We are happy to announce that we continue where we left off in 2012. Our latest cooperation partner is CrossingtheBaltic, a blog dedicated to the cultural and political developments in the Baltic Sea region. Founded in 2011, CrossingtheBaltic is a young and very dynamic project that provides a wide range of articles on all aspects of life in the region.

Together we aim to provide not only a platform for each other’s articles and thus expand our readership and visibility. We are convinced that our cooperation will allow us to provide our readers with an even more diversified perspective on developments in particular in Central Europe and the Baltic region.

Gazprom: A gas-giant in trouble

Whilst natural gas prices have been rising in the last decade, Russia’s coffers were overflowing, allowing the country to repay its international debt and perform a more assertive, at times even aggressive, foreign policy. However, due to lower demand from Europe, the shale gas revolution in the US and increased global competition from more than a dozen LNG-exporting nations, Gazprom has found itself facing severe drops in its annual revenue. A number of important contracts have been renegotiated as E.ON (Germany), Eni (Italy) and PGNiG (Poland) all demanded modifications to existing long-term contracts due to falling global gas prices. Others, such as OMV (Austria), Edison (Italy) and GDF (France) reached similar agreements with Gazprom. The most important modification concerns linking an increased share (usually around 25% of the contracted volume) to spot-market prices instead of maintaining an oil-linked indexation. Not only has Gazprom lost its supremacy in negotiating gas-supply deals, it was forced to make major concession to most of its important trade partners in order to prevent a falling out with them.

The developments on the European market are disappointing, causing problems for Moscow but things are getting even worse. Initially, the EU expected an increase in its gas demand and Russia was considered the single most important source to cover it. Whilst this was good news, it is no longer valid. Russia may remain a major source of natural gas imports, but it is unlikely that gas demands will reach the pre-crisis levels before 2020, maybe even later. To illustrate the gap between estimates concerning gas consumption in 2030 made before and during the crisis, one can consider the figures provided by Eurogas for EU natural gas consumption by 2030: 625mtoe (2007)  and 500-540mtoe (2010).
Furthermore, due to the EU’s more determined diversification efforts after the last gas crisis in 2009, especially in regards to natural gas imports, more gas will be imported from other suppliers around the world. The number of LNG terminals in the EU is likely to reach around 25, including new terminals in the Baltic Sea region. Both Poland and the Baltic states will then receive LNG from suppliers like Qatar, Nigeria or Angola, whilst the UK and the Iberian peninsula will be turned into major LNG destinations. Even the United States might join the club of LNG exporters, capitalising on its abundant cheap shale gas reserves.

..and then there was shale gas.

Shale gas has been quite a buzz word for energy enthusiasts, in particular after the spectacular shift in the US energy balance resulting in cutting its imports and enabling it to become a net exporter in the near future. Shale gas has had a major impact on US energy consumption and its trade balance (greatly reducing the need to import gas). Other countries are determined to lessen their energy import dependency by replicating the US experience. Not surprisingly, one of the most active supporters of the shale gas exploitation in Europe is Poland, but other countries in the region, such as Lithuania and Ukraine have expressed similar hopes and ambitions. Both Poland and Ukraine have adopted new energy strategies, that include, among others, increasing domestic natural gas production, mostly from shale. Results from test drills in Poland have been mixed, with more positive results in the northern part of the country. However, despite some setbacks, such as a major reduction in shale gas reserve estimates (reduced by around 90% from initial estimates!), Poland is convinced that shale gas production will begin by 2014, and it is likely that its neighbours will exhibit renewed interest in shale gas then. The EIA predicts the largest reserves in Poland, Lithuania and Ukraine, followed by smaller, yet still significant amounts in Romania, Bulgaria and Hungary. Their exploitation would significantly change the market dynamics in the wider Central Eastern European region and would break Russia’s grip over energy supplies.

EU-antitrust case against Gazprom

Shale gas, greater diversification, competition and LNG is not yet the end of bad news for Russia. In September the European Commission announced that it was launching an antitrust probe against Gazprom to investigate Gazprom’s long-term contracts in CEE in order to determine if Gazprom has imposed unfair prices by maintaining oil-linked indexation of natural gas prices and preventing gas trade between importer countries (so-called destination-clauses), thus impeding upon their diversification efforts. Whilst Gazprom has claimed to have adhered to market and competition rules, Moscow seems to have been gripped by panic. All claims aside that Gazprom is an entity registered outside the EU, Putin is fully aware that Gazprom has to face EU antitrust provisions. In order to prevent any harms to Russia’s economic interests – such as forcing Russia to apply fair rules to all consumers instead of exploiting their infrastructural heritage – the new law was passed that forbids Gazprom’s executives to cooperate with the EU without the formal consent of Putin. This will certainly slow down the investigation, but it is unlikely that it will be a successful move for Russia in the long-run, not only because around a dozen of Gazprom-linked offices were raided last year to collect evidence of market distortion, but also because the EU (and its predecessors) has not lost an abuse-of-dominance case since 1958. Putin is right to worry, and so is Gazprom, given that should the company be found guilty, it can be fined up to 10 per cent of its global turnover.

What’s left for Putin? Hope that the global economy will recover in 2013, that China will need more gas and turn to Moscow and the faint hope that in the long-run Gazprom will avoid the fate of Microsoft and others that fell prey to the EU’s antitrust lawyers.

Prime Minister David Cameron, certainly not known to have ever promoted the idea of separating the English and its northern neighbour, has agreed with Salmond that a referendum on the Union shall be held in 2014. The aim is simple: to resolve the issue and silence voices calling for an independent Scotland. Scots will be asked a simple Yes/No question (though simplicity is in the eye of the beholder) and will thus be able to determine the future of their country.

The question arises why Cameron would agree to such a move and what benefits Scotland’s leadership believes a breakaway from the Union will have.

Political considerations

• Cameron claims that he could not ignore the election results in Scotland which swept into government a separatist party. Even though that is true the question remains whether voters were influenced chiefly by the pledge to secure a referendum or by disappointment of the other (Labour, LibDem and Conservative) parties’ records. The government in London felt that after SNP secured 69 out of 129 seats in Holyrood tension over the state of Union would only continue to rise, especially after the council elections in May 2012 confirmed the strong support for SNP when the party continued to increase its share of councillors by securing almost 60 additional seats (424 out of 1200).
• For SNP securing a referendum agreement on the independence vote with London was essential as it was one of the core promises of the party. Failure in this matter might have resulted in a disenchantment of voters with Salmond (something Cameron probably would not mind a bit) – not dissimilar to the fate of LibDem leader Nick Clegg in the current coalition government in London, whose has been marginalised by Cameron.
• Both party leaders have hinted at the possibility that, should the referendum fail to produce a majority for an independent Scotland, talks about further devolution might be held. This would fall short of full sovereignty for Scotland but might nonetheless result in a greatly expanded portfolio of areas future governments will be able to legislate.

Scottish economic considerations

• Scotland’s wealth, derived among others from its vast oil and gas fields in the North Sea, certainly plays an important role in the debate as the government aims to ensure the majority of oil and gas revenues will flow into the coffers of the government in Edinburgh, not London. Furthermore Edinburgh is one of Europe’s most important financial centres, and in the past few years the country has become one of the strongest supporters of renewable energy sources (RES) in Europe. Already now it is a net exporter of electricity and given its ambitious goals of generating 80% of its energy needs from renewables by 2020, and 100% by 2025 (later announced to be reached by 2020!), huge electricity export surpluses are expected to contribute to the state budget in the future. The government is very optimistic and developments are very promising indeed, with RES providing around 35% of energy needs in 2011, and reports suggesting steady progress. Whether the 2020 goals are entirely realistic is an altogether different issue, however. Legislation and governmental support greatly encourage investors to believe in Salmond’s green Scotland.
• However, oil and gas revenues are chronically volatile, rising and falling depending on world market demands and therefore not a reliable source of state revenue. The cash flow from oil and gas sales will certainly provide a nice additional source of revenue, but should not be the main pillar for the government’s budget (as for example in Russia or Venezuela, where falling oil rises often translate into governmental action, such as cutting social service budgets or military expenditure). Additional pressure would arise from taking over responsibility for pensions and other social service related costs that might easily exceed the revenue from oil and gas.
  There are, however, many areas that could provide the government with a more predictable income, such as the services sector, exporting technological solutions to harness the power of RES or the manufacturing sector and tourism.

The status of EU membership

What will happen after Scotland gains independence? Will it automatically receive EU membership status or will it have to apply for it and if so, would the process be fast-tracked given its previous membership as part of the UK? There seems to be currently no clear answer to this question. Whereas the Scottish government seems to be confident that Scotland would automatically be granted membership status, statements from Brussels seem more cautious and might even hint at the possibility that Scotland would initially find itself outside the EU. Commission President Barroso seems to suggest the latter, indicating that any new country wishing to join the EU would have to (re-)apply for membership: “A new state, if it wants to join the European Union, has to apply to become a member like any state. In fact, I see no country leaving and I see many countries wanting to join.”

Whether the independence vote will succeed or fail, whether Cameron has outsmarted Salmond, and whether support for independence actually picks up (currently around one-third of the population), is all to be seen. For the time being many questions remain.

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More on Renewables in the EU and globally can be found in the REN21 global status report (2011)

A great overview over the Edinburgh Agreement and questions relating to its content, consequences and prospects can be found at the Guardian’s website.

Here is why the ECB is right:

ECB president Mario Draghi has labelled this new programme “Outright Monetary Transactions” (OMT), which will be used to buy sovereign bonds in the secondary market. OMT will be used to buy the amount of bonds necessary to ensure interest rates on markets remain within “reasonable” margins. This has two implications. First of all, it means that the ECB has finally opened its war chests and will be able to buy unlimited amounts of bonds – a threat that no investor will be willing to test. In theory the announcement alone might be enough to calm the markets and keep speculators from trying to push interest rates up. This would allow countries to borrow money more cheaply and would clearly be the ideal outcome of Draghi’s announcement. Secondly, in order to finance such purchases, more money would have to be printed. Some fear this might lead to a creeping and potentially crippling inflation, which will drag down not only the southern economies but also the more robust northern ones.

However, there is some good news after all for all those sceptics of ECB policies: Unlimited bond-purchases will only take place once a country agrees to implement reforms and slip under the ESM umbrella – which includes accepting foreign supervision by the International Monetary Fund (IMF).

The effects of OMT:

The announcement of the OMT has indeed already had an effect on markets – not only have stock markets rallied, but the cost of yields has fallen too. Both Spanish and Italian yields have fallen since Draghi had pledge in July to “do whatever is necessary” to help ensure borrowing costs would be reduced. The fact that the ECB has put its full weight behind OMT, despite the objections of Bundesbank President Jens Weidmann, will most likely not only reduce costs for short termed yields but also for more mature ones. This is a clear indicator that investors are regaining confidence in the ability of the member states to overcome their problems soon.

Lower interest rates are good news for Madrid and Rome, but concerns over “state financing via the money press”, (Weidmann’s words) trigger another concern that will need to be addressed, namely devaluation of the common currency. In order to avoid inflation, the ECB is going to link its bond-purchases with simultaneous sales of other highly valued assets – a process called sterilisation. This, however, will do little to assuage concerns of a creeping devaluation of the common currency. Not because it does not work, but because the very process will remain largely hidden from the general public, which will focus solely on the bond-purchases. It is here that the ECB, and in particular also member state governments, will need to become active and explain the actions of the Frankfurt-based bankers. The alternative is to risk an increase in negative public sentiment towards Draghi who is already facing severe trust issues, especially from the German population.

What OMT does not do:

Despite the psychological effect that the OMT might have on markets, Spain and Italy are far from saved. Their economies are struggling, with Spain’s (and Greece’s, too) youth unemployment rate at 50 per cent. Any solution to banks sitting on huge amounts of bad loans (housing and construction bubbles) will require a sum between 60 and 100 billion Euros in book cleaning costs. Furthermore, Spain’s regions might soon be requesting further loans to prop up their budgets.
Italy’s reforms have mostly come to a halt – its labour market continues to be fairly inflexible, its pension system remains generous, and tax evasion continues to constitute a major obstacle to recovery.

The most important issue, however, is one that requires much more than just financial assistance. Any reform will only take effect in the long-run, which means in 5-10 years from now. At first certain reforms might actually have the opposite effect, leading to higher unemployment rates and popular protests against the governments. Germany’s Agenda 2010 is often cited as the blueprint of chancellor Angela Merkel’s insistence on austerity and increases in efficiency, productivity and competitiveness. Yet it resulted in the electoral loss of then incumbent chancellor Schröder, and still haunts its creator, the Social Democratic Party (SPD). Still, it has allowed Merkel to proudly present ever-falling unemployment figures.

What is therefore needed is European support for those countries undergoing painful reforms, in particular further investments and funding for the modernization and improvement of their industries. Some countries, such as Spain, Italy or Greece, should be encouraged to seek further investments into greener industries. This would allow them to take full advantage of their renewable energy source potentials, whilst domestically political parties will have to rally and support reforms, instead of using public discontent and the promotion of anti-EU sentiments to secure electoral victories. Otherwise Spain and Italy will remain where they are now – on a downward spiral that will see their economies plummet. Is it likely? Not necessarily, but it is necessary; not in order to recreate a second or third Germany, but to give people in less developed countries a future.

What’s next?

Regardless of the effects of OMT, the EU has found itself upon a path that will almost inevitably lead to a closer banking union, potentially even fiscal union. There will be opposition to such a development. For example, Germany’s political scene, especially the Bavaria’s Christian Social Union (CSU), have repeatedly tried to stop Germany’s involvement in bailouts and the creation of the European Stability Mechanism (ESM). Member states will be reluctant to give up supervision over their banks. However despite all populist rhetoric, it is either further integration or collapse, as the EU’s current structure simply lacks sufficient control mechanisms to ensure proper development.

Wind turbine. © Wikipedia

It is one of the European Union’s major projects, but the decarbonisation of its economy was never going to be an easy or cheap development. From the beginning there have been obstacles that put the success of the project into doubt, starting with the uncertainty surrounding anthropogenic climate change, the expected consequences as well as the temperature increase still tolerable for Earth, to issues regarding how best to tackle the problem, and finally questions about the commitment of each member state. However, there was one certainty: Germany was committed to reduce its emissions and help trigger the gradual decarbonisation of its economy. Even though there has been disagreement how to achieve the greening of Europe’s most powerful economy, the commitment as such remained unquestioned. Since the first Schröder government (1998-2002) Germany has pledged to renew and actually re-develop its energy market, putting great trust into renewable energy sources such as wind and solar power. The Renewable Energy Act (Erneuerbare Energiengesetz) (2000) has triggered a massive development of wind power and somewhat paradoxically also solar power. According to the German Energy Agency (DENA) around 17% of electricity, 8% of heat and 6% of fuel used in Germany was generated from renewable sources (January 2011). The coalition of Social Democrats and Greens agreed to phase out nuclear power, the one energy source many consider most effective in the combat against climate change because it is almost carbon-emissions free and reliable. The conservative government of Angela Merkel first reversed the nuclear phase-out, and then reversed its decision after the nuclear incident at the Fukushima-Daiichi power plant in March 2011 and declared the country will shut down all nuclear power plants by 2022.

A slow start to green energy

Since then Germany’s Energiewende should be under way, however, the project has experienced serious setbacks from the start. Not only have energy companies such as RWE or E.ON only begrudgingly accepted the phase-out of nuclear power and the obligation to bring about the greening of the energy sector, but the government has failed to secure the consent of the population. Even though the EEG and the solar power subsidies have led to more small scale investments into RES, major projects, such as energy transmission lines, the connection of offshore wind parks to the grid and the construction of new gas-fueled power plants have been severely delayed. New developments such as NIMBYism have added to the slow transition of its economy. Last but not least, due to the financial crisis that continues to threaten the future of the common currency, especially after the failure of the Greek parties to form a new government after the recent elections, European leaders, and thus also Germany’s leaders, have neglected the challenges posed by the European Energiewende.

Why it matters for the EU

The problem of German’s delayed Energiewende is bigger than it might seem at first as any delay in the construction of the country’s energy highways connecting northern Europe with the southern states and the Balkans will inevitably lead to a more unstable supply of energy in the EU. Currently gas and coal-fired power plants will be used to provide back-up capacity to maintain a stable level of energy in the system. However, the increased share of RES, the more fluctuating nature of solar and wind power and the seasonally different energy generation potentials put the transmission system under strain and push it closer to the brink of collapse. Whereas most wind power is generated in the sparsely populated north, the biggest energy consumers are located in Germany’s southern states of Baden-Württemberg and Bavaria. Currently not enough transmission capacity is available to ensure all available energy is feed into the grid – unless more conventional power generation sources, such as coal and gas fired plants, are taken temporarily off the system during peak hours. This solution is neither effective nor cheap and heavily criticised even within the current government coalition.
The condition of Germany’s transmission system is of paramount significance as the country serves as a major exporter and transit country for electricity. The Bundesnetzagentur, Germany’s Federal Network Agency, has repeatedly warned of blackouts, in winter due to higher energy demand that will overload the outdated infrastructure, and in summer due to the fluctuating nature of solar and wind power and the lack of storage capacity to take off surplus energy off the grid.

The future EU-wide electricity network will also depend on Germany’s transmission network to a large extent, both for transmission and as the “last mile” (basically the last part of the transmission line that links the source to the consumer). Already now Germany is importing electricity from Austria and the Czech Republic and France, and exporting electricity to Poland and Belgium. In the next two decades electricity generated in the sun-rich Mediterranean south, energy from hydro and wind power, based on plans such as the North Sea grid, and electricity from bio-waste will add considerable quantities of electricity to the grid that will be transported throughout the EU, preferably through high voltage direct current lines (HVDC), but more likely through extended AC/ CD-lines.

It is here that Germany is missing out on a second important factor. Even though the Energiewende will be a very expensive project, it is one that will benefit the country and the EU as a whole if conducted in a pan-European framework. Even though Germany’s EEG has created hundreds of thousands of new jobs and a myriad of supply industries to keep its leadership position worldwide in the field of renewable energies, the government has been slow to embrace measures that ensure energy companies will provide their share to modernise the country’s energy infrastructure, but more importantly has actively supported an irrational policy of supporting solar power as a major source of green energy. This is in particular surprising given that Germany’s solar energy potential, measured as kWh/m² is between 1000 and 1200, compared to 2200 kWh/m² in most regions in Spain and Portugal and 2000kWh/m² in Italy, Greece or southern France. It is in those countries’ vast energy potential that Europe should invest and given the bleak economic situation in particular in Greece and Portugal, major public or European investments could provide a stimulus for growth and job creation. Many German enterprises are leaders in the field of renewable energies, and a European investment plan to realise the southern sun and wind powered part of the EU-wide energy network would allow German investments and create new jobs in Greece, Portugal or Italy.

Frankfurt Skyline (wikipedia)

Germany has played a major role in every discussion revolving around the current Greek budgetary crisis. Not only has the country been singled out as the biggest creditor, and more generally as Europe’s paymaster, but it has also come under severe criticism for enforcing an export driven economic policy that condemns its European partners to negative trade balances with Berlin. It has been argued repeatedly that Germany is therefore at least partly responsible for the problems faced by the countries on the periphery of the European Union. Germany’s chancellor, Angela Merkel has forced crisis-hit countries like Greece, but also Italy, Spain, Portugal and Ireland, to impose severe budgetary cuts and introduce reforms aimed at economic modernisation and labour market liberalisation. The results have been mixed, with the Irish economy clearly recovering and also Spain, Italy and Portugal disappearing from the headlines (and off the radar of most commentators and analysts, it seems). Greece on the other hand has remained in the spotlight and with the second bailout package agreed upon in Brussels recently, rumours have surfaced that a third package might be necessary (though, maybe wisely nobody has yet spoken of any rescue actions after this) to keep Greece from defaulting.

Germany has throughout the history of the European project been blamed of trying to shape it in its own image, making it a larger copy of itself. In the economic and financial context this would have meant recreating an overtly export oriented Union. There is no doubt that Germany’s economic success is largely due to its exports as domestic consumption has always lagged behind. It is exactly this issue that has triggered repeated statements that Germany’s successes come at the detriment of its European partners. A look at the statistical data provided by Eurostat actually shows a rather interesting development in Germany’s trade balance. The country generally enjoys huge surplus relations with all major western economies, with France and the United Kingdom responsible for almost two-thirds of Germany’s intra-EU trade gains, whereas its eastern trade balance is more balanced, with Poland its biggest surplus partner and the Czech Republic responsible for its biggest trade deficit in the East.

Economic growth “made in Germany”

After a few rather sluggish years, Germany’s economic performance has been very impressive, with a near tripling of its export trade value between 2000 and 2007. At the same time it has generated trade surpluses of 500 per cent outside the EU. Are critics right then, when they claim that Germany’s title as “export world champion” is only possible because its European partners run trade deficits? It would certainly seems so, considering that no other European economy has benefited more from the removal of trade barriers, tariffs and the reduction of exchange rate fluctuations through the introduction of a common currency. All this has made the comparison of prices easier for customers and, combined with the perceived superior quality of goods “Made in Germany”, gives German companies a considerable competitive advantage over their French or British competitors. German auto-mobiles, machinery and pharmaceuticals are among the world’s best and most sought after, explaining its huge trade surpluses.

However, one would assume that European competitors could rival Germany though lower prices for their goods. This though might have been a truism that is no longer valid. German wage moderation in the early 2000s under the Schröder governments, accompanied with huge investments in the modernisation of its major industries, has led to a considerable boost in efficiency, resulting primarily in a) faster and increased production and b) lower production costs per unit. Both factors play a crucial role in ensuring that German products remain competitive and cheap enough to ensure large demand abroad.

Germany’s export orientation, especially within the EU, is not without dangers. In the time between 2007 and 2009, its intra-EU surplus melted from over €125 bn to around €70bn, whereas its extra-EU trade balance remained almost unscathed by the beginning of the financial crisis. Largely responsible for the slump were lower demand in Spain and Italy, where demand for German goods was almost half as much as two years earlier!

Intra-European trade and German demand

What about German intra-EU imports (or arrivals, as the EU jargon has it)? Imports reached an all-time high of almost 520bn Euro in 2008 before dropping sharply in the second half of 2008 and afterwards. The country’s intra-EU imports are by far exceeding the imports of any other EU country. Spanish and French imports combine are almost equal to German imports, thus claiming that the country is not importing enough from its European neighbours seems to be a bit far fetched. Intra-European arrivals are almost twice as high as extra-European imports (mostly Chinese and American goods)! It is difficult to condemn Germany’s decision to import goods from China or Vietnam if those goods are comparable in quality but cheaper than European products. In a globally operating free market, every market player, regardless of the membership in a regional organisation, will pursue a rational and economically sound policy. Besides, most European majors produce in China, not in Europe, and those products of genuine Chinese origin are often not produced in Europe as the old continent has decided to reinvent itself as a service-oriented economy and has thus closed down most of its manufacturing centres.

To demand from Germany to import more from its European neighbours is thus somewhat naïve and populist. The country will continue to be both Europe’s biggest importer and exporter, both in intra- and extra-EU trade, but in order to boost German demand for European goods two factors need to be met: Germany’s domestic consumption needs to pick up; an issue consecutive governments have struggled as German consumer demand remains at satisfactory high but not very high levels with the exception of the holidays, especially Christmas and New Year’s; and its European partners need to offer a portfolio of products, which Germany currently imports elsewhere. Though this might seem like a reasonable proposal, it actually creates new risks, especially if the smaller economies orient their economic output too much in line with current and projected German demand. Any proper diversification of target markets will create the risk of over-dependence and potential economic meltdowns, if demand in Germany would suddenly collapse.

Let us be honest: Severe austerity measures are not going to work. Cutting budgets is not going to save neither Greece nor Portugal. It might actually do exactly the opposite. This does not mean that austerity and responsible budgetary policies are wrong. Proper fiscal austerity and strategies aimed at creating a well-balanced budget should be part of every country’s agenda (though not necessarily the way Germany insists). The EU’s insistence on austerity measures for both Greece and Portugal is correct but not in its current form and certainly not right now!

The beginning of…

Greece has not yet defaulted but “saving” it will costs European taxpayers more than 145bn euros if data provided by the IMF, ECB and EU Commission are anything to go by. In October 2011 this figure was at least €15bn lower and it seems unlikely that this will actually be enough to ensure Greece will avoid bankruptcy this year. Since then Greece has seen the Papandreou government fall from grace and the creation of a government of national unity with former ECB vice president Lucas Papademos as new prime minister. The announcement that Greece would raise close to €50bn through privatisation of national companies and assets has so far failed to raise even a tenth of the promised income and austerity measures have devastated the economy.

The Greek population does not perceive the European efforts as benevolent but rather express their frustration, rage or even hatred for Brussels and especially Germany’s chancellor Angela Merkel and her finance minister, Wolfgang Schäuble. Instead of seeing their European partners as saviours, Greeks suspect foul play and evil motivation behind the relentless European drill of increased austerity and pay cuts.

…the problem…

The major issue goes a lot deeper than corruption or a failed bureaucracy. The Greek economy is bloated and ineffective. The EU most likely knew Greece was not fit to join the euro e.g. the manipulation of economic key data to secure its entry into the eurozone was somewhat obvious, but allowed Athens to join nonetheless. The rich and middle-income class have for years wilfully avoided paying taxes. Most major Greek companies cannot compete with their rivals in the EU. It lacks economic competitiveness and a major cash inflow sector – tourism alone is not enough anymore, and products such as olives, rice, fish and cotton can only generate a limited amount of additional state income. Thinking about any major Greek company that competes successfully on the European market is difficult. There is no national air carrier (unlike in France, Germany, Poland, etc.), no major technology companies (though telecommunications company OTE is a major player in South-eastern Europe), no pharmaceutical firms.

The picture is no better when looking at other factors: No Greek university is listed in the top 200 rankings of the TimesHigherEducation or the Shanghai Rankings, compared to 12 in the UK (top 100!; 11 in the Shanghai ranking), Germany’s four (seven) or Sweden’s three (four). Almost half of all young Greeks are unemployed. In the third quarter of 2011, so well into the crisis, the youth unemployment rate stood at a shocking 45%, but even in 2008 was at an EU high of 22,1 per cent, only Spain fared worse with 24,6 per cent!

So, basically Greece has a structural problem that, combined with the current financial problem, makes its survival rather unlikely and in the best case scenario at least extremely costly. The solution cannot be to give Athens money whenever it needs to repay another instalment. Neither can it be to throw good money after bad money. The haircut that was discussed in the past few months again and again – letting Greece default but agreeing with its creditors that it will repay part of its debt – has still not become reality. Maybe it would thus be time to take matters into European hands and, together with the IMF, come up with a different solution? It was a good day when European leaders agreed that Greece needs more than austerity measures and that the EU as a whole has to focus more on stimulating economic growth. This is exactly what needs to be done in Greece. The country is broke and it will remain broke, especially after the heavy series of lay-offs and pension cuts which will bring the economy to a halt very soon, if strikes don’t do it first.

…the solution: investments!

What Greece needs is a modern Marshall-Plan. Instead of covering the problems, the Greek economy needs to be rebuild from scratch. This should allow both Brussels and Athens to take more radical steps to a) ensure a return to economic growth and employment, b) attract foreign investments, c) calm financial markets as this would signal a radical shift towards action instead of re-action, and d) capitalise on Greece’s geographical location and green its economy.

The earlier mentioned factors, such as tourism and demand for certain agricultural produce would be supplemented by other income sources. Utilising wind and solar power would allow Greece to become a major energy exporter. Higher employment rates will ensure more consumption to revive domestic markets, also giving young people a future in the country. This in turn will prevent the dangerous brain-drain that would leave the country without brilliant young minds that can contribute to make the economy more competitive.

This will not be cheap, let’s be honest about it. However, it might pay off a lot faster than keeping Greece barely alive at the moment. Considering the fact that the EU is determined to run the world’s most eco-friendly economy, it would make sense to take the necessary steps now. Helping Greece now will eventually be helping the EU achieve its climate goals.

Pipeline

The bad news came just before the closure of the October 1 deadline and might have been the final lethal blow for the European Nabucco Pipeline project. UK oil and gas giant Beyond Petroleum’s (formerly British Petroleum, short BP) proposal of the South-East European Pipeline (SEEP) might easily rival and replace Nabucco as the most suitable option to bring Caspian gas to Europe. Even though some of Europe’s strongest energy companies stand behind Nabucco: Austria’s OMV, Hungary’s MOL, Turkey’s BOTAS and Germany’s RWE; it has always had a bit of a slow start in comparison to its competitors in the Caspian Sea region. Other projects, such as ITGI, TAP or the Russian South Stream have always seemed somehow more suitable, either because they were endorsed by a shareholder of the Shah Deniz field, such as TAP by Statoil, were smaller and thus more adjusted to the gas available in the second development stage of Shah Deniz (ITGI and TAP should each carry 10bcm compared to Nabucco’s 31bcm) or had the financial backing (South Stream will be build by Gazprom and Italy’s Eni). However, most importantly, Nabucco’s single biggest failure was long considered a smart move: it had failed to secure gas before its construction and now struggles to find enough gas to justify its construction.

SEEP has one major advantage over Nabucco – BP is one of the stakeholders of the Shah Deniz field (together with Statoil and a few others) and will thus be in a position to shift the vote in favour of SEEP instead of Nabucco. It can to some extent be considered to be a bastardized version of Nabucco. It looks like Nabucco was fleshed out and adjusted to the realities – its capacity of 10bcm would match the additional gas output of Shah Deniz II post-2017, and unlike Nabucco, and in line with ITGI and TAP, it will rely on BOTAS pipeline network to transfer gas through Turkey. This will greatly reduce costs and should ensure the projects financing.

However, there are a number of problems that need to be addressed. First of all, SEEP can hardly be called a proper project so far, as it is hardly more than a conceptual proposal with little more than cost estimates and an alternative route to transfer Azeri gas. Though it will be cheaper than Nabucco, the reliance on the Turkish pipeline network and parts of Hungary’s and Bulgaria’s network, could prove a potential problem, especially as all networks require modernisation to meet future gas transport requirements. Finally, the capacity of 10bcm will hardly be enough to reduce the regions dependence on Russian gas deliveries, and unless SEEP will be scalable, it will remain one of many pipeline projects necessary to increase the energy security of the region. This could, almost ironically, mean that Nabucco could eventually be build after all.

Should Brussels attempt a counterattack?

As mentioned above, Nabucco has been slow to take off and now SEEP might have dug the grave for the EU project, but Nabucco might still prevail if the EU finally takes a stance and backs the project properly. There is no doubt that Nabucco is too big for the 10bcm of Shah Deniz alone but there are other sources for natural gas – Iraq amongst others – and more importantly Turkmenistan and one day Iran. The country is willing to diversify its energy exports – currently Russia and China are the only destinations for Turkmen gas – and the European market, especially in light of the “greening” of its economies, might be the ideal market. However, the Turkmen government is unwillingly to invest in the Trans-Caspian pipeline unless it can be sure that Europe is going to import a large quantity of natural gas. Other countries, such as Kazakhstan or Uzbekistan might sign up to the proposal once their governments are convinced that Europe is determined to invest in a project that is in line with their Big Gas strategy.

Nabucco was recently estimated to cost somewhere between €14-20bn, a cost that many deem too high and uneconomical. Compared to South Stream it will still be cheaper and will reduce the EU’s dependence on Russian gas. Furthermore, it might bring about closer relations between the EU and natural gas suppliers such as Iraq, Turkmenistan or even Iran. Proponents of Nabucco will claim that Turkmen or Iraqi gas is cleaner than any natural gas extracted from Polish or French shale. Furthermore, if Nabucco fails, the EU will suffer a humiliating defeat vis-á-vis Russia over its energy security, as Nabucco was more than just a project but first and foremost a symbol of European determination to rid itself off Russia’s energy power grip.

In times of economic turmoil it might seem like a mad idea but if the EU is serious about reducing its greenhouse gas emissions, then Nabucco should be build, however, only after the consortium secured access to Turkmen (and possibly Iraqi) gas. The consortium should thus primarily focus on Turkmenistan’s gas reserves as Azerbaijan’s gas reserves might be enough for the beginning but will not be enough to fully fill Nabucco. This solution might require large investments but might be the only answer to Russia’s energy pincer (Nord Stream and its souther ‘sister’ South Stream).

The green energy revolution in the EU might be taking place but it will take many years before renewables will be able to provide enough energy to substantially lower Europe’s hunger for gas. In the struggle for Caspian gas size might thus actually matter if Nabucco can be slightly adjusted to convince the littoral states of the Caspian to contribute to it. One thing is sure though, Europe needs to get a foothold in the Caspian region, otherwise its energy security will remain in the hands of external forces for decades to come.

Orbán, learning from Putin?

It is a twist of history, the cruelest one imaginable maybe, that a former Communist dissident would turn a democratically ruled country into an authoritarian regime. It is even more ironic if such a regime change should happen within the borders of the biggest democracy promoter in the world. Unfortunately, this is exactly what is happening right now in Hungary, one of the countries that joined the European Union in 2004. The person in question is the country’s Prime Minister, Viktor Orbán, the man who let Hungary into NATO and promised fundamental changes and a clear break with the past in Hungary.

Since Orbán’s Fidesz party has won the majority of the votes in the 2010 election and ousted the disgraced Socialist government under Prime Minister Gordon Bajnai, who had replaced Ferenc Gyurcsany after the “lies-gate” in 2009, Hungary has undergone a radical change. The party that ran a virtually non-existent campaign by simply distancing itself from the Socialists, has since last April changed the Constitution of the country, declaring the country to be simply “Hungary “instead of the “Republic of Hungary”. It has curbed the authority of the Constitutional Court and removed its competence to rule in questions related to the state budget. It has also adjusted the constituency borders to give itself an electoral advantage over other parties in future elections. Fidesz has nationalised the pension fund and imposed a new media council, staffed with Fidesz cronies, to supervise media outlets. Currently, close to 80% of all media is considered to be Fidesz friendly. Critical outlets, however, such as the popular Hungarian newsportal index.hu have been banned from reporting from inside the parliament building after a satirical take on the government at the end of the year. Last but not least, the government recently decided to impose its authority over the National Bank, thus effectively removing the independent financial supervision in the country. Orbán plans to merge the National Bank with the Financial Regulatory Authority and would thus give the government direct control over the institution.

Hungary on Russia’s path

All this sounds strangely familiar, though recollections of such incidents happening in a democratic country are rare and do not come to mind. It is a very different case when one thinks about the beginning of various authoritarian regimes, and ironically the example of Russia easily comes to mind. Under the presidency of Vladimir Putin (2000-2008), Russia’s government centralised power over all major political bodies, such as the Duma (parliament) which nowadays can hardly be considered to control the government, or the Constitutional Court, which has repeatedly ruled in favour of the government and has been called corrupt and incapable by some of its own judges (see here in Spanish and here in English, and in a very disturbing book by the late Anna Politkovskaya). The media are controlled by the Kremlin and major companies have been brought back under control, often without the consent of their owners. Powerful oligarchs, such as Berezovsky or Chodorkowski ended up in exile or jail, their companies – oil companies Sibneft and Jukos and media outlet ORT, were either nationalised or dismantled and sold off.

The European Commission has repeatedly criticised Russia for its lack of democratic rule and the violation of human rights. When Dmitry Medvedev was elected third President of the Russian Federation, European leaders were hoping that reforms would turn the country into a more democratic country. However, Medvedev has failed to transform the Russian political system. A democratic Russia seems to remains a vision for the distant future.

Meanwhile back in Hungary

Support for the government has been falling rapidly recently. Only 16 per cent of Hungarians still back the government. More than 80 per cent think the country is heading in the wrong direction. The national currency has been losing around 15 per cent of its value in the past few months. For the second time in a decade the country needs international help to solve its financial problems, provided by the IMF and the EU. However, the situation differs from 2008, insofar that the country’s financial institutions are considered to be no longer independent. The IMF and the EU have announced they would not continue negotiations about a new loan if the government does not loosen its power grab on the National Bank. Hungary might need around 20bn euros, which strengthens the position of the EU and the IMF to force the government to give up its authoritarian campaign.

Even though it seems unlikely that Orbán will admit that the EU still holds certain power over the country’s politics, the government does not find itself in a good position. It has been milking the population with new taxes, international companies are considering moving their assets abroad and the population lost its faith in Fidesz. The country’s credit rating was downgraded by all major rating agencies to “junk” status.

In this situation the country will eventually need help from its European partners. This position of weakness should be exploited by the EU to ensure Hungary returns to the path of democracy. A total overhaul of the changes is not possible but at least the government’s attempts to bring under control the National Bank could be reversed.

This would be a first corrective step. Hopefully it will be the first of many. It would be good for Hungary and the EU. Only a functional system of checks and balances (and this also includes non-classic actors such as the Hungarian National Bank) will ensure democratic rule, a prerequisite for membership in the EU. In the long run Hungary will need the support of its European partners even more to succeed in the international system. The EU, too, could benefit from Hungary, its skilled labour force, its inventors and entrepreneurs

Council of the European Union

One could feel a bit sorry for the British Prime minister David Cameron after last week’s EU summit. What 26 countries agreed to set up, is deemed as a pre-federation in the UK.  Tighter economic and fiscal rules, more control over the budget of states and more integration – federalists will rejoice after what can be called a great step towards the creation of a Federation of States. Whereas Merkel and Sarkozy basked in the light of success, Cameron faced harsh criticism for the UK’s decision to “remain sovereign” and not sign up to the Franco-German “dictate”.

Cameron’s decision, however, is not entirely bad for the EU. Relations between the UK and the EU have never been a real love story and it should not come as a surprise as the  country has once again decided to stand outside. The European currency has never been a favourite of the British, which cling to the pound, nor is the UK part of the Schengen agreement. Governments in London have seldom been in favour of further integration, instead of  hoping that a widening of the EU would prevent too much integration.

Why this decision is good news for the EU

The UK’s decision to remain on the sidelines is therefore a blessing for the EU to some extent.  Assuming that stronger integration in the field of economic, fiscal, financial and budgetary policy is possible without a new treaty, London’s decision will remove a major roadblock for all other member states. If the UK, similar to Schengen or the Euro, does not actively prevent an agreement, this will certainly strengthen Brussels and those participating in it. Even Denmark, the other eurosceptic with an opt-out, has decided that it will be better to  suppor the general course the other countries have subscribed to.

It is good news also for all those states that currently do not yet share the common currency of the Eurozone, but have agreed to introduce it some time in the future. Countries like Poland or Hungary will be involved in all processes that have so far been discussed only among the Eurogroup. Closer cooperation in all the above-mentioned areas will ensure that the “invisible wall” surrounding the Eurozone will not become a reality that will eventually make it impossible for them to ever meet the criteria to introduce the Euro.

And here’s why not

However, just as always, there is also a downside and in this case, it is  what might matter the most, namely the regulation of the financial sector. London continues to be Europe’s centre of commerce and finances and even though Paris or Frankfurt are slowly gaining importance, London is the EU’s banking and insurance capital. Any agreement to tighter rules or more control over the banking and insurance sector will, therefore, necessarily remain somewhat limited, if it cannot be applied to the fullest. In the worst case it remains likely that London will veto any attempts to curb transactions or introduce regulation that might diminish the importance of the City.

The question thus is how happy one should really be about the agreements made at the summit. So far every announcement was eventually followed by new summits to be followed by yet another one and little has actually happened to contain the crisis. The 26-1 decision also raises another question. If the UK is not happy to be in the EU and has no aspirations of ever becoming really Europeanised, and at the same time prevents other countries from the continuation of the European integration project, how long will it remain a EU member? Does it really make sense for London to remain in the EU, or should it leave the Union but instead be part of EFTA again? The country has always been mostly interested in securing access to the European market, and this can be achieved without actually being part of the Union. This would have certain disadvantages obviously, such as being unable to influence decisions made with regards to the internal market, however, at the same time it would spare London from all the troubles of implementing legislation it does not like.

One problem remains

If the UK decides to leave the EU many will cheer, some, including the current coalition partner of Cameron, the Liberal Democrats,  but dropping out might have another unintended consequence. Certain parts of the UK, especially Scotland are more in favour of the EU than England itself, and with independence tendencies in the UK under way already, a European exit might also spell the end of the UK as we know it today.

The EU too will have to think about the consequences of a British exit. It will have to re-adjust not only the voting systems but will have to set its relationship with the UK on a new footing. So far no country has ever left the EU, there is no precedent nor plan how such an event should happen.

But should it happen? If the UK will not contribute to a stronger EU, maybe it should. The question who has more to lose is of yet unanswered, but only few small countries have managed to survive and strive in today’s globalized world. Would the UK be one of them? Personally, I don’t think so.