BelgiumEconomies at Columbia Uni- explained George. “Collater- been securitised in the 20 prior cial regulation.versity, Professor of Economics alised debt obligation cannot be years,” explained Wignall.Padma Desai, pointed to unsus- patented, so banking products At the time, financial insti- Lissandra Ellynetainable current account imbal- become riskier as banks strive to tutions were under the regula-ances of five or more percent of be innovative. This is what hap- tory arbitrage of Basel I andGDP and poor policy decisions pened when credit rating agen- were preparing internationalon the part of the US govern- cies, which get paid by the indi- recommendations on bankingment and Federal Reserve viduals they rate, were left to laws and regulations for BaselBank. “Why did the Fed reduce determine worthy debtors. II. “They then decided to makeinterest rates to two percent Large conglomerate banks, fur- the poachers the game-keepers.when it was using East Asian thermore, believe that whatever Federal housing oversightnet savings to finance a growing they do they will be bailed out,” imposed on mortgage lendersnet deficit? Couldn’t policies be she continued. Freddie Mac and Fannie Maeimplemented to reduce exces- Did bankers, brokers and came down and all banks decid-sive consumption and mortgage government suddenly wake up ed to get in the business oflending to stabilise the situa- and decide to make poor policy mortgage lending and securiti-tion?” she questioned. choices? Wignall suggested sation,” recalled Wignall. In thisECONOMY Retail sales slump faster than predicted across EuropeIn yet another sign of how consumers are keep- revised down the March retail sales data to aing their wallets in their pockets and slowing month-on-month fall of 0.9 percent and a year-their buying on everything from cars to refriger- on-year drop of 2.3 percent. With food pricesators, European retail trade fell more than surging, the figures showed sales of food, drinksexpected in April, data released June 4 showed, and tobacco sliding by one percent month-on-adding to signs of slowing growth amid concerns month in April to record an annual 3.4 percentabout soaring food prices and inflation. fall. The European Union’s statistics office said The data showed retail sales in the 27-mem-retail trade in the 15-member Eurozone ber EU dropping 0.4 percent in April and by 0.8dropped by 0.6 percent month on month in April percent on the year. Once again, the statisticsresulting in an annual fall of 2.9 percent. point to the EU’s new member states in Central Analysts had predicted that retail sales in the and Eastern Europe outperforming several ofcurrency bloc would edge up by 0.2 percent in the Brussels-based bloc’s bigger and more estab-April and rise by a modest 0.6 percent on the lished members.year. A closely watched European Commission While retail trade in Romania bounded bysurvey released last week showed consumer con- an annual 18 percent in April and by 14 per centfidence in May in the Eurozone cascading down in Lithuania, retail trade in Europe’s biggestto its lowest level since September 2005. economy, Germany, slumped by 5.6 percent on Releasing the data, the statistics office also the year.
New Europe6 THE UNION June 8 - 14, 2008 EMPLOYMENT Interview with Maive Rute, Director, DG EnterpriseECONOMYECB hints a rate hike iscoming, but not much The EU is making great strides in helping workers, businessEuropean Central Bank chief Jean-Claude Trichet has sig-naled a possible 25 basis-points rate hike as early as nextmonth amid growing concern among the world’s leading cen-tral banks about the threat posed by surging consumer prices.“We could decide to move rates at our next meeting,” How would you describe the in business-oriented trainings, businesses across Europe? AreTrichet told a press conference after the ECB left rates employment levels seen across the launched by the Commission, there some markets which haveunchanged at four percent for the 12th month in a row and 27 Member States at this time? whereby they run small compa- adapted better than others?raised its inflation forecasts. “I don’t say it’s certain. I said it’s In the last years, due to the nies to familiarise themselves with The regulatory environmentpossible,” said Trichet adding it should not be excluded that extension of the internal market basic practical concepts and skills. in which businesses operate has athe ECB’s 21-head rate-setting council set down for early with 12 new Member States, the This policy will more likely be a major influence on their competi-July could increase rates by 25-basis- points. EU has achieved a greater divi- success that will offer considerable tiveness and ability to grow andTrichet’s surprise announcement came in the wake of data sion of labour and massive econ- benefits for the medium and long create jobs. The Commission hasshowing inflation in the 15-member Eurozone hitting a 16- omies of scale. It enjoyed sustain- term period. Already, according committed itself to develop a bet-year high in May but also just as predictions roll in pointing able growth in many economic to the 2007 data, 45 percent of ter regulatory environment forto growth in the currency bloc’s economy slowing as the year sectors and remarkable job cre- Europeans prefer to be self- businesses, by reducing red tapeunfolds. ation in 2007, with 3.5 million new employed. The Commission has and overbearing bureaucracy.However, despite the forecasts of slower growth, the hawkish jobs, 850,000 of which during the recently proposed a “Small Busi- In January 2007, the Commis-ECB’s governing council has resisted the drive to lower rates last quarter alone. And, for the and sustainable economic devel- ness Act” for Europe that will set sion presented an Action Pro-launched by the world’s other major central banks to help first time in more than a decade, opment might only be based on a out principles and concrete mea- gramme to reduce administrativeshore up their economies in face of the global financial crisis. job creation has gone hand-in- vibrant landscape of SMEs. They sures to improve the framework burdens on businesses in the EUBut US Federal Reserve chief Ben Bernanke has expressed hand with ever increasing produc- employ local labour force (89 per- conditions for European SMEs, by 25 percent by 2012. Thisconcern about the inflationary fallout from the weaker dollar tivity levels across the EU. cent of an SME’s workforce is while taking full account of their decrease will lead to a rise in thewith markets believing that interest rates in the world’s Despite the relatively local), thus contributing to the diversity. Its goal is to fully unlock GDP level between 1.4 percentbiggest economy could now be on hold for the coming favourable labour market, there wealth and development of rural job and growth, in order to create and 1.8 percent. Alone, the 10months. are still great disparities between and peripheral areas, urban and a maximum political momentum “fast track actions” identifiedTrichet said the ECB was in “a state of heightened alertness” Member States and the conver- industrial districts. Aiming to for the European SME policy. within the Action Programme areinsisting that fighting inflation remained the bank’s top pri- gence is seen in long-term per- overcome the business constraints intended to generate significantority and predicted that consumer prices would remain at a spective. Most pressing, youth across the EU, the European What challenges does DG benefits (estimated at 1.3 billionhigh level for a protracted period. The ECB was forced to unemployment continues to be a Commission launched and imple- Enterprise face in the coming years Euro) through relatively minorabandon a planned 25 basis-rate rise last September as a severe problem in most of the mented the Modern SME Policy where employment is concerned? changes in the underlying legisla-result of the financial market turbulence unleashed by the European countries. In this con- and has committed itself to In terms of employment, tion.US mortgage market crisis and global credit crunch. text, the goal we have set, as part improve the business environ- there are several challenges that Moreover, the Lisbon Strate-Trichet’s announcement that the bank was considering a rate of the Lisbon Strategy, to reach an ment, by introducing the “Think the European economy is current- gy identifies the need for thehike helped to trigger a new Euro rally with the common cur- employment rate of 70 percent by Small First” principle. This means ly facing and to which DG ENTR Commission and the Memberrency jumping back up towards USD 1.56 in late afternoon 2010 is of keen importance. Some that both the Commission and the is actively involved in finding solu- States to simplify the current reg-European trading. Trichet said the bank was raising its fore- Member States are already close national administrations should tions. First, changes in employ- ulatory environment. The movecasts for inflation markedly to average 3.4 percent in 2008 to meet this goal. For example, integrate the needs of SMEs at an ment patterns, family structures should give Europe’s enterprises aand 2.4 percent in 2009. Germany was only 0.1 percent early stage of policy making and, and lifestyles, caused by ageing better opportunity to prosper andWhile the ECB’s 2008 average growth rate of 1.8 percent is away from the Lisbon employ- whenever necessary, bring for- population will require a new help consumers get full benefitroughly in line with its previous projection, the currency’s ment target, mainly due to the 1.6 ward specific provisions encourag- approach to the social agenda from the internal market.bloc expansion rate is predicted to slow to average 1.1 per- percent decrease in unemploy- ing SMEs growth and develop- with major implications at nation-cent next year. The ECB staff projections released in March ment last year. ment such as simplified reporting al and EU level. More effective How do you see globalisationpredicted that inflation in the Eurozone would average 2.9 In order to reach this aim, requirements, longer transition means of ensuring citizens’ exist- impacting on the industry sectorpercent this year and 2.1 percent in 2009. other Member States are current- periods, reduced fees, exemp- ing rights to access to employ- across Europe? Are we uniformlyData released earlier showed inflation in jumping to a record ly implementing substantive tions, administrative assistance ment, education, civil services, moving ahead or are there varia-3.6 percent in May, as a consequence helping to drive con- reforms that will meet the chal- instruments (e.g. help desk, health care and other forms of tions which are significant thatsumer prices further away from the ECB’s target of keeping lenges of globalisation and aging. awareness actions) etc. Moreover, social protection will be needed. need to be considered?inflation close to but just below two percent. Trichet said the The process has already started in it has made significant efforts to Second, in a Europe with no inter- Globalisation is increasinglybank had decided against raising borrowing costs at its meet- 2005, aiming to eliminate barriers cut red tape for SMEs and has sig- nal borders, the changing de- shaping our lives by fostering newing June 5 to give it time to monitor economic developments. to employment, by focusing on the nificantly increased the SME mands of an ageing society and a ideas and promoting better improvement of European labour focus within major EU spending labour market in constant evolu- opportunities to citizens and busi-IMMIGRATION markets. In this sense, Member programmes for the period 2007- tion have developed new assump- nesses. By tailoring new economic States are designing new policy 2013. These policies have pro- tions about migration. and social policies at national andMore EU citizens data measures and implementing a set duced significant improvements in A new global approach is EU level, we are prepared to meetis set to go abroad of common principles of flexicuri- ty, as a useful reference in achiev- creating a more SME-friendly business environment, thus dri- needed so that migration strikes the right balance between the risk the challenges of tougher interna- tional competition. The Commis-European Union governments have agreed on a long-awaited ing more open and responsive ving employment growth, in par- of labour market shortages, eco- sion has set up the aim to ensurecommon set of rules governing the deportation of illegal immi- labour markets and more produc- ticular in sectors like construction, nomic impacts, negative social that globalisation is a source ofgrants and limiting their maximum detention period to 18 tive workplaces. The effectiveness transport, communication or consequences, integration policies prospects and building new instru-months. At a meeting in Luxembourg, EU interior ministers also of these policies are spreading and tourism. In 2007, SMEs account- and external policy objectives. ments and policies will be benefi-stepped up cooperation in the fight against terrorism, agreed to boosting prosperity across ed for almost 70 percent of total Last but not least, both the Com- cial for the European society.provide airline passenger data to Australia and contemplated set- Europe. Growth is expected to employment, with micro-busi- mission and the Member States These responses must address theting up an electronic travel authorisation system similar to the one remain around 2.75 percent this nesses providing the bulk of are showing an increased interest risk of increased inequality andbeing introduced by the United States. year, although many challenges employment. in flexicurity, as a solution to cure constant gap between the skilledOfficials said the Return Directive on illegal immigrants are still ahead, as the high rise of For example, in France, and manage the employment and unskilled.approved by ministers will provide “clear, transparent and fair oil prices on the global economy between 1985 and 2004, employ- transitions in times of accelerating The Commission hascommon rules” and will fully respect their human rights and fun- or the consequences of the finan- ment remained stable in large economic change. By upgrading responded to these challenges bydamental freedoms. The agreement capped three years of wran- cial turmoil in the US. companies at around 5.5 million their skills, and protecting people creating the Globalisation Adjust-gling among member states, but it must now be endorsed by the employees, whilst the number of rather than particular jobs, it helps ment Fund and will continue toEuropean Parliament in a vote scheduled to take place on June Has the focus of the Commis- employees in SMEs grew by 35 people to move into better paid, respond to the legitimate con-18. The directive limits to six months the period over which EU sion and the European Union insti- percent (2.3 million new jobs) to more satisfying jobs, or even set cerns of people adversely affectedmember states can detain illegal immigrants. But the decision to tutions as a whole shifting to SMEs reach 8.9 million in 2004. up their own businesses. by changes in trade patterns andallow this limit to be extended by a further 12 month if a detainee affected employment levels in With regard to the self-entre- The Lisbon strategy for by economic and social change,refuses to cooperate has been strongly criticized by civil rights Europe? Have you seen many more preneurs, considerable efforts growth and jobs are already the main objective being togroups. Commissioner Jacques Barrot, the European Commis- Europeans becoming self-employed were done to simplify and reduce answering many of the questions increase the performance of thesioner for justice said such extensions would only be allowed in as a result of this emphasis? the registration process of a com- raised above, by bringing the dif- educational and training system“exceptional” circumstances. He also noted that as many as nine pany across the EU area. More- ferent stands of policy together and to modernise the existing poli-EU member states currently set no detention limits at all. SMEs remain the mainstay of over, entrepreneurship is already with the goal of making the EU a cies in this field of action.The directive also regulates the deportation of illegal migrants to new jobs in the EU, employing recognized as a priority objective dynamic, competitive knowledgetheir country of origin, grants them free legal aid and clarifies more than 75 million people. It and is embedded explicitly in the based society. Maive Rute, Director for the Pro-rules on the access by non-governmental organizations to EU becomes evident that they are framework curricula. It is estimat- motion of SMEs’ Competitivenessdetention centres. playing a crucial role in the Euro- ed that more than 200,000 sec- What results have you seen on for the European Commission’s pean economy and a successful ondary school students participate achieving better regulations for DG Enterprise and Industry