European Union

Written by Suzana Elena Anghel, Stanislas de Finance, Ralf Drachenberg

This 25-26 June 2015 summit witnessed an intense debate. While the agenda originally covered Common Security and Defence Policy (CSDP), the digital single market and the European Semester, in addition to a presentation from David Cameron, United Kingdom Prime Minister to outline his vision on renegotiating his country’s relationship with the EU, the summit became a crisis Council. Many discussions again focused on the situation in the Mediterranean, with several lively exchanges. The German Chancellor, Angela Merkel described the issue as the ‘biggest challenge’ Europe had faced during her time in office.

The Council’s conclusions nevertheless managed to address all issues on the agenda. The Heads of State or Government concentrated on three key dimensions of the European Commission’s agenda on migration: the relocation/resettlement of migrants; their return/readmission/reintegration; and cooperation with countries of both origin and transit. Clear differences in opinion persisted on the voluntary or mandatory nature of the relocation scheme, but agreement was reached on ‘the temporary and exceptional relocation, over two years, from the frontline Member States: Italy and Greece, to other Member States of 40 000 persons in clear need of international protection’.

Although the debate on CSDP fell short of its original ambition, the Council conclusions included a statement that the European Council ‘will keep security and defence policy on its regular agenda’, thereby clearly underlining the future importance of CSDP.

United Kingdom Prime Minister, David Cameron’s presentation of his vision on renegotiation of the UK’s relationship with the EU, did not outline any specific details, however, it provided an impetus for European level discussions on this issue, with Council President Donald Tusk seeing it as ‘the first step in a longer process that will also end at the European Council’. This issue is certain to reappear on the agenda for the Council meeting in December 2015.

The significantly shortened debate on the Commission communication on a Digital Single Market strategy for Europe, nevertheless led to Council conclusions calling for the rapid adoption of the Telecommunications Single Market Regulation, the Directive on Network and Information Security, and the Data Protection package. Heads of State or Government also stressed that action must be taken on key components of the Commission communication, such as eliminating mobile roaming charges. On this issue, on 30 June 2015, the European Parliament, the Council and the Commission, reached agreement to end roaming surcharges by 15 June 2017.

The EPRS publishes briefings on the European Council before summits, and European Council outcome briefings (next to be issued just after the European Council of 15-16 October 2015).

Read this Briefing on Outcome of the 25-26 June European Council in PDF
Filed under: BLOG, Institutional and Legal Affairs, Policy Cycle Tagged: briefings, CSDP, digital agenda, economic governance, EPRS briefings, European Council, migration, Post-European Council Briefing, Ralf Drachenberg, Stanislas de Finance, Suzana Elena Anghel Gavrilescu

When Greek Prime Minister Alexis Tsipras decided to unilaterally abandon negotiations over Greece’s so-called ‘bailout programme’ and to propose a referendum on the latest offer that Greece had been made, he employed a tactic that is common in negotiations in the European Union (EU): using difficulties with domestic ratification of EU agreements to extract concessions. Paradoxically, no agreement was reached in this particular case, but Mr. Tsipras believes that once the Greek people have rejected the latest offer of the European Commission, the European Central Bank and the International Monetary Fund, the three ‘institutions’ will have to make them a better one. As he put it: ‘The day following the democratic choice, and a proud “No” to subjugation and to indignity, our country will have a much stronger negotiating position, and it will be the moment of truth for the creditors. They will finally understand that Greece is not going to surrender, that Greece is not a game that is over’.

Prior to Mr. Tsipras’ announcement regarding the referendum, the ratification difficulties that he has tried to use were real. The constituency in favour of the policies that Greece’s two bailout programmes included was never particularly large. The (partial) implementation of the two programmes reduced its size further. Many of those whom the two programmes have left worse off and supporting Mr. Tsipras’ Coalition of the Radical Left (SYRIZA) used to feel that they have nothing left to lose and that anything would be better than the continuation of austerity. As one of them put it: ‘[A choice] between more austerity or chaos? Chaos’.

The irony for Mr. Tsipras is that as soon as he made his announcement regarding the referendum, ratification of any agreement on any offer that the three ‘institutions’ might make Greece became less difficult. Ratification difficulties diminished as the Greek people caught a glimpse of the alternative to non-agreement/non-ratification. Queues outside banks, in supermarkets and at petrol stations and living in fear of banks running out of money and of shortages of food and fuel. ‘Chaos’, it seems, is no longer preferable to austerity. Opinion polls showing the ‘Yes’ vote ahead have already been reported. Mr. Tsipras has hinted that he will resign if the Greek people vote ‘Yes’. Rightly so. A ‘Yes’ vote will mean either that Mr. Tsipras has failed to implement the mandate that he has been given or that the Greek people have rescinded their mandate. If this proves to be the case, the announcement regarding the Greek referendum will have been the beginning of the end for Mr. Tsipras.

 

Kyriakos Moumoutzis is a Lecturer in European and International Politics at King’s College London.

The post The Beginning of the End for Mr. Tsipras appeared first on Ideas on Europe.

What would a third bailout for Greece look like? The International Monetary Fund has provided the first public insight into how much it could cost, and it will be expensive. According to IMF estimates, over the next three years, Greece will need €52bn in new bailout financing.

That is close to an estimate we came up with in February. But that may not even be enough. The new IMF debt sustainability analysis, which we’ve posted here, assumes the money in the EU bailout that just disappeared would be used to cover Greek needs through October. That cash, about €16.3bn, is now gone. So the total price tag could go up to close to €70bn.

But that’s not all. The IMF report also assumes the budget targets and economic growth projections made during the recent negotiations still hold. Under that plan, Greece would post a primary budget surplus – revenues minus expenses, when interest on debt isn’t counted – of 1 per cent of gross domestic product this year, rising gradually to 3.5 per cent in 2018.

It also assumed no economic growth this year, but a return to 2 per cent growth next year and 3 per cent in 2017 and 2018.

Given Greek banks have been closed for a week and its economy is in free-fall, those targets are, in all likelihood, becoming more outdated by the minute.

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With the end of the first Latvian Presidency of the EU Council, the half-year-long trip through Europe of the #mindpower short film project dedicated to the 150th anniversary of Latvian poets Rainis and Aspazija also comes to its end. In the last episode of the project, their ideas resound in Romanian mountains.

With the end of the first Latvian Presidency of the EU Council, the half-year-long trip through Europe of the #mindpower short film project dedicated to the 150th anniversary of Latvian poets Rainis and Aspazija also comes to its end. In the last episode of the project, their ideas resound in Romanian mountains.

Following last week’s European Council and the expiration of Greece’s bailout, all eyes are now set on the outcome of the Greek referendum and the future of European integration. The summit has shown the extent of strain in Europe’s political fabric.

Sharp exchanges among European Union (EU) leaders on the pressing refugee issue and the breakdown of negotiations on Greece point to the risk of a much-diminished Europe at home and abroad. Faced with the risk of collective failure, a strong collective reaction to restore political cohesion is urgent. But Europeans should beware of spinning into another spiral of introspection. The world is watching and taking notes.

Foreign policy begins at home, American diplomat Richard Haass reminded us a few years back. In short, domestic political, economic and social conditions can provide a sound basis for, or debase, ambitions and initiatives on the international stage. The economic and political crisis that has shaken Europe since 2009 has provided ample evidence of that. However, it has also shown that this is not a one-way street.

Domestic politics often starts abroad. This trend is particularly consequential for Europe because, in this case, internal politics unfold at two levels – national and EU. And those often appear out of sync. Europe struggles to weather the impact of external turmoil on national politics with national publics growing sceptical of the EU, often for opposite reasons.

The financial crisis was the mother of all external shocks to Europe’s cohesion. It originated in the US before hitting the rest of the world and the EU, where it exposed the fragility of the Economic and Monetary Union and economic divergences among Eurozone countries. The crisis shockwave required rescuing countries in financial disarray and strengthening the coordination and monitoring of national public finances. The consequent fiscal austerity alongside growing unemployment and difficult reforms at national level generated much controversy among and within member states. The rise of parties at the extreme wings of the political spectrum has considerably shrunk support for both traditional mainstream parties and for the EU.

The sustained flow of migrants and refugees towards Europe is also exposing cracks in Europe’s politics. Already absorbed by the impact of the economic crisis, Europeans took a hesitant approach to the Arab uprisings of 2011. Europe did not truly engage North Africa and the Middle East at a time of critical change. Four years on, this destabilised region is very much engaging Europe. Countries like Italy and Greece called for joining forces and sharing burdens at European level to deal with the massive human flows pushing on their borders. After much quarrelling and many casualties at sea, member states have made available some ships and planes for missions directed to both rescue migrants and disrupt their brutal traffic. But the bitter and divisive debate within and among member states on the Commission’s proposal to distribute among them up to 60,000 asylum-seekers (in a Union of 500,000,000) shows how deeply external pressures are affecting the bonds between EU countries.

The standoff between the EU and Russia over Ukraine seems to tell a different story. EU members agreed to adopt sanctions towards Russia following the latter’s annexation of Crimea and involvement in the conflict in Eastern Ukraine. This show of common resolve (including the renewal of the sanctions in June 2015), however, masks significant differences among member states on how to deal with a more assertive Russia beyond punitive measures. Besides, Moscow is nurturing links with those political forces across Europe that favour closer ties with Russia, and bash the EU, such as the National Front in France, the Northern League in Italy and Syriza in Greece. Moscow’s soft power towards governments such as those of Hungary and Greece introduces another corrosive external variable in European politics.

These three very different cases reveal two broadly common patterns. First, paradoxically, the more decisions are taken at EU level, the more fragmented European politics become. The measures adopted to respond to the Eurozone crisis have been far-reaching and unprecedented. The agreement on sanctions towards Russia was a foreign policy achievement and Europeans are at long last taking timid steps to deal with refugee flows. In some of these cases, however, decisions have amounted to too little, too late. In others, punctual deals do not necessarily reflect shared assessments of the underlying problems and of required solutions.

Second, in recent years external trends and events have shaped EU politics more than the EU has been willing or able to shape them. Foreign policy is inherently reactive, the EU has not stood still and all actors meet limits to their power in a polycentric world. However, the overarching pattern has been one where the EU and its member states have been consumers of challenges more than providers of opportunities.

The importance of external factors for domestic politics is not new. After all, the start of the European integration process owed much to the security guarantees of the US during the Cold War. Besides, interdependence has always been a two-way street – from the inside-out and from the outside-in. The problem for Europe is that the external context is the least benign since the early 1990s and the dark side of interdependence is amplifying. Whether through financial interconnections, new media channelling propaganda or radicalisation, or flows of desperate masses escaping conflict and famine, interdependence reaches deep.

Separate decisions have not produced a strategic vision to renew the pact among Europeans, which remains essential. They have also not adequately coped with broader regional and global trends that are in turn affecting European politics. The outcome of the Greek referendum this weekend will be a defining moment for Europe. But Europeans cannot afford further fragmentation and introversion. They must take responsibility together to provide security, prosperity and rights beyond their borders, as a condition for preserving them at home. Europeans badly need a shared assessment of their interests and priorities on the international stage. Amidst political turbulence, the European Council has tasked EU High Representative Federica Mogherini to work with member states on an EU global strategy on foreign and security policy. The deeper the crisis at home, the more there is a need for a more effective common foreign policy and joint action abroad.

Giovanni Grevi is director of FRIDE.

Photo Credits: European Commission

 

France v Commission
State aid
The shareholder loan offered to France Télécom by the French authorities at a time when the telephone operator was undergoing a major crisis cannot be classified as State aid

The year 2015 marks the 40th anniversary of diplomatic relations between the European Union (EU) and the People’s Republic of China. Since 2003, China and the EU have enjoyed a strategic partnership, which includes a multitude of activities in areas such as trade, international security and environment protection. The “EU-China 2020 Strategic Agenda for Cooperation” outlined many of these new areas of co-operation, including the strengthening of dialogue and communication on international and regional issues with major implications at the global level, with a particular focus on enhancing consultations on Africa.

In light of high-profile trade deals by China in Africa, the EU has become aware of China’s growing presence. European policymakers increasingly fear that China’s policy could affect the interests of the EU with regard to energy, natural resources and trade, as well as the dissemination of the EU’s norms and values. Since 2007, there have been calls to develop EU-China-Africa trilateral co-operation, but with limited success. One of the main factors for this failure has been the nature of both China and Europe’s economic interaction with Africa. While EU aid, investment and trade with Africa are conditional in order to promote good government and democracy, Chinese economic interaction is unconditional. China claims this arrangement allows African states to find the path to development that best suits their unique context. Both the EU and China claims it is contributing more than the other to Africa’s economic future.

“While the EU is a key trading partner for Africa, as well as a source of aid, China is driving African development”

China and the EU are both important trading partners for Africa. In 2009, China became Africa’s number one trading partner. From 2009 to 2011, the scale of Sino-African trade expanded rapidly. According to the 2013 State Council policy document, China-Africa Economic and Trade Cooperation, the total volume of China-African trade in 2012 reached $198.49bn. Of this, $85.32bn consisted of China’s exports to Africa, up 16.7% from the previous year, while China’s imports from Africa accounted for $113.17bn, up 21.4%. Natural resources accounted for the lion’s share of Africa’s exports to China, and huge Chinese demand has raised the price of these products, increasing overall GDP growth in Africa. Between 2007 and 2012, the value of EU imports from Africa increased by 46% to €187bn. Exports to Africa were €152bn in 2012. In total, 37% of African trade in 2012 took place with the EU. However, it is as an investor where the EU is Africa’s strongest partner. In 2012, the EU accounted for 48% (€221bn) of FDI stocks to Africa, making it the biggest provider of FDI to Africa. These investments are spread throughout all sectors of African economics, not just in natural resources, which helps to spread economic development across the population. Africa’s GDP is expected to accelerate from 3.5% in 2014 to 4.6% in 2015. This is in part due to strong Chinese demand for African resources as well as Europe’s investment on the continent. However, Africa’s human capital and economic infrastructure remain underdeveloped. Both China and the EU have engaged in aid programs to help overcome this underdevelopment.

Despite a decrease in bi-lateral aid to Sub-Saharan Africa between 2012 and 2013, the EU still remains Africa’s largest aid donor; 27.5% of the EU’s entire 2013 aid budget of €14.86bn went to Sub-Saharan Africa. In exchange for aid, the African, Carribean and Pacific (ACP) countries are asked to promote human rights, processes of democratisation, consolidation of the rule of law, and good governance. However, it is claimed that China’s provision of an alternative source of economic and political support to Africa has weakened the effect of positive conditionality. According to the 2014 Chinese white paper on foreign aid, development aid to Africa in 2009 made up 45.7% of China’s total aid, while the share for Africa had climbed to 51.8% by 2012. Chinese foreign development aid uses a no-strings-attached policy, which means the Chinese do not assign the politically difficult and often unpopular conditions that accompany EU aid.

“While EU aid, investment and trade with Africa are conditional in order to promote good government and democracy, Chinese economic interaction is unconditional”

However, it is unclear if China’s model of aid is preventing the development of good governance in Africa. A 2011 study by Christine Hackenesch on Ethiopia and Angola found that domestic factors – notably the level of challenge to regime survival – rather than Chinese aid were the biggest problem to the adoption of good governance. Despite this, the EU reacted to China’s no-strings aid policy in 2007 by readjusting its own development aid policy to promote the effectiveness of aid: First, it adopted the EU Code of Conduct on Complementarity and Division of Labour in order to reduce fragmentation of aid among the EU donors; second, it transformed its donor-recipient relationship to the donor–partner countries relationship; and third, it changed the nature of conditionality. These changes have reduced the conditionality of EU aid. The Chinese, too, have reformed their aid and investment methods, distancing themselves from some private Chinese actors such as the Hong Kong–based consortium known as the 88 Queensway Group, which was involved in a questionable $2.9bn construction project in Angola.

China is Africa’s main trading partner and an important aid donor, but is China now contributing more than traditional actors, such as Europe, to Africa’s economic future? It is very difficult to provide a simple answer to this question. While the EU is a key trading partner for Africa, as well as a source of aid, China – and particularly its huge demand for natural resources – is driving African development. Nevertheless, the EU is by far Africa’s most important source of FDI, which is needed to develop the continent’s economics beyond supplies of resources.

Both the EU and China have helped to develop Africa in different – sometimes complementary, sometimes conflicting – ways. However, it is important for both Chinese and European policymakers to remember that the African people are the greatest contributors to Africa’s economic future, and both actors’ policies need to ensure that they support the development of those people.

 

IMAGE CREDIT: CC / FLICKR – jbdodane

The post Is China contributing more than Europe to Africa’s economic future? appeared first on Europe’s World.

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The EU and the Association of South East Asian Nations (ASEAN) share a commitment to regional integration as a means of fostering regional stability, building prosperity, and addressing global challenges.

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There is much to give concern in the world of European politics these days. From Greece to the UK, the Mediterranean to Finland (even Austria), you don’t have to look far to find examples of ‘how it’s all going belly up’ (to quote one of my colleagues).

It would be simple to take the counsel of despair, throw our hands up and reject it all. Surely everything tells us that Nigel is right and we should just put ourselves out of our own misery now. What possible value can there be in a system that tramples on Greek democracy, demonstrates scant respect for those who have risked their lives to reach our countries and apparently couldn’t organise an economic recovery worth the name, when everyone else did it some years ago?

Eurosceptics have long made much of how the EU holds back states, either economically or politically (or both), but never have such arguments had such resonance: my Facebook and Twitter feeds are full of people decrying it all and wondering it’s worth it any more.

I have a degree of sympathy with such views: certainly the Greek crisis has been a masterclass in how to make things worse, with all sides making unreasonable assumptions and not accepting that they have to make some concession. The realisation of the profound interdependence between all the actors is there, but only partial – each knows that it has the other over the proverbial barrel, but hasn’t yet worked out that they are in the same situation too.

And yet.

All of these things highlight that we do live in an interconnected system, where the actions of one affect the lives of others. Contrast this to the dark days of 2008/9 as the great recession broke. Then the reflex was to national action, supported by global coordination: the European level of governance felt (and was) largely irrelevant. For all that people talk of being ‘ruled by Brussels’, Brussels mostly sat on its hands or followed the lead of the G20 or of member states: anyone who thinks the 6-pack resolved the situation needs to go and look again.

But now the European level is central once more. This is partly because of the issues involved: Greece’s economic situation is directly linked to its membership of the Euro, the migrant crisis is linked to the Dublin Convention and Schengen, the British Tories seem to focus on little else. But it’s also because the EU is a relevant political arena and the way in which European states treat with each other is very different from how it used to be.

And here’s the rub. as Rafael Behr rightly pointed out in a great piece yesterday, the EU isn’t here to crush democracy. I wrote something similar last autumn:

The EU is not a hegemonising monster, intent on steam-rolling everyone and everything into uniform submission, but a mechanism for accommodating differences.

That might feel somewhat unsatisfactory, but Behr asks us to consider the alternatives.

A collapse of the Union would certainly come with transition costs, whatever the ultimate outcome, particularly for states like Greece. The removal of a system of institutionalised interaction might offer succor to those who would take a more autarkic and/or nationalistic view of the world, if only because goodwill might be in short supply.

If this sounds like ‘Project Fear‘ again, then maybe reflect on this last point. Perhaps the only reason people feel they can confidently talk about stepping away from the EU model is precisely that model has made a more stable and non-conflictual way of working with each other possible. The big question then has to be whether attitudes have changed fundamentally or remain contingent.

The post Who’s in charge here? appeared first on Ideas on Europe.

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The Latvian Presidency of the Council of the European Union takes over on 1 January 2015.

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On 29-30 June, the second board meeting of the European Crime Prevention Network (EUCPN) took place at the National Library of Latvia. During the meeting participants discussed issues related to organised crime and how to provide support to the European authorities in combating it.

On 29-30 June, the second board meeting of the European Crime Prevention Network (EUCPN) took place at the National Library of Latvia. During the meeting participants discussed issues related to organised crime and how to provide support to the European authorities in combating it.

China’s manufacturing boom is well known; over the past 25 years the Chinese share of the value-added by the manufacturing sector worldwide has increased almost tenfold. Nor has the pace of that change eased, for in the six years since the onset of the financial crisis China’s share has still risen by more than one percentage point every year – faster therefore than in the previous 12 years. Chinese value-added manufacturing overtook the combined output of Japan and Korea in 2009, that of the United States in 2014 and by 2016 or 2017 may well surpass than of the European Union.

But China’s population is more than double that of the EU and four time that of the U.S. The value-added of its manufacturing industry would need to quadruple to achieve the same per capita output as in Europe or America. Despite the rapid advances of recent years, the Chinese economy’s resurgence may have only just begun.

Historically, China’s manufacturing has been driven by its state-owned enterprises, but their dominance began to change a quarter of a century ago with the arrival of the Chinese or foreign-owned contract processing companies that assembled products without even owning the raw materials. Along with the reform of its state-owned enterprises, China also saw foreign direct investment in manufacturing gain ground steadily, and all of these developments were aided by special tax regimes for domestic profits as well as imports.

The change in ownership of manufacturing industry became even more pronounced in the middle of the last decade when China’s constitution was changed to recognise private property, and when company law was simplified by reducing the capital needed to form an enterprise. In the six years before that change, private sector value-added had been growing three percentage points faster every year than the state-owned sector, and in the following decade the gap widened to almost five percentage points. The domestic private sector was, meanwhile, expanding in relation to companies owned by shareholders from outside the Chinese mainland.

Private sector enterprises in China’s industrial sector have achieved extremely high rates of return. Despite the international financial crisis, the average return last year on equity before tax was 25%. With high returns and low taxation, private sector manufacturing in China has generated a large number of billionaires, even when measured in U.S. dollars. Of the 58 people with identified wealth last year of over $3bn, nearly 40% had amassed their fortune in manufacturing.

Rising wages have been seen as a threat to the development of the Chinese economy, and certainly average pay has risen significantly in real terms. The pay of a migrant worker in China relative to that of an unskilled worker in the United States, let’s say as a janitor, has almost doubled since 2008. Yet an unskilled American worker still earns almost five times more than a Chinese counterpart. This rapid increase has pushed the earnings of migrant workers in China well above their average earnings in countries like Indonesia, Thailand and the Philippines.

The rise in migrants’ earnings has also boosted domestic demand in China. Labour intensive industries have been able to switch output to the domestic market just as their shares of export markets for products like clothing, textiles, footwear and toys had begun to stabilise or even to fall. And Chinese entrepreneurs in these industries have reacted to higher wage costs by boosting manufacturing investment. The domestic value-added of the labour intensive industries’ output has risen faster since 2008 than that of the most capital intensive industries.

China’s industrial polices have long aimed to upgrade existing industries to higher value added by moving up the global value chain. China’s industrial policies have been typified by changes in its semiconductor industry. The first policy phase attempted to create national champions, but that was a failure. In the past decade, a new set of policies encouraged foreign investment with the aim of transferring technology to China. High-tech zones were created and foreign companies offered a special tax regime. The end result has been a strong rise in the semiconductor industry’s output, but chiefly for domestic consumption. China uses over half the semiconductors produced worldwide, but its semiconductor companies account for only 2% of global sales.

The overall result is that while China is now the leading exporter of high-tech products, the impact on its local economies has not been in line with that. Around four-fifths of China’s high-tech exports are by processing companies that import and then assemble parts in China, and re-export finalised goods. The sector’s share of gross domestic value-added is less than 45%. After allowing for royalties and the profits of the foreign-owned companies, the share of high-tech exports that are genuinely Chinese is below a third.

The government introduced new guidelines for the semiconductor industry a year ago that featured a National Investment Fund with a capital of just under $20bn. It is to be used for capital injections and to aid consolidation amongst Chinese companies, and some provincial governments are expected to create their own funds along the same lines. The objective is to raise overall Integrated Circuits (IC) production by 20% a year by 2020.

Chinese firms have struggled to enter the main semiconductor industry, but a number are making headway in communication devices. The boom in low-cost smart-phones from Chinese manufactures such as Huawei, Xiaomi, ZTE and Coolpad has been built on local semiconductor design companies specialising in communication chips.

Another key development has been the new foreign investment law and related regulations making it easier foreign companies to invest. The new law means investors will no longer have to obtain pre-approval before setting up a company, unless the investment is in a restricted area and on a negative list. China’s revised list of restricted or prohibited industries is now limited to only some mining areas, utilities, energy, finance and automobiles. From a European or American point of view, the main disappointment has been the placing on the restricted list of joint ventures in automobile production, and significant restrictions also remain in the finance sector.

The joint venture requirement for automobiles is designed to ensure technology transfers needed for a Chinese car industry. Allowing foreign companies to produce cars in China has been a major success, with vehicle production three times greater than before the 2008 onset of the western financial crisis, making it significantly larger than in North America or the EU. Although the Chinese sometimes claim that their six major companies account for 85% of domestic sales, the fact is that 70% of these domestically produced cars are from foreign joint ventures. Only one in six of the cars attributed to China’s six major automobile companies is produced by the Chinese partner. China’s car exports are insignificant because of poor productivity, design and quality.

The joint venture structure has also failed to yield technology transfers as foreign partners keep the JV separate from their Chinese partner, which will generally provide senior staff for marketing, human relations and government relations while the foreign partner contributes the engineering and technical staff. To overcome this problem, the Beijing government has insisted that JVs produce a Chinese model, with the JV partners responding by re-badging models from their global model portfolio not yet produced in China. To differentiate such products from their foreign brands, prices were set at a level competitive with domestic Chinese models. Consumers then turned to the new cheap JV brands and so accentuated the decline in the market share of the domestic Chinese producers.

The major industrial policy successes in the upgrading of its manufacturing industries have so far been confined to areas where both producer and the purchaser companies are state-owned, rather than by selling to consumers. Key examples are high-speed trains and wind turbines, and even in these areas, as with semiconductor foundries, there have been allegations of intellectual property theft, with severe penalties sometimes imposed.

China’s aircraft industry falls between the automobile and railways sectors as an industrial policy success. The Chinese government has long wanted an aircraft industry capable of competing on world markets, but so far no Chinese commercial aircraft has obtained foreign type approval. China’s development of new aircraft is running well behind schedule, highlighting the lack of advanced engineers.

Human capital is key factor to all forms of innovation. China’s physical capital is quickly renewed and replaced and half of the capital stock in its manufacturing industry is less than three years old. But human capital takes much longer, and although the human capital stock has grown rapidly, achieving the average education levels of advanced countries will take decades. This lack of experienced and qualified managers is reflected in a growing number of research projects where quality is lagging.

Chinese manufacturing has expanded rapidly over the past two decades, but is still far from being a mature, advanced sector. Rapid wage increases have put pressure on traditional labour intense industries, even though they are adapting. Return on equity remains high, dropping only slightly in the recent downturn, and that provides an incentive for the private sector to increase investment. In labour intensive sectors, investment is still increasing at a rapid pace, suggesting that private entrepreneurs who are responsible for nearly 90% of that investment are moving away from labour intensive production so as to remain competitive.

The fundamental factor affecting China’s drive to upgrade manufacturing will be the rate at which well-educated engineers graduate from universities at home and abroad. That can already be seen in areas where knowledge evolves most rapidly, such as communications and internet applications. But it will take time for a new generation of engineers to make a difference. The best industrial policy for China is that it announced in 2013 of letting the market decide on the allocating of resources.

 

IMAGE CREDIT: CC / FLICKR – The.Rohit

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Although there is a strong element of grievance in the politics of populism, one factor which is common to almost all of the continent’s populist parties is an anti-EU sentiment. It is the degree of this – and fundamentally its effect on governments – which is causing most concern among mainstream parties.

A fanciful book, Apocalypse 2000, written in 1987, features the use of the European Parliament as a continental political platform for a populist Left/Right demagogue elected in Britain – Olaf D. Le Rith (Adolf Hitler) – who eventually seizes power across Europe. With centrist parties like the British Conservatives giving ground to populists at home and now across Europe, we should all be watchful. Let’s look at some of the most recent, worrying developments.

The populist challenge to the UK

In the UK’s May general election, the eurosceptic UK Independence Party (UKIP) came second in 120 of the 650 constituencies and third in the popular vote, garnering nearly 4 million votes, although it won only a single seat. David Cameron’s tour of EU capitals seeking a redefinition of the UK’s relationship with the EU does not stem from any conviction on his part – Cameron has always been content-free on Europe – it comes about because of his fear of UKIP, and of the hardline eurosceptics in his own party.

I was involved in a minor skirmish at the beginning of the Conservatives’ European turmoil when, as leader of the 36 Conservative members of the European Parliament in 1999, I was tasked with negotiating a more detached relationship with the Christian Democrat/Conservative European People’s Party (EPP) Group. Ten years later, David Cameron, under yet more pressure from the Right, pulled the Conservatives out of the EPP and created the European Conservatives and Reformists group with nationalists like Poland’s Law and Justice and controversial fringe parties such as Alternative for Germany (AfD), to which Cameron’s grouping now gives credibility. I left the Conservative Party in protest. Cameron’s split with the mainstream only adds to his negotiating task ahead of the UK’s EU membership referendum. Within the EPP, he would have had direct access to most of the EU’s top leadership in Brussels and national capitals.

The populist challenge to Europe

The rise of populism, especially on Europe’s Right, began to cause international concern after the European Parliamentary election of 2009, when Time magazine’s cover story, ‘Far Right Turn’, argued that “extremist parties in Europe are feeding off the economic crisis and the loss of trust in mainstream politics to extend their reach”. In May of last year, following the next and even more shocking European election, Time wrote, ”Anti-E.U. populists may have scored big at the ballot box, but they’re wrong on foreign policy”; not just wrong, but dangerous.
By last summer, one-third of the 750-member European Parliament was of the Right, largely a consequence of the continuing eurozone crisis and economic stagnation across much of Europe.  A new phenomenon had also emerged: populism of the Left, represented notably by Greece’s Syriza and Podemos (‘We can’), a Spanish party founded in early 2014 based on the radical Indignados movement. The success of Podemos in Spain’s recent regional and local elections, coupled with the success of the anti-establishment Ciudadanos movement, has shattered previous expectations for the general election later this year.

The populist opportunity for Putin

While Europe’s mainstream was anxious, these results encouraged Vladimir Putin’s international ambitions. His developing support for populist parties of Left and Right came into its own over his annexation of Crimea, which many supported. Putin’s strategy is based on his continental ‘Eurasian Union’, the brainchild of Moscow guru Aleksandr Dugin. Decrying liberalism, the aim is to break up the EU, sever transatlantic links and promote nationalism. Marine Le Pen is the most prominent of a troupe of populist or extremist leaders to visit Russia or Crimea. Tellingly, a resolution criticising Russia in the European Parliament on the 10th of June drew out these populist parties. UKIP and the Front National teamed up with other anti-EU parties to vote against the non-binding resolution, which ultimately passed by 494 votes against 135 with 69 abstentions.

Like the totalitarian dictators of the 1930s who funded foreign populist movements, whether Mussolini, Hitler, or indeed Stalin’s early funding of Hitler through Kurt von Schleicher, Time magazine’s ‘Man of the Year’ in 1932, Putin has been funding today’s extremists. Last November, French investigative journalists revealed that the Front National have received at least €9 million in loans from a Kremlin-linked bank. German media and the Austrian opposition say the AfD and the far-Right Freedom Party of Austria (FPÖ) are also financed by Russia; allegations they each deny. And in Greece, Putin’s funding of the neo-Fascist Golden Dawn did not stop Syriza’s Alexis Tsipras making Moscow his first port of call as premier, resurrecting old geostrategic fears.

Reversing the trend

German political scientist Florian Hartleb, who specialises in the rise of populism, has written that “while there is no incontrovertible proof that demystification through participation in government is an effective strategy for successfully combating Right-wing populists, there is no doubt that the worst response strategy is ‘toleration’ because this allows populists directly to exert influence on a country’s political decision-making without being directly held to account for it.”

Polish columnist Paweł Świeboda has called for more pro-EU activism, saying “Much of the frustration of European citizens has to do with the policy that originates in Brussels. The institutions have tended to assume that they are bound to be on the virtuous side and their case will prevail. They have feared becoming embroiled in national party political squabbles. This strategy has run its course and will need to be replaced by more active messaging.”

What we can be clear about is that far-Right populism will not disappear of its own volition. Ms le Pen has recently announced the formation of a new Europe of Nations and Freedom group in the European Parliament. This gives her a front row seat and her far-Right team a platform, and €17.5m of public money over four years. As le Pen put it, “far more firepower than ever before”.

 

IMAGE CREDIT: CC / FLICKR – European Parliament

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