Expert Comments - Elcano Royal Institute empty_context Copyright (c), 2002-2018 Fundación Real Instituto Elcano Lotus Web Content Management <![CDATA[ Sánchez must snatch the Economic Vice-presidency for Spain ]]> http://www.realinstitutoelcano.org/wps/portal/rielcano_en/contenido?WCM_GLOBAL_CONTEXT=/elcano/elcano_in/zonas_in/commentary-oteroiglesiastoygur-sanchez-must-snatch-economic-vice-presidency-for-spain 2019-06-10T06:26:02Z

Spain deserves a top job in the EU and Pedro Sánchez is determined to get it. For a country that is strongly pro-European and the fifth-largest (fourth, if Britain quits) economy in the Union, it is embarrassingly underrepresented. 

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Spain deserves a top job in the EU and Pedro Sánchez is determined to get it. For a country that is strongly pro-European and the fifth-largest (fourth, if Britain quits) economy in the Union, it is embarrassingly underrepresented. Since Javier Solana and Joaquín Almunia left Brussels, Spain has not had a high-profile politician in the European capital. At the depth of the crisis it even lost its seat on the European Central Bank (ECB) Executive Board with the departure of José Manuel González-Páramo, a loss only reversed in June 2018 with the arrival of Luis de Guindos.

The comparison with Italy is striking. Italians currently hold the Presidency of the ECB (Mario Draghi) and the EP (Antonio Tajani), and include the High Representative for Foreign Affairs (Federica Mogherini) and the head of the ECB Single Supervisory Board (Andrea Enria). That is quite a prize for a country that in recent times has shown very little enthusiasm for the European integration project.

Sánchez should play his cards wisely this time. After his good results in the last national and European elections (with 33% support in the latter, which translates into 20 MEPs) he has become the de facto leader of Social Democracy in Europe and, consequently, the chief negotiator of the Party of European Socialists (PES) for the Top Jobs. Therefore, the question is to know what Pedro Sánchez will do with his newly-acquired power.

“Sánchez is certainly keen to have a more progressive Commission, but it is not entirely certain that he will spend all his political capital on it”.

There has been much speculation that Sánchez will side with Emmanuel Macron in trying to isolate Manfred Weber and the European People’s Party (EPP) and seek an alternative candidate. Sánchez is certainly keen to have a more progressive Commission, but it is not entirely certain that he will spend all his political capital on it. Ultimately, he knows that the CDU/CSU is an indispensable force to get things done in Europe. Hence, for Sánchez it is important to gain the trust of both Macron and Merkel.

The three constitute the sides of a double triangle. They are the leaders of Germany, France and Spain, the three biggest pro-integrationist countries and at the same time the de facto leaders of the EPP, S&D and ALDE. Under this configuration, Sánchez will defend the candidacy of Frans Timmermans, the socialist candidate, but also the Spitzenkandidaten method. There is strong backing in Spain for the latter process since it strengthens the power of the European Parliament, the main engine for an ever-closer union, and Spain’s mainstream parties are well represented in the key families.

If Timmermans ultimately fails to get the top job, Sánchez would be content with both Weber and Vestager as alternatives. Many believe that as Spain has no strong candidates for either the Commission or Council Presidencies, Sánchez will aim for the High Rep position and place his current Foreign Minister, and former EP President, Josep Borell, there. But this is not so clear. The feeling in Madrid is that the High Rep does not have enough influence in the Commission. Travelling leads to too many absences and, furthermore, when there is a significant foreign crisis, as in Syria or Libya, national Foreign Ministers of the big member states still call the shots.

For Spain, and for this government in particular, the biggest priority is deepening the Economic and Monetary Union (EMU) –which is seen as the core of the European project– so it is conceivable that Sánchez will forgo a Top Job for a Spaniard as long as he can snatch the Vice-presidency of the Commission in charge of economic and financial affairs. He is also likely to insist that the Vice-presidency be the first and cover all key DGs in the area, from the budget (DG BUDG) and fiscal issues (DG TAXUD) to economic governance (DG ECFIN and FISMA), trade (DG Trade) and industrial policy (DG Grow). In an era of geostrategic competition, this will become a powerful post.

"Should that be the case, Sánchez has another card up his sleeve: Nadia Calviño".

Josep Borrell, one of the most respected politicians in Spain, with a PhD in economics and a strategic mind, could be a very suitable candidate for the position. The only problem is that he might be considered too heterodox by some of the northern countries. Should that be the case, Sánchez has another card up his sleeve: Nadia Calviño. The current Minister of Economy and former Director General for Budgets (DG Budget) has an excellent reputation in Brussels. She combines both determination for fiscal rectitude, sensitivity for social cohesion and zeal for competitiveness in a globalised world.

Apart from securing this strong Vice-presidency, Spain is also keen to have a greater presence and influence on the second-tier levels of Europe’s institutions. Getting the job of Secretary-General of the European Commission if Martin Selmayr finally needs to go would be an attractive proposition too. The next Spanish government will also make a strong effort to have Spanish officials in the cabinets of all the Presidencies of the three institutions and of key commissioners and in all the DGs and their units. The determination in Madrid is that influence needs to be built from the bottom up. Last but not least, Iratxe García, as a possible leader of the S&D Group, should be added to the list of persons of influence.

Ultimately, it is important to underline that Sánchez will not only seek influential posts but also insist on inserting progressive items on the legislation agenda. Although the priority will be EMU reform, more papers might be coming from Madrid focusing on strengthening the Union’s social pillar, developing a new green deal, designing a European industrial and innovation policy, strengthening the single market, generating a true ‘level playing field’ in global trade, better managing migration flows from Africa and increasing the EU’s capabilities in foreign affairs and defence. Should this come to pass, Spain would finally move from being mostly a passive to an active player in the EU.

Miguel Otero-Iglesias
Senior Analyst at the Elcano Royal Institute and Professor at IE School of Global and Public Affairs
| @miotei

Ilke Toygür
Analyst, Elcano Royal Institute
| @ilketoygur

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<![CDATA[ EU policy in the face of the Chinese challenge ]]> http://www.realinstitutoelcano.org/wps/portal/rielcano_en/contenido?WCM_GLOBAL_CONTEXT=/elcano/elcano_in/zonas_in/commentary-esteban-oteroiglesias-eu-policy-face-of-chinese-challenge 2019-06-06T04:40:39Z

While the change in the European Commission’s narrative on China is highly significant, it is not at all clear how this will translate into the foreign policy of the various member states.

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Original version in Spanish: La política europea frente al desafío chino.

As the People’s Republic of China transforms itself into a technological and military superpower, while maintaining a party-state system, there is increasing debate at the heart of the EU about the terms on which relations with the country should be pursued. Pressure has been exerted on the debate by the EU’s main ally, the US, whose strategic rivalry with China is growing daily.

For decades the EU sought to enhance relations with China on the basis that it was a developing country, something that carried two main implications. First, the EU was willing to accept a relationship based on asymmetrical rules that were advantageous to the Asian giant. Secondly it was hoped that China’s socioeconomic development and its incorporation into the value chains of the global economy would translate into greater political pluralism and a general improvement in civil liberties and political rights.

“While the change in the European Commission’s narrative on China is highly significant, it is not at all clear how this will translate into the foreign policy of the various member states”.

The spectacular progress China has made over the years (it has become the world’s second-largest economy, with the second-largest budgets in research and development and defence) has rendered any attempt to describe it as a developing country as obsolete. There are many voices in the EU, moreover, that consider the situation unsustainable, owing to the size and ambitions of China.

China accounts for 20% of the world economy in terms of purchasing power parity and it is therefore hardly surprising that it has become a trading and financial partner of great importance for many European countries. The relationship has always been complex, offering major opportunities and challenges to European companies and governments. The EU Trade Commissioner, Cecilia Malmström, has frequently pointed out that 3 million jobs in the EU depend on trade with China and that many EU companies obtain competitive advantages thanks to their presence in China and their contacts with Chinese suppliers. However, Malmström has also repeatedly called for an end to the discrimination EU companies suffer in China, given that they face various barriers to entry, are not able to access the same sources of finance or tender for the same state contracts as local firms, and nor do they enjoy the same level of legal protection as their local counterparts.

Despite these problems, the document that guided Sino-EU relations from 2013 onwards, the EU-China 2020 Strategic Agenda for Cooperation, describes China as a vital strategic partner for addressing the main issues on the global agenda in a multilateral international order. This view was substantially revised on 12 March 2019 in a European Commission document titled EU-China – A Strategic Outlook prior to the European Council meeting of 21-22 March, in which less benign descriptions of China such as ‘economic competitor in the pursuit of technological leadership’ and ‘systemic rival promoting alternative models of governance’ were added.

This new, more assertive, view of China stems from concern about the fact that the country’s development, driven to a large extent by its international relations, has not translated into the adoption of economic and political governance models prevailing in Europe, but rather into the strengthening of a markedly protectionist party-state system; the latter has aided the internationalisation of its companies in strategic sectors that are closed or barely open in its own market to EU firms, and driven its technological development in economic sectors that play a key role in the fourth industrial revolution, such as digital platforms, 5G, big data and artificial intelligence.

Is EU policy towards China being ‘Trumpified’?

While the change in the European Commission’s narrative on China is highly significant, it is not at all clear how this will translate into the foreign policy of the various member states, nor that the EU or its member states will sign up to the policy of containing China pursued by the Trump Administration and set out at the end of 2018 in a major speech by his Vice-President, Mike Pence.

“The member states do not have an agreed stance on relations with China”.

The member states do not have an agreed stance on relations with China. Indeed, it is possible to identify three distinct positions. In one faction there are countries such as Germany and France, which are driving the more assertive tone in EU policy towards China, and which is also translating into concrete steps such as the implementation of a mechanism to oversee foreign investments. These players are especially concerned, in the European context, by the geostrategic implications of China’s rise and by the loss of their companies’ competitiveness compared to their Chinese counterparts in strategic and high-added-value industries. Moreover, as they have confirmed in a recent manifesto, the two countries advocate the bolstering of EU industrial policy and the role of the state in driving the creation of European champions that ensure the importance of European companies in these economic sectors, preferably in the global marketplace, but at the very least within the EU market.

In a second group there are countries that share the unease of the first, but are more reluctant to increase the level of state intervention in the economy as a means of addressing the economic challenge posed by China. This group includes the Netherlands, the Nordic countries and the UK. Brexit has thus had a major effect on the current EU debate on the nature of relations with China, because the group’s main champion has lost influence within the Union.

In a third group, the majority of countries in the EU’s south and east are more receptive to continue strengthening economic ties with China, even if the Chinese authorities are not willing to embrace economic governance models more attuned to European ones, and choose to continue with an economy that is notably more closed and subject to intervention than its European counterparts. Such countries usually show more interest in attracting Chinese investment and finance than the members of the preceding two groups, because they have more problems in satisfying their financing needs. Moreover, governments that have had disputes with the Commission or with France or Germany on other issues have tended to turn to China to make it clear to their European counterparts that they have other options to diversify their foreign policy. Hungary, Greece and Italy fall into this group.

The most recent illustration of these divisions came with the European Council meeting of 22 March, where discussions on relations with China ended without an official communiqué, while on the very next day the Italian government agreed a memorandum of understanding to sign up to Xi Jinping’s stellar foreign policy project, the Belt and Road Initiative, despite being at the receiving end of repeated lobbying from Washington and Brussels against the initiative. There are now 14 EU member states, including Italy, that have signed some type of agreement to support the initiative (Austria, Bulgaria, Croatia, Slovakia, Slovenia, Estonia, Greece, Italy, Latvia, Lithuania, Poland, Portugal, the Czech Republic and Romania). The rest (including Spain) reject doing so until such time as the initiative operates in a more transparent and multilateral way, in accordance with the social, environmental and financial sustainability standards recognised internationally and set out in the connection strategy proposed by the EU.

Having said this, it is important to point out that even the players advocating a more assertive reformulation of EU policy towards China, such as the European Commission and the Federation of German Industry (known by its German initials BDI), which published a report on the issue recently, deem it essential to continue bolstering economic and political links with China. This is the same message that Juncker, Macron and Merkel conveyed to Xi during his recent visit to Paris, reflecting the lack of EU support for the US desire to block Chinese technology in the development of 5G networks.

Spain too takes a line that is clearly different from that advocated by the more hard-line members of the Trump Administration, who argue for containment measures against China and a reduction of the interdependence between the two countries. This difference of approach stems from a divergence of interests between the US and European authorities. The former are more focused on perpetuating US hegemony and consequently on the evolution of the balance of forces (including in the military sphere) between the US and China. The European authorities on the other hand place more importance on the absolute economic gains and the role that Beijing could play in consolidating a multilateral international order capable of ensuring the provision of global public goods. Whereas the zero-sum game predominates in the US, there is still a belief in Europe in a positive-sum alternative.

What should the EU do?

The growing rivalry between the US and China forces the EU to reflect and ask itself what role it wants to play within the international community in a context in which the US is going to be increasingly concerned with preserving its hegemony and less with ensuring the provision of global public goods and defending the values it shares with Europe, whereas China is going to push in an increasingly concerted way to impose its models of political and economic governance at an international level.

The EU thus faces four possible scenarios: (1) aligning itself with the US, on the grounds of sharing principles and values, and because, over the short and medium-term, the US still underpins European security; (2) aligning itself with China, because it is the most dynamic market in the most dynamic region and because in the long run China will become the largest economy in the world; (3) the EU not acting uniformly, thus becoming divided and weakened, with some countries taking a lead from the US and others from China, and with recurring internal tensions; and (4) the EU coming closer together and acting as a third pole in a world characterised by systemic strategic rivalry between China and the US and by occasional multilateral cooperation.

The EU should aspire to the fourth scenario, something that entails being committed to taking integration further in order to become a global actor with growing strategic autonomy. Only then will it be able to harmonise and consolidate an effective multilateral international order. The more integrated Europe is –in terms of a banking, fiscal, economic and political union– the more similar will be the interests of the various member states. The process will not be easy and will need to be conducted with sensitivity, empowering the various players to enable them to integrate their interests and thereby feel they are represented.

The Franco-German engine is indispensable for this, but not sufficient. Decision-making about future European champions cannot be the exclusive preserve of Paris and the German industrial cities. Pan-European conglomerates and consortiums are needed along with the distribution of resources in accordance with the specialisations and comparative advantages of the various participants. The watering-down of competition law will not solve anything if it is not accompanied by a greater commitment to funding for education, research, development, enterprise and innovation. Meanwhile, the EU needs to complete the internal market in services and apply the prohibition on unfair state-aid to non-EU companies too. The rules in the single European market must be the same for everyone.

“Spain too takes a line that is clearly different from that advocated by the more hard-line members of the Trump Administration, who argue for containment measures against China and a reduction of the interdependence between the two countries”.

Lastly, Spain, in particular, has a great deal to offer in many areas of this new technological race, from banking, telecommunications and energy, by way of the auto-industry, infrastructure, services (whether involving tourism or otherwise, including education and health) to entertainment, defence and aviation, farming and artificial intelligence. This is the first time in history that Spain has been well placed to play an active rather than a passive role in an industrial revolution. It is a starting point that must not be allowed to let slip.

But it will require a national strategic plan to be developed for the digital era and a new industrial policy and a cross-party national agreement to be forged regarding shared interests. Only then will Spain be able to play a leading role in Europe. Over the course of recent years, Brussels, Berlin and even Paris have requested more input from Spain in EU debates, because they know that Spain is a country convinced that it needs a more united EU to be able to address the major challenges of the 21st century. The rivalry between the US and China is one of these, and Spain is especially well positioned to try to catalyse a consensus on this matter within the Union thanks to its ability to build bridges between member states concerned by the geostrategic implications of China’s rise and the loss of competitiveness among their companies, those reluctant to increase the level of state intervention to combat Chinese competition and those who want to attract a greater volume of investment and finance from China.

Mario Esteban
Senior Analyst at the Elcano Royal Institute and Professor at the Autonomous University of Madrid | @wizma9

Miguel Otero-Iglesias
Senior Analyst at the Elcano Royal Institute and Professor at IE School of International Relations  | @miotei

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<![CDATA[ Subject and object: Europe and the emerging great-power competition ]]> http://www.realinstitutoelcano.org/wps/portal/rielcano_en/contenido?WCM_GLOBAL_CONTEXT=/elcano/elcano_in/zonas_in/commentary-simon-subject-object-europe-and-the-emerging-great-power-competition 2019-05-30T03:56:09Z

The growing rivalry between the US and China compels Europeans to wake up to some hard facts. One of them is that we live in a world that is increasingly defined by great-power competition, in which the norms and institutions Europeans hold so dear may well take a back seat. 

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The growing rivalry between the US and China compels Europeans to wake up to some hard facts. One of them is that we live in a world that is increasingly defined by great-power competition, in which the norms and institutions Europeans hold so dear may well take a back seat. Another is that Europe itself may take a back seat in world politics.

Against a backdrop of tectonic geopolitical change, European experts and pundits are pondering about two sets of problems. The first relates to the specter of great power penetration on the European continent, and its negative impact on European unity and stability. The second is about how Europeans should position themselves vis-à-vis the world’s great powers. These are closely intertwined problems, which relate to the deeper question of whether Europe is a subject or an object in international politics –a debate that cannot possibly be framed in dichotomous (subject vs object) but rather complementary (subject and object) terms–.

"European cohesion is a precondition for the broader question of how the EU should position itself vis-à-vis the (other?) great powers"

The discussion on ‘Europe as a subject’ is often associated with the EU and the notion of European strategic autonomy. These days, it revolves primarily around the question of how the EU should position itself in Sino-US competition. To a lesser extent, it is also about how the EU should deal with an increasingly assertive Russia. Should the EU buddy up with the US in its global competition with China? Should it strive for some form of equidistance, and get closer to the US on some issues and to China on others? Or should it opt for a third way, and become a strategically autonomous actor? How about Russia? Should the EU align its Russia policy to that of the US? Or should it strike a different tone? Without getting into the nuances surrounding any of those questions, they all build on a fundamental premise: that of the EU as a coherent international actor. Incidentally, such a premise presupposes that the EU can consolidate its reach and influence within the European continent itself and that it is therefore in a position to prevent other external powers from penetrating Europe or significantly undermining European unity. After all, European cohesion is a precondition for the broader question of how the EU should position itself vis-à-vis the (other?) great powers.

The debate on Europe as a subject is surely a fascinating one, but it is muddied by the problem of ‘Europe as an object’ or battleground of great-power competition. This problem is about how external powers –notably Russia and China, but also, conceivably the US, and even the UK, should an acrimonious Brexit materialise– can leverage existing European divisions to maximise their influence on and over Europe.

Internal divisions and external penetration are two sides of the European coin: they feed off each other. And today’s Europe may well be experiencing the rough end of both. Over the last decade or so, the economic, migration, security and Brexit crises have fostered a number of cleavages in Europe, within and between countries, including but not limited to the north-south, east-west, and Britain vs continent divides. These cleavages are there for powerful external actors to leverage. From the perspective of an external meddler, always sniffing around for wedges to play divide-and-rule politics, today’s Europe is filled with opportunities.

An increasingly assertive Russia sees the division of Europe as a geopolitical asset, an opportunity to maximise its regional influence. Taking a cue from the Soviet-era concept of active measures, Russia is today following a strategy of identifying existing divisions within Europe and building on them. The Brexit referendum has been often cited as an example in this regard, and so has the rise of extremist parties in some western European countries. Perhaps more broadly, and more systemically, the migration crisis has offered Russia an opportunity to further a cultural and political cleavage within Europe, between west and east, but also within countries.

"The message coming from Washington is clear: Europeans who open their 5G gateways to Chinese companies should expect to be penalised in their intelligence and security cooperation with the US"

A confident China hopes that its economic largesse in Europe will translate into political influence. The question of how to deal with Beijing underscores a number of cleavages within Europe. One of them is transatlantic. The message coming from Washington is clear: Europeans who open their 5G gateways to Chinese companies should expect to be penalised in their intelligence and security cooperation with the US. But there is a second, China-related cleavage: should Europeans pursue an industrial policy, as traditionally advocated by France (especially when it comes to the digital domain and to new technologies), or should they continue to put their faith in open competition? The Germans appear to be revisiting their traditionally liberal, pro-competition stance, as they take note of Trump’s protectionist bent, and wake up to the fact that China is playing the free-trade system. Thus, the context seems ripe for a debate on an EU industrial policy. Yet no push in that direction will be hassle free. The European Commission will not quite so easily let go of its role as the guardian of competition. And other EU member states will worry about getting the rough end of the deal: neither cheap Chinese products nor any say over the direction of European (read Franco-German) champions. Such a dilemma may prove to be particularly acute for countries in eastern and southern Europe that have been showered by Chinese investment in recent years, some of which have also grown increasingly antagonistic towards the EU. The divisions are likely to remain there for China to leverage upon.

Last but not least, there are questions about the Trump Administration’s Europe policy, and more specifically its attitude towards the EU, which Trump himself has repeatedly labelled a foe of the US. This is a delicate and dangerous issue. Does President Trump calculate that, because Europe faces numerous challenges and is in a position of strategic dependence with Washington, he can renegotiate the transatlantic relationship from a position of strength? If so, he may be right. However, his approach of linking security and economics and openly lambasting the EU and some of its member states (notably Germany) may well encourage Europeans to push back, including through the EU.

"Europeans should be careful in framing their response to the US and, at any event, steer clear from the notion of resorting to other great powers (let alone China) to build up their diplomatic leverage on Washington"

It is certainly understandable, and even legitimate, for Europeans to stand up to Trumpian bullying, and reject the notion of a transactional relationship with the US. However, Europeans should be careful in framing their response to the US and, at any event, steer clear from the notion of resorting to other great powers (let alone China) to build up their diplomatic leverage on Washington. This could be politically suicidal, as it would prove highly divisive and corrosive within a Europe that is largely a by-product of US power. US power and US strategy played a key role in the genesis of the European Community, through the Marshall Plan, through US support for the re-industrialisation and re-militarisation of West Germany, and through the NATO security guarantee. This is not just ancient history. The US has also played a critical role in the configuration of today’s EU, notably through its key role in German reunification and eastern enlargement. Today, Central and Eastern European states form an integral part of the EU, and most of them see their bilateral relationship with the US as the foundation of their security and political autonomy. This links back to the underlying theme on the interdependence between internal divisions or cleavages and external penetration.

US penetration –labelled by some as mostly benevolent or ‘empire by invitation’– remains a fact of European life. And, as the world becomes increasingly competitive, its penetration may well prove to be an insurance against worse alternative futures, at least as long as Europe’s key powers continue to reject the notion of a pan-European state –which, incidentally, could very well meet the (concerted?) opposition of Washington, Moscow and London–. To be sure, insofar as both US penetration and European strategic autonomy are relative concepts, Europeans will do well to continue to lever their economic, technological and security cooperation (notably through the EU) to mitigate the spectre of total dependence on an Asia-bound US. But as the 21st century rolls in, the key question for Europe is not whether it will be subject or object, but how to reconcile the idea of being both at the same time.

Luis Simón
Director of the Elcano Royal Institute’s Office in Brussels and Senior Analyst

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<![CDATA[ EU-Japan EPA and SPA: more than a partnership, a necessary turning point for both ]]> http://www.realinstitutoelcano.org/wps/portal/rielcano_en/contenido?WCM_GLOBAL_CONTEXT=/elcano/elcano_in/zonas_in/commentary-goyyamamoto-eu-japan-epa-and-spa-more-than-partnership-necessary-turning-point-for-both 2019-05-29T01:38:47Z

With just few weeks for the opening of the G20 summit in Osaka on 28-29 June, the stakes that the world economy faces are higher than ever. The current US-China trade turmoil is precisely what Japan and the EU are trying to avoid.

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With just few weeks for the opening of the G20 summit in Osaka on 28-29 June, the stakes that the world economy faces are higher than ever. The current US-China trade turmoil is precisely what Japan and the EU are trying to avoid.

Since the 2008 financial crisis we have witnessed almost a decade of uninterrupted global economic growth with moderate inflation. However, with a downgraded 2.9% growth projection in 2019 by the World Bank we may be approaching the end of the cycle, whose effects might be aggravated if the biggest economies resort to protectionist measures.

This decade has seen many discussions about ways to achieve sustainable economic growth, fulfil the UN millennium goals and implement environmental commitments, first of the Kyoto Protocol and now of the Paris Agreement. It is in this framework that a new partnership has been established to respond to these challenges and send a clear message in defence of the liberal international economic order. In this light, the EU and Japan are actually walking together in the same direction . They share concerns that have arisen about the global economy since the 1990s : the post-Cold War order, the Financial Big Bang, the emergence of China and the ambivalent dynamics of the emerging markets and developing economies (EMDEs).

“the EU and Japan are actually walking together in the same direction. They share concerns that have arisen about the global economy since the 1990s”

It was precisely a day before the G20 meeting in Hamburg in 2017, where Japan was chosen to host the 2019 summit, when Shinzō Abe, Donald Tusk and Jean-Claude Juncker jointly announced that Japan and the EU had reached a broad consensus over an Economic Partnership Agreement (EPA) and a Strategic Partnership Agreement (SPA) . It should not have come as a surprise given Abe’s intensive efforts to counterbalance the moves of his main foreign political ally, Donald Trump, who has however held completely opposite policy views regarding trade. Abe is adept at signalling his position regarding free trade and the preservation of the liberal economic order is part of his trademark economic policy, the so-called Abenomics. Only a day before Trump’s inauguration, the Japanese Diet ratified the Trans-Pacific Partnership Agreement (TPP), even though it was assumed that it would not come into effect once Trump took office and fulfilled his campaign promise of withdrawing the US from its commitment. Japan has since taken the lead to convert the failed TPP into the new Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) that tries to lure in the post-Brexit UK, South Korea and Taiwan, among others, including –paradoxically– the US.

It is interesting to see a sort of circular chain reaction in the various steps taken to ensure that a liberal ruled-based order continues to govern world trade. The new initiative in the Pacific area was in fact given a push by the upcoming creation of the largest free trade area, as the EU-Japan EPA was due to enter into force (1 February 2019). And the latter was precisely propelled by factors including the apparently impending conclusion of the TPP, which pushed the EU to negotiations with Japan after a rather successful EU-Korea Free Trade Agreement (in effect since 2011 and fully implemented from 2015), the dissipation of the TPP that jeopardised Japan’s economic future, the Brexit vote that put at risk Japanese companies’ leverage in Europe and the Australia-Japan Free Trade Agreement, which took more than seven years of negotiations to see the light in 2014 but had a key role in managing the difficult Japanese agricultural, pharmaceutical and auto industry lobbies, decisive sectors also in the EU negotiations.

The key to a successful and unusually fast conclusion to both economic and strategic partnership was, on the one hand, the similarity of the two mature markets with comparable protection structures and, on the other, the transparency of the negotiations in the trade agreement, not so much in the strategic partnership that relied on much more sensitive information.

Figure 1. Market sizes of current largest free-trade areas
EU-Japan EPA
[in effect from 1/II/2019]
  TPP-11 (CPTPP)
[in effect from 30/XII/2018]
640 Market in million people 499
27.8 World trade share (%) 14.4
35.8 World GDP share (%) 13.3
EU Real GDP Increase
(+0.10~0.76%) + 162,000 jobs
Japan Real GDP Increase
(+0.26~1%) + 260,000 jobs
Expected gain US$147 billion
Source: data from the EU Commission, Japanese Ministry of Foreign Affairs, World Economic Forum and Peterson Institute for International Economics.

Though early to have data, with Japan being the 5th largest partner for the EU in both imports and exports, it is expected that EPA will provide a boost of €13 billion to European exports, which would reach 5% of Japan’s market share, up from the current 3%. The EU would increase its imports from Japan by €23 billion by 2035, the year of full implementation of the agreement, according to the EU DG Trade estimates. The EU will essentially scrap 99% of the tariff lines and liberalise 100% of imports in seven to 10 years while Japan will do the same for 97% of tariff lines and 99% of imports in 15 years. Some products, such as alcoholic beverages, textiles, chemicals, cosmetics or jewellery, have been fully liberalised since day one of the implementation of the agreement but most of the sensitive products, such as wood, leather, footwear and agricultural products in the case of Japan and vehicles and auto parts in the EU’s, remain to be freed from barriers by stages. Even import items not fully liberalised on the Japanese side have been granted concessions in tariff quotas. Some items have never been a subject of the negotiations, including rice, seaweed and whale meat. According to the research presented by Felbermayr e.a., 86% of the gains in mutual trade are owing to the elimination of non-tariff barriers (NTB), and half of that in the services sector alone. Only the remaining 14% result from the elimination of tariffs proper. For example, regarding sanitary and phyto-sanitary (SPS) measures, both sides have simplified approval and clearance procedures. In the EU this specially helps the value-added agri-food sector while in Japan the manufacturing and services sectors benefit. The adoption by Japan of around 200 European Protected Geographical Indications has been a major step forward.

In their final version, both the EPA and SPA deals address other key concerns too. In the first place, they include a clause safeguarding the compliance with the Paris Agreement on Climate, creating a precedent that aspires to set a standard for future trade agreements. Secondly, they attach great importance to data protection. It has been a major step for Japan to accept and model part of its procedures on the already comprehensive General Data Protection Regulation (GDPR), which commits Japanese companies to comply with European standards even when operating in third countries with information originating from European customers/clients/providers. In fact, the matter of safe data flows is considered the Data Movement Agreement or a third major agreement in its own right. Abe has taken the lead on world-wide data governance by putting on the agenda of the G20 summit in Osaka the commitment to work towards a regime built on Data Free Flow with Trust (DFFT) principle aiming at what he calls the Society 5.0 .

Thirdly, these agreements have been presented as a pillar of the Abenomics’ so-called third arrow of structural reform. The effect of their adoption could be called a positive upheaval where the exposure to liberalised trade is used as an opportunity to revamp primary and secondary sectors as well as to modernise the tertiary one by adapting to the new challenges. Akeda noted the difference between the Japanese approach at the negotiating table, more business-oriented and flexible compared with the more people-oriented and normative European style. Japan clearly pursues the improvement of economic efficiency through FTAs and one aspect that took longer in the negotiations were the European prescriptions such as those on adopting more international industrial standards (ISO). Currently, of the 10,773 Japan Industrial Standards (JIS), 6,062 correspond to international standards, with only 38% fully identical to ISO ones. This lack of international standardisation has been one of the NTBs that protected Japanese Small and Medium Enterprises (SME) that cater to a captive domestic market without the need to internationalise. In fact, SME productivity has been long under scrutiny. To force them to open up to the global market and embrace opportunities brought by the digital economy is part of the strategy of the third arrow.

The fourth important point of the agreements is EPA’s 20th chapter, devoted to the role of SMEs in global trade. Up to 88% of EU exporters to Japan are SMEs, which account for approximately 30% of trade volume. SMEs are predominantly responsible for agriculture, textile, apparel and leather products in the goods trade, and for information, communication, real-estate activities, construction, wholesale and retail in the services trade. Energy, auto, computer and electronics manufacturing as well as financial and insurance services rely on bigger corporations. The chapter tries to promote transparency of information, equal opportunities and specialised help to SMEs and their consortiums when, for example, bidding for public procurement, one of the Japanese markets that Europeans have newly gained entrance to. SMEs will see their position improved due to the reduction of NTBs and the decrease of the proportion of fixed costs of accessing the Japanese market.

Some issues have not yet been fully agreed upon, like the arbitration court and procedures in case of foreign direct investment. However, on balance, as already stated by a very comprehensive LSE study on the impact by sector of the EU-Japan EPA, ‘this new trade area would create a “smart, sustainable and inclusive growth”, jobs and welfare, with no negative impact on environmental indicators, and positive effects for the EU social indicators’.

“A challenge for two mature societies such as the sustainability of the welfare system need companion policies to a free trade agreement to ensure its accomplishment”.

This benevolent conclusion might take more to implement than just the free movement of goods and services. Part of the less known SPA leaves an ambiguous set of goals to cover, where the intentions have been signed but the mechanisms are yet to be designed. It has been stablished to promote policies in the areas of gender equality, consumer protection and safety and responsible consumption, but it would have been more encouraging if quantifiable goals and measures on these issues were mentioned. A challenge for two mature societies such as the sustainability of the welfare system need companion policies to a free trade agreement to ensure its accomplishment. There is a commitment to a coordinated emergency response as well as establishing prevention systems in the event of natural disasters, or the cooperation and mutual exchange in higher education and technology that could lead to shared research and outcomes. The common fight against cyberterrorism and the protection of intellectual property are some of the most discussed areas during the round tables. Common efforts in the designing of smart solutions for the future of mobility and urban living, or providing ideas on how to involve the local and regional economies in this new scenario will prove that the agreements that have been signed are just more than a simple partnership but a coalition for a future and stable set of rules.

Ana María Goy Yamamoto
Associate Professor, Center for East Asia Studies, Autonomous University of Madrid

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<![CDATA[ Jihadists who left Spain for Syria as foreign terrorist fighters but have returned ]]> http://www.realinstitutoelcano.org/wps/portal/rielcano_en/contenido?WCM_GLOBAL_CONTEXT=/elcano/elcano_in/zonas_in/commentary-reinares-jihadists-left-spain-syria-foreign-terrorist-fighters-returned 2019-05-20T02:18:11Z

Around one fifth of the 230 to 235 jihadists who between 2012 and 2018 travelled from Spain to Syria and Iraq as foreign terrorist fighters (FTFs) have already returned. 

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Around one fifth of the 230 to 235 jihadists who between 2012 and 2018 travelled from Spain to Syria and Iraq as foreign terrorist fighters (FTFs) have already returned. There are currently 40 to 50 of these returnees. Most of them travelled initially with the purpose of joining the ranks of Islamic State –also known as ISIL or ISIS– or, to a lesser extent, organisations related to al-Qaeda. But some travelled in order to settle within territories where these jihadist organisations had either managed to temporarily impose their control or at least to establish a notable and influential presence.

"Not all returnees received training in the use of weapons and explosives or engaged in acts of violence and terrorism"

However, not all returnees received training in the use of weapons and explosives or engaged in acts of violence and terrorism while they were in Syria and Iraq. That is the case, for example, of several among the approximately 30 women who were part of the FTF contingent who left Spain for these two Middle-Eastern countries –around 13% of the total– but have returned. There are, for instance, women who came back, even as widows and with young children, after leaving Spain for reasons having to do more with their marital status or their early age than with a militant commitment.

However, among the Jihadist FTFs from Spain, there are men like Abdeluahid Sadik Mohamed who did not prove capable of dealing psychologically with the situation in which they found themselves immersed and returned. But there are also those who, like Ahmed Samsam, returned only to go back again onto the battlefield; and those who, like Benaissa Laghmouchi Baghdadi, returned to help send more FTFs recruited in Spain; or even those who, like Abdeljail Ait El Kaid, returned with the purpose of participating in the preparation and execution of attacks, including attacks on Spanish soil.

Some 20 of these returnees are now in prison, but only half of them are held in Spanish penitentiaries, where six were already serving sentences by the end of 2018, including all four of those mentioned above. The rest are imprisoned in Morocco, which is unsurprising because a majority of FTFs from Spain were Moroccan nationals. Moreover, only a few returnees imprisoned in Spain were arrested within the country. Most were apprehended in Turkey –the usual transit country for jihadists entering or exiting Syria–, but a few in Belgium, Bulgaria or Poland and then handed over to the Spanish authorities thanks to international arrest warrants.

Criminalisation is the first response in Spain to the phenomenon of returnees, given that they have committed crimes as defined by the national Criminal Code. Crimes such as, for instance, travelling to a foreign territory controlled by a terrorist organisation and settling in a foreign territory to receive training or to collaborate with a terrorist organisation. Yet enforcement of the law can be modulated according to the characteristics of returnees and the circumstances under which they originally departed, as in the case of women who returned to Spain with children in need of very special attention.

"Since 2016, an intervention programme has been underway in Spanish prisons with the purpose of distancing radicalised prisoners from extremism"

Furthermore, the incrimination of returnees, usually involving incarceration, does not exclude rehabilitation. Since 2016, an intervention programme has been underway in Spanish prisons with the purpose of distancing radicalised prisoners from extremism and bringing them closer to democratic values so that, once freed, they pose no danger to society. These radicalised inmates include returning FTFs who nevertheless remain adhered to the attitudes and beliefs of Salafi Jihadism. The problem is that more than half of the returnees who initially travelled from Spain to Syria and Iraq are not in prison.

Indeed, some 20 to 30 of these returnees remain at large. This typically occurs when, even though security forces or intelligence services are aware of the trajectory of such individuals, investigation into their activity fails to produce sufficient incriminating evidence. Such a situation implies a potential danger because returnees who maintain their jihadist ideas are likely to pose a terrorist threat in the short or medium term. It is known that the participation of foreign-fighter returnees tends to make the planning and preparation of attacks within western societies more effective and lethal.

Terrorists of these characteristics were among those making up the Jihadist network behind the 11 March 2004 Madrid train bombings. In any case, only around 10 of the returnees still at large are thought to be within Spain’s national territory. Some 10 to 20 more are now located outside Spain, mainly –though not exclusively– in Morocco. This suggests the extent to which the Spanish authorities can manage the problem of returned FTFs taking into account the phenomenon’s international dimension, highlighting the importance of counterterrorism cooperation with other countries, in this case especially with Morocco.

Concerning its domestic dimension, the basic challenge is applying the law in an individualised and appropriate manner to foreign-fighter returnees whose offences can be proved. This must be done while, on the one hand, developing initiatives aimed at facilitating the de-radicalisation and social integration of returned FTFs who are imprisoned in Spain, and, on the other, continuing to track returnees who remain at large in the country but for whose criminal offences there is as yet insufficient evidence, and improving the state’s ability to detect potential FTFs before they leave or, indeed, disrupt them in transit.

Fernando Reinares
Director of the Programme on Violent Radicalisation and Global Terrorism at the Elcano Royal Institute | @F_Reinares

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<![CDATA[ Spain’s socialists beat a divided right but without a clear majority ]]> http://www.realinstitutoelcano.org/wps/portal/rielcano_en/contenido?WCM_GLOBAL_CONTEXT=/elcano/elcano_in/zonas_in/commentary-chislett-socialists-won-spains-third-general-election-in-less-than-four-years-but-without-governing-majority 2019-04-29T02:02:25Z

The Socialists won Spain’s third general election in less than four years, but without a governing majority.

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The Socialists won Spain’s third general election in less than four years, but without a governing majority, while an upstart far-right party (VOX) stormed into parliament for the first time since the Franco dictatorship, producing the worst-ever result for the conservative Popular Party (PP) and splitting the right along with Ciudadanos (Cs).

Voter turnout in the most aggressively fought and contentious election for years was 75.7%, well up from 69.8% in 2016 and underscoring the sense among the electorate that the contest between five parties in a highly fragmented panorama represented a defining moment for the country.

“The Socialists’ victory is a personal triumph for Sánchez, but he faces a difficult task in finding the extra support he needs”.

The Socialists under Pedro Sánchez won 123 of the total 350 seats, 38 more than in 2016, and with the radical left Unidas Podemos (UP) would command 165 seats, 11 short of the magic number of 176 in order to rule with an absolute majority (see Figure 1). The three parties on the right have 147 seats between them and will not be able to repeat at the national level what they have in Andalucía since last December , when they won a majority of seats in the region’s parliament.

Figure 1. Results of general elections, 2019 and June 2016 (seats, millions of votes and % of total votes)

  2019 2016
Seats Votes % Seats Votes %
Socialists 123 7.48 28.7 85 5.42 22.6
Popular Party 66 4.35 16.7 137 7.90 33.0
Ciudadanos 57 4.13 15.9 32 31.2 13.1
Unidas Podemos 45 3.73 14.3 71 5.04 21.1
VOX 24 2.67 10.3
Catalan Republic Left 15 1.01 3.4 9 0.62 2.6
J×Cat (1) 7 0.49 1.9 8 0.48 2.0
Basque Nationalist Party 6 0.39 1.5 5 0.28 1.2
EH Bildu 4 0.25 1.0 2 0.18 0.8
Canarian Coalition 2 0.13 0.5 1 0.07 0.3
Others 4 0.33 1.2
Voter turnout 75.75     69.84    

(1) CDC in 2016.
Source: Interior Ministry.

Sánchez came to power in June 2018 in a minority government after dislodging the PP in a censure motion over a corruption case, but had to rely on parliamentary support from UP, Catalans in favour of independence and Basque nationalists. He was forced to call a snap election after Catalan MPs refused to support the government’s 2019 budget because he did not advance the cause of Catalan independence.

The Socialists’ victory is a personal triumph for Sánchez, but he faces a difficult task in finding the extra support he needs without having to resort again to the pro-independence Catalan MPs, which he desperately wants to avoid. That support infuriated the right, and was a catalyst behind the success of VOX, which incessantly banged a drum that Sánchez wanted to break up Spain. VOX also militantly opposes multiculturalism, unrestricted migration and what it calls ‘radical feminism’.

The backing of the Basque Nationalist Party, with six seats and the Canarian Coalition with two would still leave the Socialists three short of an absolute majority. An alliance with just Cs would produce a government with 180 seats, but Albert Rivera, the party’s leader, ruled out a coalition with the Socialists even before campaigning began. An alliance with Cs, however, would upset many Socialist voters and would make UP the left-wing opposition in parliament. The other alternative would be for the Socialists to carry on as a minority government, albeit in a stronger position than before. Spain, together with Malta, is the only EU country that has not had a coalition government at the national level in the last 40 years.

Many analysts believe a coalition between the socially-progressive Socialists and the pro-market Cs would produce the kind of stable government that Spain badly needs, but Rivera’s strategy is to become the main party on the right, and it is paying off. Cs almost doubled the number of its seats to 57, only nine fewer than the PP, whose result was its worst ever. Its share of the vote was halved to 17%.

The Socialists and the PP, the two parties that have alternated in government since 1982, obtained 45.4% of the vote, down from 55.6% in 2016 and a peak of 83.8% in 2008, when between them they had 89% of the seats in parliament (see Figure 2).

Figure 2. The rise and fall of the Socialists and Popular Party in general elections between 1982 and 2019 (% of total votes cast)

  Socialists Popular Party (1) Combined votes
1982 48.1 26.4 74.5
1986 44.1 26.0 70.1
1989 39.6 25.8 65.4
1993 38.8 34.8 73.6
1996 37.6 38.8 76.4
2000 34.2 44.5 78.7
2004 42.6 37.7 80.3
2008 43.9 39.9 83.8
2011 28.8 44.6 73.4
2015 22.0 28.7 50.7
2016 22.6 33.0 55.6
2019 28.7 16.7 45.4

(1) Popular Alliance until 1989.
Source: Interior Ministry.

While the PP suffered a debacle, the two pro-independence parties in Catalonia increased their seats in the national parliament from 15 to 22 and the number of their voters rose from 1.1 million to 1.5 million.

Resolving the Catalan issue is one of the main challenges facing the next government. Twelve Catalan separatist leaders have been on trial since February on charges including rebellion, which carries a sentence of up to 25 years. Nine of them have been in prison for 17 months. Whatever the sentence, this is an issue that is far from going away.

The new government also needs to approve the budget for this year. The fiscal deficit dropped below the EU’s threshold of 3% of GDP last year (to 2.5%), making Spain the last country to be released from the excessive deficit procedure after 10 years. But there is little leeway for a return to the days of carefree spending. The economy hardly figured in the campaign, even though unemployment is 14% and public debt is close to 100% of GDP.

“Resolving the Catalan issue is one of the main challenges facing the next government”.

According to a study by the Club de Exportadores fewer than 1% of the parties’ proposals referred to foreign trade and more broadly to the economy’s internationalisation . Exports of goods and services have played a key role in the economic recovery over the last decade (rising from 22% of GDP to 34% in 2018). Spain was the improbable locomotive of the eurozone in 2018 as it was the largest single contributor to the area’s growth.

Education is another critical area. Spain’s early school-leaving rate last year at 18% of those aged between 18 and 24 was still close to the double the EU average.

How long it takes to form a new government is anyone’s guess. With regional, municipal and European elections on 26 May, Sánchez might wait for the outcome of these results before making a move.

William Chislett
Associate Analyst, Elcano Royal Institute
| @WilliamChislett3

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<![CDATA[ France’s Iran policy indicates INSTEX will not undermine sanctions ]]> http://www.realinstitutoelcano.org/wps/portal/rielcano_en/contenido?WCM_GLOBAL_CONTEXT=/elcano/elcano_in/zonas_in/commentary-tanchum-frances-iran-policy-indicates-instex-will-not-undermine-sanctions 2019-04-25T05:07:28Z

Despite its rhetorical position as the leader of the Western opposition to the Trump Administration’s policies toward Iran, France’s Iran policy orientation has remained largely in line with US objectives.

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The US re-imposition of sanctions against Iran on 4 November 2018 prompted vociferous official protests from its European allies, particularly France, Germany and the UK, who remain signatories to the Iran Nuclear Deal . Among these so-called E-3 nations, France positioned itself as the leader of the European opposition to the new US position towards Iran. Despite the initial defiant tone from Paris and its advocacy for an alternative financial mechanism to evade sanctions, France has not acted to undermine the US objective of bringing economic pressure to bear on Tehran by limiting the revenue-earning capacity of Iran’s oil and natural gas industries. France’s actions indicate that the E-3’s implementation of the INSTEX alternative trade channel to Iran will, likewise, not be used to thwart US policy towards Iran, at least not at the outset.

“France’s actions indicate that the E-3’s implementation of the INSTEX alternative trade channel to Iran will, likewise, not be used to thwart US policy towards Iran, at least not at the outset”.

The re-imposition of sanctions resulted from US President Donald Trump’s 8 May 2018 withdrawal from the Iran Nuclear Deal. Formally known as the Joint Comprehensive Plan of Action (JCPOA), the 2015 agreement between Iran and the P5+1 nations (the permanent members of the UN Security Council plus Germany) exchanged a reduction in international sanctions on Iran for Tehran limiting its nuclear development programme. The Trump Administration’s renewed sanctions target Iran’s petroleum and shipping industries and place limits on financial transactions with the aim of crippling the country’s oil and natural gas exports.

Among the E-3 nations, France’s response was the most openly adversarial. ‘Europe refuses to allow the US to be the trade policeman of the world’, declared France’s Minister of Economy and Finance Bruno Le Maire in response to the new sanctions regime. Vowing to protect the EU’s ‘economic sovereign’, Le Maire threatened to make the EU’s currency, the euro, as strong as the US dollar, starting with the creation of a Special Purpose Vehicle, an alternative trade channel to the SWIFT system that would be immune to US scrutiny.

Despite the strident tone from the French government, French firms have been forced to comply with the new US sanctions against Iran’s energy sector, since Washington refused to grant France a sanctions compliance waiver such as it had given to eight other nations. As a result, France’s largest energy company, Total, was forced to withdraw from a US$4.8 billion development project in Iran’s massive South Pars natural gas field. Total is highly vulnerable to punitive action under the US sanctions as 90% of its financing operations involve US banks and the company also maintains US$10 billion in capital in US assets. Total, Europe’s largest refiner, did not seek a waiver to continue crude oil purchases from Iran and France’s Iranian oil imports had already ceased in September 2018 anticipating the new sanctions. While France constituted only 6.3% of Iran’s 2017 export market, the loss of French purchases will represent a US$2-3 billion annual revenue shortfall for Iran, if the Islamic Republic cannot find an alternative buyer under the new sanctions regime.

Like the cessation of French oil imports from Iran, French car manufacturers in Iran have suspended their operations. Following the initial defiant tone emanating from Paris, Renault's then CEO Carlos Ghosn vowed in June 2018 to defy US sanctions and maintain its operations in Iran. One month later, Renault reversed its decision, following its French rival PSA Group, manufacturer of Peugeot and Citroen, which had already suspended its operations in Iran.

“Despite its rhetorical position as the leader of the Western opposition to the Trump Administration’s policies toward Iran, France’s Iran policy orientation has remained largely in line with US objectives”.

In light of these emerging realities, in the run-up to the new sanctions regime the French President Emmanuel Macron struck a more conciliatory tone about the re-imposition of sanctions on Iran during his September 2018 address to the UN, suggesting that US economic pressure on Iran combined with the continued EU engagement with the country would serve to limit Tehran’s military capabilities while preserving the power of the reformist elements in the Iranian government. Speaking to reporters, the more circumspect Macron explained that ‘Perhaps because we’re able to keep this multilateral framework [the JCPOA], avoid the worst and act as a mediator, while the US sanctions create pressure and reduce the amount of money available for Iran’s expansionism, that can accelerate the process we want’.

France’s attitude has also been moderated by the discovery of Iranian covert operations on French soil. On 2 October 2018, France publicly accused Iran of being behind the failed plot to bomb a 30 June 2010 rally near Paris organised by the exiled opposition group, the National Council of Iran. The Macron government eventually expelled an Iranian diplomat allegedly linked to the plot.

In addition, France has also looked askance upon Iran’s efforts to enhance its long-range missile capability. Condemning a failed Iranian satellite launch that allegedly employed technology applicable to ballistic missiles, Paris threatened Tehran with sanctions if it does not reign in its missile development programme. Declaring on 16 January 2018 that ‘The Iranian ballistic programme is a source of concern for the international community and France’, the French Foreign Ministry issued a formal appeal to Iran to cease its testing: ‘We call on Iran not to proceed with new ballistic missile tests designed to be able to carry nuclear weapons, including space launchers, and urge Iran to respect its obligations under all UN Security Council resolutions’.

UN Security CouncilResolution 2331 formally enshrines the terms of the JCPOA that includes a call upon Iran to refrain for eight years from developing ballistic missiles capable of delivering nuclear weapons. In a response to criticism from France and other Western nations over the satellite launch, Iran’s then Foreign Ministry spokesman Bahrem Qasemi claimed ‘Such (space) capabilities have civilian nature and are by no means in violation of any of the international regulations in this area’.

France’s exhortation came a week after talks in Tehran between Iranian diplomats and envoys from the E-3 nations as well as from Denmark, the Netherlands and Belgium resulted in the Iranian side storming out of the meeting. In response, the EU imposed its first sanctions on Iran since 2015. Although largely symbolic, the measure was designed to send a clear signal to Tehran about EU member states’ concerns over both the missile programme and Iranian operations on European soil. On 25 January the French Foreign Minister, Jean-Yves Le Drian, a prominent advocate for an alternative EU-Iran trade channel, threatened Tehran with more significant sanctions if the negotiations on Iran’s ballistic missile programme makes no progress. In response to Le Drian’s remarks, Qasemi firmly stated, ‘Iran’s missile capability is not negotiable, and this has been brought to the attention of the French side during the ongoing political dialogue between Iran and France’.

“The use of INSTEX for the sale of humanitarian items will not undermine US goals”.

Iran apparently was able mollify Paris’s concerns, aided by its Deputy Foreign Minister Seyed Abbas Araghchi’s 4 February 2018 meeting with the Secretary-General of France’s Ministry of Foreign Affairs, Maurice Gourdault-Montagne. The February meeting in Paris was the first of the two biannual ministerial-level meetings established to improve bilateral relations between France and Iran. As a result of the progress in relations, France appointed Phillipe Thiebaud its new Ambassador to Iran on 6 March, followed two days later by Iran’s appointment of Bahrem Qasemi as its own Ambassador to France.

Iran’s undisclosed accommodation of France’s concerns seems to be tied to the E-3’s creation of the new payments channel, the Instrument for Supporting Trade Exchanges (INSTEX), based in Paris to enable European businesses to conduct financial transactions with Iran without US scrutiny. Although the details have not been made public, the system involves parallel payments within a particular EU state and within Iran. On 15 March 2018 the head of the Central Bank of Iran announced the creation of the Special Trade and Finance Institute (STFI) in Tehran to operate in parallel with INSTEX, following the 12 March meeting between E-3 representatives for INSTEX and their Iranian counterparts in Tehran.

To Tehran’s chagrin, France and the other two E-3 partners have made the operation of INSTEX contingent upon progress in the negotiations on Iran’s missile programme and Iran joining the Financial Action Task Force (FATF) designed to stop money laundering and terrorist financing. Ayatollah Sadeq Amoli Larijani, the Chairman of Iran’s powerful Expediency Discernment Council, described the terms as ‘denigrating conditions’. Furthermore, the E-3 has also said that INSTEX will be used only for Iranian purchases of food, medicine and medical equipment, and is holding out the possibility for wider use of the trade channel as an incentive for increased cooperation from Tehran.

The use of INSTEX for the sale of humanitarian items will not undermine US goals. While France and the other two E-3 nations continue to uphold the JCPOA, their lack of investment in the development of Iran’s oil and natural gas industries means that Iran will have a hard time maintaining its oil production and satisfy an increasing demand for natural gas and petrochemicals. Iran will not see the financial dividends that it had anticipated when entering into the deal. With insufficient oil, gas and petrochemical revenues, Iran’s economy will become increasingly fragile. The Iranian government’s predicament of needing to satisfy domestic consumer demands while simultaneously financing bloated state and military institutions could result in an economic collapse and therefore induce Tehran to return to the negotiating table.

Despite its rhetorical position as the leader of the Western opposition to the Trump Administration’s policies toward Iran, France’s Iran policy orientation has remained largely in line with US objectives. Until France and its two E-3 partners decide to use INSTEX as a channel for investments in Iran’s oil and gas sectors, US sanctions will continue to exert increasing economic pressure on Tehran. The recent history of France’s Iran policy indicates that INSTEX will not be used to undermine US sanction in the near future.

Micha’el Tanchum
Fellow at the Truman Research Institute for the Advancement of Peace, Hebrew University, and non-resident affiliated scholar with the Center for Strategic Studies at Başkent University in Ankara, Turkey (Başkent-SAM) | @michaeltanchum

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<![CDATA[ Blackouts in Venezuela: why the power system failed and how to fix it ]]> http://www.realinstitutoelcano.org/wps/portal/rielcano_en/contenido?WCM_GLOBAL_CONTEXT=/elcano/elcano_in/zonas_in/commentary-viscidi-graham-blackouts-venezuela-why-power-system-failed-and-how-to-fix-it 2019-04-20T11:05:38Z

When the lights went out on 7 March many Venezuelans would hardly have been surprised. Electricity rationing has become routine over the past decade. However, this blackout quickly proved to be different to most.

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When the lights went out on 7 March many Venezuelans would hardly have been surprised. Electricity rationing has become routine over the past decade, especially in the early months of the year when reservoir levels are low (because of overdependence on hydropower), and large-scale power failures are commonplace despite the country’s vast energy resources. However, this blackout quickly proved to be different to most, affecting all 23 states and lasting for longer than any other (more than five days in most of the country), aggravating a humanitarian situation that was already dire. At least 26 people perished in hospitals, where dialysis machines and ventilators for premature babies failed. People rushed to leaking drainage pipes to collect water as water pumps failed, and looted hundreds of stores as food rotted without refrigeration, including more than 4.4 million pounds of meat in the first two days alone. Public transport and communication systems collapsed, closing most schools and businesses. Early estimates place economic losses above US$875 million.

“A lack of transmission-line maintenance may have been the immediate trigger for the power outage, but it is a symptom of almost two decades of government mismanagement that has debilitated Venezuela’s power sector”.

Venezuelan energy experts were quick to dismiss the explanation of the disputed President, Nicolás Maduro: that the US perpetrated a cyberattack on the Guri hydroelectric complex, which supplies 80% of the country’s electricity. They say that the plant’s operating systems are not connected to the Internet and physical entry would be almost impossible. It now seems clear that wildfires overheated one of the main transmission lines that carry power west from the Guri Dam to most of Venezuela’s population, causing the others to become overloaded and crash. According to two engineers, routine brush clearing beneath power lines ceased three years ago.

A lack of transmission-line maintenance may have been the immediate trigger for the power outage, but it is a symptom of almost two decades of government mismanagement that has debilitated Venezuela’s power sector, draining its reserves of both human and financial capital and nudging it towards collapse. With wages that scarcely cover their daily bus ride to work, almost half of Corpoelec’s skilled employees have left the country, according to the Executive Secretary of Venezuela’s electricity industry union.

Electricity rates have been frozen since 2002 in an economy facing hyperinflation, and consumers pay only 20% of the real costs of producing power, delivering Venezuelans the lowest electricity prices in Latin America. This has encouraged waste (Venezuela has the highest per capita electricity consumption in the region) and wiped out revenue, initiating a vicious cycle of underinvestment and financial deterioration. Corpoelec, the overburdened state power monopoly created when all private power companies were nationalised in 2007, recovered just 30% of its operating costs in 2010.

The failure to invest in grid maintenance and payment collection has led to further revenue declines as transmission and distribution losses (mostly caused by theft) soared to 35% in 2014 –over twice the Latin American average and almost six times the OECD average–.

Caracas sought to diversify away from hydropower and increase generation from other sources after a major drought in 2010 led to rolling blackouts and a nationwide restriction of work schedules to save power, but that effort has also largely failed. The country lacks an adequate pipeline network needed to bring natural gas to power plants, forcing it to overuse diesel in thermal power plants (which can run oil or natural gas), which damaged them. As a result, many of the country’s thermal plants are shut down due to lack of maintenance. According to an internal Electricity Ministry report, power generation was operating at around one third of capacity in October 2018. US sanctions affecting fuel imports since January have further restricted Venezuela’s access to diesel imports.

“Stopping future blackouts will require a short-term fix but also a restructuring of the power sector”.

Meanwhile, part of Corpoelec’s remaining funds have been siphoned out by networks of corruption. Examples abound. In an expedited process to construct thermal power plants in 2010, PDVSA and Corpoelec paid millions of dollars in no-bid contracts to political connections, according to The Wall Street Journal. Another report concluded that up to 50% of expenditure on thermal, hydroelectric and wind projects in 2003-13 was in excess of the costs of equivalent projects elsewhere. The Tocoma Dam, whose cost was quoted at around US$3 billion in 2005, has already devoured more than US$10 billion and produced no electricity. Its construction has been stalled since 2015.

Given the profound problems facing Venezuela’s power sector, such blackouts will inevitably continue. Indeed, on 25 March much of the country was dark once again and on 31 March Maduro announced 30 days of electricity rationing. Stopping future blackouts will require a short-term fix but also a restructuring of the power sector. This process will have to begin with a thorough assessment of the state of Venezuela’s power infrastructure, as statistics about the national power system have not been published for eight years. In the short run, to guarantee reliable electricity access Venezuela will need to import fuel to supplement hydropower, for example in the form of a floating storage and regasification unit to provide natural gas for generation, as well as power generators. In the long run, the country should return to the pre-Chavista model in which generation and distribution were privately managed, largely by regional companies. An independent national electricity system operator alongside an electricity regulatory body should coordinate and oversee private generators, creating a decentralised, diversified and efficient power industry with adequate capital for investment. Finally, while poor consumers’ ability to pay must be considered, Venezuela’s excessive fuel and electricity subsidies create an unsustainable strain on public finances and perverse incentives for high consumption and thus cannot continue in the long run.

“However, further rationing regimes, like that declared by Maduro on 31 March, will only aggravate the country’s astonishing economic contraction (…)”.

Protesters in Caracas and around the country are rightfully demanding the restoration of their most basic services: clean water, food, transport and light; and the destruction of Venezuela’s electricity system has brought economic activity to a virtual standstill at times, halting everything from steel and oil production to small family businesses. Non-governmental organisations on the ground continue working to alleviate the suffering brought on by Venezuela’s collapse. However, further rationing regimes, like that declared by Maduro on 31 March, will only aggravate the country’s astonishing economic contraction when they are not accompanied by a recognition of the systematic lack of available capacity and a proposal to resolve this problem.

Lisa Viscidi
Program Director, Energy, Climate Change & Extractive Industries, Inter-American Dialogue | @lviscidi

Nate Graham
Program Assistant, Energy, Climate Change & Extractive Industries, Inter-American Dialogue.

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<![CDATA[ Italy’s budget battle with the European Commission ]]> http://www.realinstitutoelcano.org/wps/portal/rielcano_en/contenido?WCM_GLOBAL_CONTEXT=/elcano/elcano_in/zonas_in/commentary-steinberg-italys-budget-battle-with-european-commission 2018-11-14T07:02:44Z

The European Commission has rejected Italy’s proposed draft budget because of how seriously it breached prior fiscal commitments, including an increase in the deficit to 2.4% of GDP, three times higher than originally agreed.

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The original version in Spanish was published by Agenda Pública

Challenging European institutions seems to be catching on. In September the Commission took Poland to the Court of Justice to force it to preserve the independence of its own Supreme Court. At the end of October, the head of Europe’s Brexit negotiation team, Michel Barnier, repeated for the umpteenth time to Prime Minister Theresa May that her Chequers plan is unworkable and that the Commission’s red lines are not flexible. Finally, the Commission also rejected Italy’s proposed draft budget because of how seriously it breached prior fiscal commitments, including an increase in the deficit to 2.4% of GDP, three times higher than originally agreed. This is the first time in the euro’s history that a draft budget has been rejected.

As a result, political collision seems inevitable. With the odd bedfellows Matteo Salvini –leading the xenophobic far-right Lega– and Luigi Di Maio –head of the 5 Star Movement, originally left-wing and ‘anti-system’ but now hard to categorise– in the Italian government, it is unlikely to be intimidated by Brussels although it could buckle under market pressure, as other Southern European countries did during the euro crisis.

Italy’s draft budget is explosive, combining the Trump-style tax cuts desired by the Lega with the increased spending demanded by the 5 Star Movement, in the form of higher minimum pensions and long-term unemployment subsidies –that could be akin to a minimum basic income–, further aggravated by a reduction in the retirement age that makes Brussels particularly uncomfortable. Nevertheless, the budget should be no surprise. The Italian government promised higher expenditure, a perfectly natural policy for a country that has been economically stagnant for two decades and whose infrastructure is literally collapsing, although it has so far not suggested an increase in revenue to fund a fiscal expansion that might satisfy Brussels. Hence, the President, Sergio Matarella –who could reject the budget as unconstitutional for violating prior Italian commitments to the EU– will very likely raise no objections in order to prevent ‘Europe and the establishment reject Italy’s budget’ from becoming the war cry of the government coalition’s campaign for the European elections next May. According to the latest Eurobarometer only 42% of Italians believe that EU membership is beneficial for Italy, six points less than the British, who are quitting the Union, and 30 points less than the Spanish. Clearly, the anti-Europeanism is a good selling point in Italy.

Figure 1. ‘Generally speaking, do you think that your country’s membership of the EU is…’ (%)
Figure 1. ‘Generally speaking, do you think that your country’s membership of the EU is…’ (%)

For its part, the Commission had no choice but to reject the draft budget, since it deviated so unjustifiably from what had been agreed, unlike the cases of other countries from which explanations were requested like Belgium, France, Spain, Slovenia and Portugal.

Italy should send the Commission an amended budget, although it most likely will not. The gesture of one of the Lega’s MEPs was highly revealing: after Commissioner Pierre Moscovici had presented the Commission’s opinion of the Italian budget he purposefully placed his shoe on top. Everything seems to suggest that Italy will continue challenging the Commission because it is not too concerned about possible sanctions, which would only be imposed in the spring of 2019 and be subject to a long list of conditions: that it is finally agreed that Italy’s debt is not on the right downward trend –since the deficit is below 3% it cannot give rise to sanctions–, that the data published next year support that conclusion, that the Commission proposes sanctions, that the Council approves them and a number of other aspects of the tortuous Stability and Growth Pact that needs reforming to make it simpler and more transparent…

“ (...) the real worry is that if Italy fails to improve its growth potential through the medium of reforms, it will find it increasingly difficult to remain in the euro”.

But the Italian government is aware that it will have to back down if the country’s risk premium shoots up as a result of both the budget and the subsequent confrontation with the Commission. After all, most Italians are dissatisfied with the EU but they do not want to leave the euro (similarly to the Greeks in 2015).

The question is how much market pressure will be required for the government to give way. From statements made the leaders of the government coalition it can be surmised that they will not budge until country risk is above 400 basis points, perhaps because they have done their maths and believe that up to that level the higher cost of debt will still not offset the budget’s fiscal stimulus, although that remains debatable. In any case, the government knows that the markets want growth, the budget is expansive and the country has some structural strengths that are often overlooked –such as a primary fiscal surplus, a current account surplus and a net positive international financial position (something Spain, for instance, lacks), while most of its public debt is held by Italian and not foreign savers–. Furthermore, for the time being the ECB is buying Italian debt via its quantitative easing programme and will continue to do so while credit quality does not decline (in which case it would not serve as collateral). All this suggests that the markets may take some time to react –with an Italian risk premium currently at 320 basis points– and instead wait and see if the situation is resolved before Italy finds itself on the ropes. As a backup, it appears that the Italian government has asked Russia for financial support, as Greece did at one point, although that would be an unlikely solution: Italy, after all, is still a richer country than Russia.

Although the Italian government’s style –especially Salvini’s– runs against the grain of Europe’s habitually suave diplomacy, there is still a window of opportunity for tension to wind down. This could happen if the markets put on more pressure, Italy begins to see the wolf at the door and the government makes minor changes to the budget –as regards, for instance, the age of retirement, certain items of expenditure or a proposal to increase revenue–, leading the Commission to finally approve the budget.

However, there is no guarantee that things will ultimately work out that way. Beyond Italy’s confrontation with the Commission, the real worry is that if Italy fails to improve its growth potential through the medium of reforms, it will find it increasingly difficult to remain in the euro. Since 1999 Italy has lost 20 per capita income points relative to Germany and today its income level is still roughly the same as when the euro was introduced. This is unsustainable over the long term. It is bleak outside the Monetary Union but, for many members, the euro at present is an unhappy marriage whose cost of divorce is simply too high. It must be made to function better.

Federico Steinberg
Professor at the Autonomous University of Madrid and Senior Analyst at the Elcano Royal Institute | @Steinbergf

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<![CDATA[ Salvini’s Italy between Greek tragedy and Portuguese fado ]]> http://www.realinstitutoelcano.org/wps/portal/rielcano_en/contenido?WCM_GLOBAL_CONTEXT=/elcano/elcano_in/zonas_in/commentary-oteroiglesias-salvini-italy-between-greek-tragedy-portuguese-fado 2018-10-19T02:29:57Z

Salvini has struck a heroic pose because he knows it attracts votes in Italy. Conversely, his pugnaciousness makes him many enemies in Brussels and elsewhere. It might not be a bad idea to implement some of the structural improvements recommended by the European Commission.

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The original version in Spanish was published by Agenda Pública.

Italy is the chronicle of a conflict foretold. It was evident the government of Giuseppe Conte –directed by his political patrons, Luigi Di Maio (of the Five Star Movement) and Matteo Salvini (leader of the Lega and, for many, Europe’s strongest because most feared politician)– would clash with the European Commission over the deficit levels of the new Italian public budget. Di Maio and Salvini convinced (or more likely compelled) their Minister of Finance, Giovanni Tria, to allow the deficit for 2016 to rise from a planned 1.6% of GDP to 2.4%, which was received in Brussels like a slap in the face. In response, the Commission’s President, Jean-Claude Juncker, was very firm: Italy cannot receive favoured treatment, for ‘if everyone received it, that would be the end of the euro’.

I have just returned from a few days in Italy, where the tension was plain to see. I had the opportunity to attend a meeting of young US and Italian leaders from a variety of sectors, organised by the Italy-US Council. The level of concern amongst the Italian contingent was more than noticeable. Many feared that Salvini would over-estimate his own strength in his battle with Brussels and push the country into an even more acute crisis. The ghost of the Greek tragedy of 2015 was in the air. Nevertheless, many of these young Italian executives and entrepreneurs understand that their current government has a popular mandate. If the politicians who won the elections with such a broad majority have promised a basic subsidy for the long-term unemployed, a minimum pension of €780 and a tax cut for nearly a million workers, naturally the deficit will increase.

“Salvini has struck a heroic pose because he knows it arouses sympathy and attracts votes in Italy. Conversely, his pugnaciousness makes him many enemies in Brussels and elsewhere”

It is possible to feel a certain sympathy for Italy’s increased spending. The country has been stagnating for decades and its public accounts are subject to the iron-fisted control of senior civil servants in the Treasury, who know that Italy’s hefty public debt (over 130% of GDP and €2.3 trillion in volume) does not leave the state much elbow room. In a sense Salvini’s government could do what Antonio Costa’s did in Portugal. When the latter came to power –also on the back of an unprecedented coalition that generated as much mistrust in Brussels as in the markets– many commentators thought his anti-austerity measures reckless. Nearly three years later, however, Portugal is bringing down its debt –despite (or perhaps as a result of) raising the salaries of civil servants–, increasing pensions, cutting unemployment and recording over 2% growth.

And this is precisely Giovanni Tria’s vision. At the last Eurogroup meeting he apparently asked his colleagues for an opportunity: a chance to apply stimulus policies to conjure up the primeval spirit needed to re-launch the economy. If the experiment works, it might even bring down Italy’s debt.

It sounds reasonable, but the snag is more the style than the substance. Were Salvini to go to Brussels singing a mellow Portuguse fado like Costa did, he would raise far greater sympathy. But, to the contrary, the Lega’s leader seems to have chosen drama and Greek tragedy. He has sought confrontation and constantly provoked the Commission and the Union’s northern members. Like Varoufakis in his day, Salvini has struck a heroic pose because he knows it arouses sympathy and attracts votes in Italy. Conversely, his pugnaciousness makes him many enemies in Brussels and elsewhere. The EU is based upon dialogue, alliances and mutual commitment and at present Italy has not a single ally in the Eurogroup, not even Malta. Salvini does not seem to grasp that today it is much more difficult to play the old ‘two-level’ game in the EU. In an ever more integrated and interconnected Europe, ranting at home is heard by the entire neighbourhood. By playing the tough guy in Italy, when in Brussels the legitimate representatives of the other European democracies will have to be tough too, precisely so as not to lose votes at home. That is how democracy works.

Italy is a club member that tends to be underestimated: certainly, it has a large public debt, but it also has a primary surplus and its debt stock has a relatively long average maturity. The country also has an almost structural current account surplus (my visit to Trentino and Alto Adige only confirmed my view of northern Italy’s powerful export strength), while its net international investment position (ie, its net foreign debt) improved from -24% in 2014 to -8% in 2018. It can therefore stand its ground for a few rounds with Brussels (which the Commission knows). However, if confrontation continues unabated, the markets will start to get jittery, the risk premium will shoot up, Italy’s banks will see their Italian public debt holdings lose market value and the country could swiftly descend into a vicious cycle like the one that overwhelmed Greece in 2015, particularly if Salvini starts to play the ‘Italy might leave the euro’ card. This seems unlikely at the moment, but it remains a powerful political weapon especially if Brussels appears before Italian public opinion as the implacable bureaucratic monster.

My advice to Salvini and Di Maio would be not to follow in Varoufakis’ wake. They should choose the Portuguese fado (even if a melancholy acceptance that heroics are something of the past) over Greek tragedy (which always ends in tears). It might not be a bad idea to take the European Commission’s most recent country report on Italy and implement some of the structural improvements it recommends. Commissioner Moscovici and the Eurogroup would then surely be more flexible and a more positive dynamic could be fostered, on balance benefitting Italy. In the final analysis, what Italy needs is more investment and higher productivity, and this cannot be achieved with higher consumption alone. In that too, Portugal can be an apt lesson on what to avoid: its productivity levels remain low.

Miguel Otero-Iglesias
Senior Analyst, Elcano Royal Institute
 | @miotei

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