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European Union

Will Italy leave the European Union

Following a decrease of 0.1% in the third quarter of 2018, Italy’s economy contracted of 0.2% in the final quarter of the same year. As such, Italy is now officially in technical recession; just when it seemed to be recovering from the effects of the debt crisis. This has sparked an intense political debate and has cast doubts over its economic prospects. But what does this actually mean for Italy and the EU?

Technical recession: the domestic debate

The news that Italy has entered into technical recession have immediately triggered a mutual-blaming quarrel between political forces. The governing coalition formed by the Five Star Movement and the League attributed the fault to the former ruler, the Democratic Party; who, on its part, accuses the economic policies of the current executive.

In reality, the situation is way more complex, and the responsibility cannot be ascribed to a single reason. As in all economic issues, there are multiple factors in place whose interplay determines the growth on a given period; therefore, it is difficult to clearly find out who or what is responsible. Economic performance is a long-term issue. Amazon’s CEO Jeff Bezos once said that “if we have a good quarter it’s because of the work we did three, four, and five years ago. It’s not because we did a good job this quarter”. His sentence does also apply to states. So, part of the responsibility can be imputed to the previous governments who, in spite of having managed to reassure the markets and bring Italy back on the path to a limited growth, failed to reduce the country’s huge debt. But it is equally true that the current executive, in power since June 2018, has raised the concerns of investors with the economic policies it has implemented or proposed.

First, it attempted to adopt an expansionary fiscal policy to boost growth by increasing public expenditures. However, this alarmed the EU Commission: even though Italy’s budgetary plan did not break the Union’s rules, it was still considered too risky as it would have caused a fiscal deficit and increased the already enormous public debt. This resulted in a standoff that was ultimately solved when the Italian government partially backed down and reduced the planned spending. Yet, the episode caused stress on the financial markets and harmed trust among investors. Another controversial topic in the economic policy of the incumbent government is the introduction of a basic income for unemployed people: it would increase public spending, but its future benefits are dubious.

Technical recession: the external factors

Apart from the policies of this government or the previous ones, there are many other external factors that the executive cannot control and that probably have had a more important impact on Italy’s economic performance. The country’s GDP contractions comes amid a global slowdown. The growth of the EU as a whole has been limited to 0.3% in the final quarter of 2018. There are some issues on trade as well. China, the world’s second-largest economy and a non-negligible export destination for Italy, is also growing at a slower pace than before. Problems exist also with another and more important trading partner: the United States. President Trump’s protectionist policies have surely had a negative impact on the EU and on Italy. At the end of May 2018 the US imposed 25% tariffs on steel and 10% ones on aluminium. In 2016, Italian metal exports to the US were worth almost 2 billion dollars. This is not an impressive figure, but more important industries could soon be hit and this eventuality could have had an impact. Trump is threatening to put tariffs on cars, that always in 2016 represented 9.5% of total Italian exports to America for a total value of more than four billion dollars. Again, this is not an extraordinary amount, but the spill-over effects on related industries should also be considered. The EU is trying to reach a deal on trade with the Trump administration, also by menacing to impose counter-tariffs wort 23 billion dollars on US products, but in case it fails Italy will surely be negatively affected. The looming possibility of a no-deal Brexit in recent months might also have had a role. The UK is a more important destination for Italian export than China and the US, and the prospect of a no-deal scenario may have had an impact, even though it is still too early to evaluate this. But the most important point probably concerns energy supplies. Italy is dependent on petroleum imports, and the price of oil surged in 2018 to reach the climax at the beginning of October, thus covering much of the period in which the Italian economy has contracted. The price went down since then, and the effects will probably be felt in the coming months.

These are only some of the numerous factors that may have determined Italy’s recession in the second half of 2018. What is important to understand is that the issue is very complex and easy explanations are not effective indicators of the reasons behind the GDP contraction. But what about the future prospects for Italy? Will it leave the Eurozone?

A prelude to leaving the Euro?

Since the debt crisis of 2011 and the subsequent austerity policies, Euroscepticism has become common in Italy’s political discourse. EU institutions were criticized and perceived as technocrats at the service of financial interests, and some even advocated for Italy to abandon the EU or at least the Euro. The most recent recession, albeit marginal by now, might reopen the debate, especially if it were to continue. After all, the two ruling parties were among the most vocal anti-Euro political forces, even though they took more moderate positions later on.

This is a political choice that Italy will have to make, but it will have of course major economic implications. According to the optimum currency area theory, it is economically beneficial to have a single currency in case the region is strongly integrated by intense trade exchanges and a great mobility of production factors. So, a country evaluating whether to enter or leave a common currency area should assess its degree of economic integration with other participants. As a matter of fact, the higher the level of integration, the greater are the benefit and the lowest are the costs of renouncing to monetary sovereignty to have a single currency. For what concerns the benefits, the main advantage of a common currency is to eliminate transaction costs due to exchange and interest rates and their variation. If the economies are closely intertwined with an elevated trade volume and a strong mobility of workers and productive factors, having different currencies brings very high costs that partly eliminate the gains of trade; and adopting a single currency removes these costs. But having a common currency also brings its own costs, because it makes it impossible for states to use monetary policy to counter asymmetric economic shocks, namely recessions that hit only that country but not others. If it has its own currency whose value can freely float, its automatic depreciation will boost export and counter the economic slowdown. But if it has renounced to its monetary sovereignty by adopting a common currency like the Euro, this mechanism is impossible. However, a high degree of economic integration minimizes this inconvenience, as it also allows to reduce the recession’s effects. If the country’s economy is closely intertwined with that of its fellow partners, the diminution of the price of its products will encourage others to buy them, thus increasing its exports. Similarly, if there is a high mobility of workers, then jobless people will be able to emigrate to other countries thus re-equilibrating the domestic labour market. In short, if the economies are strongly integrated, the benefits of having a single currency are high and the costs are low; so, it is wise to adopt the common currency. Now, is it the case of Italy?

For what concerns trade, in 2016 Italy’s exports to Eurozone alone was worth 192 billion dollars, over a total amounting to 450 billion. In the same year, its imports from other Eurozone countries amounted to 207 billion on a total of 397. This shows the importance of its exchanges with the other countries using the Euro. Moreover, its economy is also integrated with the Eurozone via mutual investments, expats, joint-ventures, services and others. If it abandoned the Euro, then it would lose all the advantages of having the same currency as its main economic partners. In addition, if it came back to the lira it would have to face the short-term shock. The currency would rapidly depreciate, and while it is true that this would boost export, it would also bring back consistent transaction costs. Moreover, inflation would erode the people’s purchasing power and there would be deep consequences on its debt with soaring spread and strong difficulties to obtain new loans. The situation would surely stabilize with time, but all in all, this does not seem to be an economically-convenient move for Italy.

Conclusion

The fact that Italy has entered in technical recession is surely no good news for it and the EU. Blaming each other at the political level will not solve the issue, also because there are many factors at play and responsibility cannot be fully attributed to anyone. Much will depend on future economic developments; but the contraction is limited by now and, in spite of the Eurosceptic positions of the current government, there is nothing that indicates that Italy will leave the Eurozone anytime soon.

Is Macron a friend of the Rich?

Recently France has been swayed by large scale protests carried out by tens of thousands of its citizens in response to a series of economic reforms since the new government came to power in 2017. A growing mistrust amid the tax cuts on corporations and high earners while raising taxes for the working class has prompted the people to put pressure on the government to make big changes.

Emmanuel Macron founded the centrist movement named “En Marche!” in April 2016 and much to the surprise of many, won the elections the following year. The French saw promise in Macron’s manifesto, which promised significant economic reforms backed up by his relevant experiences both in the public and private sectors. The fragile economy and mistrust for the previous regime left the people with no options but to take a risk instead of voting far-right candidate Marine Le Pen. However as the recent “Yellow Vests” movement spread out in France the truths behind the reforms have only started to get publicity.

Historical information

Francois Hollande, who preceded Macron as President, failed to live up to expectations having faced major opposition from his proposed economic and employment reforms. He faced criticism for many issues including failing to address difficulties in integrating immigrants into the French society and even pandering to the right with his comments on stripping French citizens with dual nationalities off their citizenship following the high profile terrorist attacks that shook the country, including the Charlie Hebdo shooting in 2015 and the Nice truck attack in 2016. Hollande decided not to re-run for the election due to a combination of social, political and economic frailties and the huge mistrust shared among the French citizens.[1] Macron on the other hand was appointed Deputy Secretary General to Hollande in 2012, while also serving as Minister of Economy, Industry and Digital Affairs between 2014 and 2016, where he formulated several business reforms to aid the economy.[2]

Macron was born in Amiens, France and is an alumnus of the elite École Nationale d’Administration. He showed great aptitude in the areas of literature, politics and theatre at an early age and had been able to forge powerful connections during his time as an inspector at the French Finance Ministry during Nicolas Sarkozy’s tenure as President. However he switched civil service to work in investment banking at Rothchilde and Co where he swiftly rose up the ranks to become managing director before being appointed as Francois Hollande’s staff. [3] His most significant contribution in investment banking was his crucial role in advising Nestlé on its USD 12 billion acquisition of a unit of Pfizer in 2012 which earned the nickname- “the Mozart of finance”.[4]

Despite public protests as, the business reform package he introduced in 2015 as Finance Minister was forced through parliament by then Prime Minister Manuel Valls who invoked the special article 49.3 procedure which also received criticism from within the ruling Socialist party.[5] However he soon resigned (in 2016), and founded En Marche! And announced his candidacy for the 2017 presidential election. His manifesto attracted a lot of attention, and was even able to gain support from both the left and the right, especially through his proposals that aimed at lowering housing and corporate taxes, reforming pensions and welfare, and allocating substantial resources.

He became France’s youngest ever president by defeating Le Pen in 2017. He had received 66.1 percent of the 47 million votes cast. He had never held an elected post but it did not seem very difficult for him to achieve his objective.

Plans for the economy/budget:

The biggest test, and also Macron’s main objective has been to overhaul France’s economy. He inherited a very poorly performing economy from his predecessor with the biggest challenges being[6]:

  • 10% unemployment, and nearly one in four among under-25s
  • Bloated public spending (56% of GDP compared with 44% in Germany and 39% in the UK)
  • Low economic growth

 His twin aims are to boost investment and set up a “new growth model” that is both good for social mobility and the environment. Macron has been advocating a Nordic-style economic model that mixes spending cuts of 60 billion euros with a 50 billion euro stimulus package over the same period. The “spend and save” system that Macron plans is meant to mix targeted public spending with fiscal discipline as a Nordic model. Besides lowering corporate tax rate from 33 to 25 percent he also has plans to slash 120,000 jobs from France’s bloated civil service while lowering companies and households; tax bill by 20 billion euros.[7] These are part of the major economic reforms that Macron has planned while making France stick to the EU government deficit limit of 3 percent of GDP.[8]

Security and Defence

In light of the recent terrorist attacks that have rattled France and resulted in the loss of hundreds of lives, Macron has proposed increase in defence and policing by recruiting 10,000 new police officers and expand prison capacities. He also advocates the idea of an EU army, and has been promoting joint military projects and setting up a permanent European headquarters.

Some of his notable plans for governance includes reducing number of lawmakers by a third in both the Senate and National Assembly, banning the hiring of family-members as assistants of lawmakers, and banning consulting activity for people holding elected office.[9]

Foreign relations and others

France’s commitment to 2015 Paris climate agreement has been among the key global issues that Macron has promised to back-up and promote since his early days in the office.

When it comes to foreign relations he has voiced support for multilateral institutions such as the UN security council, however also supporting the promotion of the French language and Francophone institutions as “an essential vector of our influence and a weapon against the spread of radicalism”. He stands strong against the Syrian regime led by Bashar al Assad and wants him to answer for his crimes before an international tribunal while being a strong critic of Russian policy, backing EU sanctions following the Ukraine crisis.

Europe

Macron is pro-EU and has campaigned for greater cooperation and integration within the EU on fiscal, environmental and social regulation. In his European agenda he has expressed his plans towards a common fiscal policy, a joint finance minister, implementation of the banking union and a bolstered bilateral relations with Germany.[10]

Macron’s tenure as president

Macron came to power at a problematic time- he faced a massive restructuring of regional powers following the Brexit referendum, as well as US President Donald Trump’s reshuffling of American interests. These major changes made the situation a little more difficult from the very start, and especially after the shocking withdrawal of the US from the Paris climate accord, a decision made my Trump himself, who does not believe in climate change. This prompted Macron to offer France as a second homeland to climate researchers.

One of the first things he did was making a state visit immediately after his election to meet Angela Merkel in his quest for improved Franco-German relations and since forged a strong relationship with Merkel and agreed on a “common roadmap” for Europe. However Merkel has a more cautious approach than Macron when it comes to major issues concerning the EU.[11]

He has always been vocal about increased European cooperation on many issues, and has been pushing for a “European Army” to improve security in the EU-with Merkel quick to endorse Macron’s plan, and . Macron also voiced strong interests to pursue security dialogue with Russia seeking to improve EU-Russia relations especially in terms of security.

In France

Macron had been quick in pressing for reforms soon as he took charge- with one of his first significant contributions being against mass corruption and nepotism in French politics- introducing a ban on elected representative from hiring family members.[12]

Yellow vests movement

In the May 2018, a political movement arose that challenged Macron’s economic reforms. It has been named “Mouvement des gilets jaunes” or the “Yellow Vests Movement” where demonstrations started on 17 November 2018, months after it was created. The main protagonists of the now ongoing movement are the ordinary working and middle class French citizens who strongly feel that Macron is not the leader for the ordinary working class. What triggered the movement was the proposal to keep increasing a direct tax on fuel, as well as the carbon tax. Although Macron stated that these were part of his plans to reduce fossil fuel reliance but it has been widely criticised as an act of “taxing the poor to tackle climate change”.[13]

In his first budget Macron’s business friendly government had proposed trimming corporate rates and a “wealth tax” on the rich, explaining that boosting investment will aid the economy, however also increasing certain taxes such as one on low-income pensioners. While giving tax breaks to big corporations, plans of charging lower taxes on high-paid workers in certain industries have garnered mistrust from ordinary citizens and political rivals alike, with the left-wing calling him “Hero to the rich”.[14] He also moved to loosen hiring and firing regulations on companies to improve France’s paralysed labour market.

Protests have been going on for over a month and hundreds of thousands of French citizens have taken part in what seems to be an anti-Macron rebellion, with the premier making a U-turn by suspending the proposed tax hike amid the protests that have turned violent. French authorities have deployed nearly a hundred thousand security forces during several days of protests detaining thousands and using anti-riot weapons such as tear gas against protestors.[15]

In a very recent bid to end the standoff, Macron announced a package of measures for low-income workers estimated by economists to cost up to 15 billion euros. Besides suspending the fuel-tax hike plans for six months, he also announced raising the minimum wage by a 100 euros per month from 2019 while scrapping the recent increase in social security taxes on pensioners earning less than 2000 euros.[16]

The protests are still ongoing with protestors expecting their 42 directives to be accepted. However recently it has garnered criticism for a lack of leader and organisation, and violence by protestors and use of force by police has already resulted in over 500 injuries. Despite Macron announcing several major changes bowing down to protestors, there are many demands to yet to be met and it is not clear when or how the Yellow Vests Movement will end.

Conclusion

Macron, poised to become “Europe’s next leader” as Merkel nears her exit from politics, saw a major slump in his popularity since the protests. Falling out of favour may mean nationalists such as Marine Le Pen gaining support, and with the rise of the populism in Europe in the past few years, it may not come as a surprise if France leans towards the far-right. A major shift in powers may make the situation in the region volatile and with France being a major power in the EU, and with the UK poised to officially leave the EU in a few months, it would cause a major restructuring in regional powers and interests. Most concerning of all, with countries such as Italy, Hungary and Poland having already given in to populism, a major power joining their ranks will shake up the EU and prove to be a major challenge in the future of the EU. The current situation and its developments in France will have a significant impact on the economic and political stability in the rest of Europe.

[1] https://theconversation.com/where-did-it-all-go-wrong-francois-hollande-flops-out-of-presidential-race-69806

[2] https://www.biography.com/people/emmanuel-macron-050817

[3] https://www.nouvelobs.com/rue89/20160830.RUE5451/au-fait-il-faisait-quoi-chez-rothschild-emmanuel-macron.html

[4] https://www.ft.com/content/9bd62502-12cf-11e7-b0c1-37e417ee6c76

[5] Revault d’Allonnes, David (17 February 2015). “Loi Macron : comment le 49-3 a été dégainé comme un dernier recours”

[6] https://www.bbc.com/news/world-europe-39845905

[7] https://www.bbc.com/news/world-europe-39845905

[8] https://www.ft.com/content/37223e92-3319-11e7-bce4-9023f8c0fd2e

[9] https://www.reuters.com/article/us-france-protests/french-yellow-vests-protest-in-their-thousands-for-fifth-saturday-idUSKBN1OE0BF

[10] https://www.ft.com/content/37223e92-3319-11e7-bce4-9023f8c0fd2e

[11] “Emmanuel Macron and Angela Merkel pledge to draw up ‘common road map’ for Europe”. The Telegraph. 15 May 2017

[12] “France bans hiring of spouses by politicians in wake of Fillon scandal”. Reuters. 27 July 2017.

[13] https://www.politico.eu/article/macrons-mistake-taxing-the-poor-to-tackle-climate-change/

[14] https://www.thelocal.fr/20170927/hero-to-the-rich-macron-cuts-taxes-for-wealthy-in-first-french-budget-france

[15] https://www.reuters.com/article/us-france-protests-tax/france-drops-fuel-tax-hike-as-yellow-vest-anger-persists-idUSKBN1O40PQ

[16] https://www.france24.com/en/20181210-macron-france-tax-cuts-raise-wages-speech-yellow-vest-unrest

5 Geopolitical Trends to watch in 2019

In today’s globalised world, many geopolitical events take place every year, and they have a long-lasting effects in time. So, considering what happened on the international scene in the year that has just ended, what are the top five global trends to watch in 2019?

1 – “America first”, America alone?

President Trump’s “America First” policy was put into practice various times in 2018. He introduced new tariffs to protect the US economy; he abandoned those agreements that he deemed contrary to America’s national interest; he criticised allies for free-riding on the US in security issues.

This is a trend that will continue as long as Trump remains in the White House, and that will have an important impact on the global order. For decades, the international system was centred on the US and its commitment to sustain its rules and provide security; albeit with limitations and largely for its self-advantage. But now, Washington prefers pursuing a narrow definition of its own national interest. This has already raised concerns with traditional partners; most notably with the European members of NATO to whom he demanded to spend more on defence. This divergence between the two sides of the Atlantic has cast doubts over the tenure of the Alliance. All this happens in a moment of renewed tensions with Russia, who in turn is taking benefit from the situation because in case of a confrontation, it will have to face a more divided and therefore weaker NATO. This uncertainty over the future of the Alliance damages European but also American interests: alienating its traditional allies risks to isolate the US and to reduce its international influence.

All this happens in a delicate moment for the US economy. While its GDP grew of almost 3% in 2018, its monetary policy is object of political debate as Trump accuses the Federal Reserve of being the “only problem” of America’s economy. If the Fed keeps on raising the interest rates to contain inflation, the US growth will slow down. This will also combine with the effects of tariffs plus the considerable public and private debt. Moreover, American stock markets have lost much value in the past year: the price of shares according to the Dow Jones index dropped of around 9.5% in 2018. And if the US economy slows, the rest of the world will follow.

2 – China’s economic slowdown

The world’s second-largest economy is also facing troubles. While it is predicted to grow of about 6.6% this year, which is still extraordinary given its size, the rate is no longer a double-digit figure as in the past. The Chinese economy is also slowing down, and this will inevitable have repercussions on the global scale. As economic prosperity is considered fundamental for social stability and for the rule of the Communist Party, the government is taking measures to maintain a steady growth. This explains various initiatives like “Made in China 2025” aimed at upgrading its industry, the huge investments in high-tech, or the far-reaching “One Belt, One Road” project.

Apart from purely economic issues, this will also have geopolitical consequences. Beijing has been increasing its worldwide presence in the past decade, notably through economic means; but if its growth slows down, its ability to sustain its greater plans in the Asia-Pacific and beyond will suffer. In this sense, the very plans it is implementing to boost its economy may result counterproductive: they are certainly ambitious projects with a great potential, but they are also very challenging. The enormous investments they require will result in a waste of resources if they do not translate into economic growth, and this will hamper China’s economy. As such, observing Beijing’s economic policies and its performance through 2019 will be an indicator of its future global role.

3 – The European (dis)Union

The EU will cross troubled waters in 2019. Anti-EU movements have risen everywhere, its economic recovery remains sluggish and each of its four most important members is not in the position to lead a reform of the common institutions. The United Kingdom will finally leave, but the exact terms are still undefined and a “No Deal” Brexit seems probable. This is the worst scenario, because it means uncertainty for economic and political actors alike. Italy is now ruled by a Eurosceptic coalition that has already clashed with the EU over immigration and economic policy. Germany continues opposing more economic integration in the form of a common fiscal policy, and Angela Merkel’s leadership has been weakened. In France, President Macron is calling for a reform of the EU and promotes further integration, but his popularity is at a record low and the country has first to deal with domestic issues.

Other members are also unable or unwilling to move the integration project ahead. The emerging countries of Central-Eastern Europe, notably Poland and Hungary, want to preserve their sovereignty and therefore oppose devolving more powers to the EU. Moreover, the Union has even initiated the infraction procedure for violation of core values against these two countries, thus leading to an open diatribe. Spain is focused on problems at home; while Greece is heading towards elections in 2019, and any change in its government could make the markets nervous and result in a renewed standoff with the EU.

As such, no state is in the condition to take the lead and move forward the much-needed reform of the Union. However, what is more worrisome is that the divergences do not simply concern the policies to implement, but the basic values of the EU and its very legitimacy are questioned and openly criticised. Considering also its complex institutional procedures, it is unlikely that the stalemate will be solved in 2019. On the contrary, it is likely that the EU will be even more divided at the end of the year.

4 – Sanctions on Iranian oil

Following President Trump’s decision to scrap the nuclear deal, a boycott on Iranian oil will be reintroduced in 2019. Given that it is largely dependent on oil revenues, the Islamic Republic will certainly suffer. The effects will not be only economic, but they will extend to the social sphere as well. Signs of discontent already appeared in late 2017 – early 2018, when mass protests erupted all over the country. As pressure increases on Iran’s economy, similar episodes may repeat in 2019 with destabilising effects on the region. Moreover, this means that Iran will have much less resources to sustain its goals abroad; notably in Iraq and Syria. As a result, it will have to reduce its international commitment and focus on domestic issues.

But this will also affect other countries who used to buy oil from Iran. China and India were its main customers, followed by Japan, South Korea and European countries. As sanctions come back into effect in 2019, such states will comply and change their import sources to avoid angering the US. This will impact the global oil market by putting an upward pressure on its price; even though many effects such as a less than expected demand may nullify this effect at least in part. Finally, while the intended effect of the boycott is to put pressure on the country and force it to negotiate another deal deemed more compatible with America’s interest, it is possible that the result will be the opposite. If Iran feels threatened enough by the US, it may decide to resume its nuclear programme after concluding that is the only way to ensure its national security. This is not likely, because Teheran would be even more isolated, but if this happens the whole region will be further destabilized.

5 – Tension with Russia

Relations between Russia and the US have not improved through 2018. Many important issues continue dividing them, like the war in Syria or Ukraine’s issue. The situation remains volatile in both cases, and the recent Kerch Strait incident has revived tensions between Moscow and Kiev. Additionally, there is another country to watch: Georgia. The new President Salome Zurabishvili has pro-EU Western views and openly calls for Georgia to join the EU and NATO. Russia will hardly accept such a scenario and may launch a military operation to prevent it, thus sparking another crisis in the post-Soviet space.

Moreover, a pillar of the longstanding strategic equilibrium between Russia and NATO has fallen: the Intermediate-Range Nuclear Forces Treaty, or INF. This agreement, dating back to the Cold War, prohibited the deployment of intermediate-range ballistic missiles in Europe, as they risked compromising the nuclear balance in the region: due to their limited range, such weapons enabled the Soviets to strike NATO in Europe without threatening the US territory, thus casting doubts among Europeans that in such an eventuality the Americans would have exposed themselves to retaliation by launching nuclear weapons on the USSR just to protect Europe.

Now that the Treaty is gone, a new arms race is likely to take place, and in fact this is already happening. Russia has tested several nuclear-capable ballistic missiles in 2018, and is rapidly working to deploy new hypersonic missiles capable of travelling at five times the speed of sound or more. The US is doing the same, and both powers are developing new weapon systems and doctrines to prevail on the other. But to pursue these objectives, Russia needs economic resources. Since oil is one of its main sources of revenues, Moscow will seek to coordinate with other producers to keep its price high enough to sustain its economy. This will largely determine the evolution of Russia’s role in 2019, but one thing is sure: Moscow will do its best to pursue its interests abroad, and as the Russian-American rivalry continues, the international scene will remain tense.

The POST-FINANCIAL CRISIS of GREECE and it’s economic prospects

Greece is just recovering from a severe economic recession, and it will take several years to consolidate economic growth and return to pre-crisis levels. But now that the worse seems over, various opportunities open up for Greece. The degree to which it will be able to manage this combination of challenges and occasion exploit will determine its course in the decades ahead.

The Financial-Economic History of Greece

Greece has a turbulent financial history marked but repeated bankrupts. Since its independence was recognized in 1830, it experienced five defaults, the last of which took place in 1932. Greece contracted its first debt from Great Britain even before becoming independent, as a mean to finance the armed insurrection against the Ottoman Empire. Unable to fully repay the interests for this loan, the Greek state had to declare its first bankruptcy while the War of Independence was still ongoing. Since then, it often contracted debts with foreign powers just to repay previous ones. A recurrent pattern can be identified in these crises. Greece received foreign loans, whose terms were not always advantageous; but it failed to repay debts and ended up declaring bankruptcy. The precondition for debt restructuring or cuts from foreign creditors was to apply austerity measures such as reducing government spending and imposing new taxes, which ultimately resulted in financial stabilization and readmission to international credit markets. Soon, investments and loans started flowing in again as foreign lenders were disposed and even eager to provide funds; but this always resulted in unsustainable levels of debt. Combined with domestic problems such as government overspending and corruption, this led to another debt crisis, thus restarting the cycle. A notable even occurred in 1898, when an International Committee was set up to monitor Greece’s public finances; thus anticipating the role of the EU institution in the most recent recession. The last default in 1932 also presents notable similarities with the recent situation, as that that crisis followed a major global-scale financial crunch; namely the 1929 Wall Street collapse.

After suffering huge human and economic losses during WWII and the Civil War that followed it, Greece managed to settle most of its external debt and experienced an exceptional economic growth; also thanks to US aid received via the Marshall Plan. It built infrastructures and promoted industrialization, the living conditions of its citizens greatly improved and its GDP growth rate was one of the highest in the world, second only to countries like West Germany or Japan. During this period, which goes roughly from the early 50s to the mid-70s and that reached its apex in the eight-year rule of Prime Minster Konstantinos Karamanlis of the New Democracy party between 1958 and 1963, the debt/GDP ratio fell to a record-low of 9.7% in 1959; and continued oscillating around 20-25% until the early 1980s. But since the Socialist Party (PASOK) took power it started rapidly growing, stabilizing at a high level of about 100% in the 90s and early 2000s. The return to power of New Democracy in 2004 did not change this course. This massive surge of public debt was largely due to uncontrolled and unproductive government spending combined with the effect of an economic slowdown plus structural inefficiency and lack of transparency, especially in the public sector. Yet, Greece achieved its objective of joining the Eurozone since its beginning in the 1999-2002 period; even though it did so by dissimulating the real entity of its debt; as otherwise the discrepancy from the financial stability criteria established by the 1992 Maastricht Treaty would have been too high for its admission. At that point, things started getting alarming, and Greece itself warned that the situation of its public finances was worse than it appeared; resulting in the country was put under observation by the EU Commission in 2005.

The Crisis

The 2008 US financial crunch had world-spanning effects; and in the EU it shook the very idea of European integration. The refusal of the US government to bailout Lehman Brothers resulted in the latter’s bankruptcy, which had chain effects on the world’s financial markets. States acted to prevent the collapse of major financial companies, as this would have had detrimental repercussions on national economies. But soon, this raised concerns over the ability of states to repay their own public debt; especially over those Eurozone states having the bigger debt/GDP ratio. Among them Greece stood out with its huge debt of more than 120% of GDP. This was the result of a combination of factors. The introduction of the Euro had caused wages to rise, thus deteriorating Greece’s competiveness. The trade balance went negative and the government deficit also reached 15% of the GDP in 2009. As the crisis struck the EU, loans from other countries begun to decline and their interest rates grew, meaning that Greece could no longer finance its deficit via cheap external debt. Moreover, while joining the Eurozone increased financial credibility and favoured trade thanks to lower transaction costs, it also deprived the country of its monetary sovereignty. Consequently, Greece could not counter the effects of the crisis by depreciating its currency; even though this would have been just a short-term solution.

At the height of the crisis, Greece found itself in a serious standoff with foreign investors over the terms of debt restructuring and cancellation. The so-called Troika, formed by the European Commission, the European Central Bank and the International Monetary Fund, demanded Greece to adopt harsh austerity measures to reorganize its finances as a precondition for a bailout; similarly to what had happened in previous cases. In this, Germany played a major role, because its banks owned the largest share of the Greek public debt. As such, Angela Merkel’s government acted primarily to protect the interests of Germany and its financial actors, who would have suffered significant losses in case of a Greek default with negative consequences for the German economy. Yet, given the relative small size of the Greek economy, a default would not have been fatal for the Eurozone; but Germany’s very decision made the situation worse. Berlin has always been very unwilling to implement expansionary economic policies to boost growth in the EU and assist countries facing economic troubles like Greece. For this reason, initially it insisted for a bail-in, which would have meant making private creditors withstand the costs of restructuring the Greek debt. However, Germany’s stance greatly undermined the market’s trust by creating fears among investors, thus further worsening the situation for Greece and the EU.

In the end, Greece had no choice but to implement the austerity measures demanded by the Troika; and in exchange it obtained three bailout programmes which included a cancellation of 100 billion euros of debts in 2011. Nevertheless, Greece plunged in a deep economic recession. Its GDP shrunk, and so did salaries. Unemployment grew to reach about 27% of the workforce in 2013, and it still remains above 20%. Living conditions worsened for large swathes of the population. Today, the government budget has returned in surplus, but due to the contraction of the economy the debt/GDP ratio has actually increased to a current level almost 189%.

But even more importantly, the crisis caused tremendous social harm, disrupting the lives of millions and sparking violent protests alimented by anti-EU and anti-German sentiments. This also arose the controversy over German reparations for WWII. Like other states, Greece was plundered by the Germans during their occupation, and it received some material compensation after the conflict in the form of equipment and commodities. But since the US wanted Germany to rapidly recover in an anti-Soviet logic, Greece and other countries were convinced to soon renounce to the remaining reparations. In addition, a 400 million marks loan that the Germans forced Greece to concede during the occupation was not included in the reparations; but today Berlin refuses to discuss the issue. Converting this amount to today’s dollars is very complex, but considering that in 1941 one dollar was worth 2.5 Reichsmark and accounting the changes in purchasing power of the USD, a rough estimate suggests that in 2017 the loan would have been worth 16.6 billion dollars. This is a huge sum, but still small compared to Greece’s 388 billion USD of debt.

What Prospects for Greece?

The acute phase of the crisis is over; yet, Greece will have to deal with its consequences for many years ahead. Its recovery is still shaky, unemployment is a problem and its debt/GDP ratio remains very high. In this context, the result of the 2019 elections and in general the future political orientation of the country is uncertain; as new economic turmoil may have negative effects on political stability and vice versa.

Still, there are also opportunities that Greece can exploit. Lower wages translate into a competitive advantage, and in the post-crisis scene there is plenty of opportunities for investment. More importantly, Greece’s large merchant fleet combined with its location give it the potential to become a Mediterranean trade hub. Being close to the Suez Canal, Greece can be seen as a gateway to Europe for Asian countries. China, in particular, has shown great interest in Greece as part of its “One Belt, One Road” initiative; and COSCO, its state-owned shipping company, acquired the majority of shares in the Piraeus Port Authority. Since then, both the container volume and revenues have greatly increased. Russia has also interests in Greece, because it is a pipeline crossroad: its Trans-Anatolian Pipeline (TANAP) is scheduled to connect on Greek soil with the Trans-Adriatic Pipeline (TAP) to reach Western Europe. Exploration for hydrocarbons in the Eastern Mediterranean is also opening opportunities for Greece, but is also accompanied by greater tensions with Turkey. Finally, as Washington’s relations with Ankara deteriorate, the former is building closer ties with Athens, who can take benefit from this.

Greece remain in complicated situation, but with a careful management it can fully recover. It must pay attention to its public finances, favour domestic saving, avoid contracting external debt, diversify its partners and attract foreign direct investments capable of sparking a positive economic spill-over. To what extend Greece will succeed in doing so will determine its future well-being and its role in international affairs.

What is the role of Italy in Europe?

Italy is facing a delicate political and economic situation. Once a centre of the Western Civilization, it gradually lost its centrality throughout the centuries. More recently, it plunged in a severe recession following the global financial crisis, and it has shown signs of recovery only in the past few years. Yet, it remains the Eurozone’s third largest economy and fourth in the EU as a whole, and it remains one of the most influential countries in the Union, of which it has been a supporter for decades. However, the current coalition government formed by the Five Star Movement and the League is casting doubts over Italy’s commitment to the EU, and notably over its budgetary rules. This in turn raises concerns over its own economic recovery and also on the tenure of the EU as a whole, which is caught between two diverging views of European integration.

Italy’s contribution to the Western Civilisation

The Italian Peninsula was first unifed under a single political entity by the Romans, whose legions ultimately conquered a vast Empire centred on Italia. But after a long decline, it ultimately fell during the 5th century AD. Yet, it left an immense cultural heritage, itself a product of the contacts with conquered peoples, first and foremost the Greeks; without which modern-day Western civilization would not be the same.

But after the demise of the Roman Empire, Italy has been divided for centuries. Yet, it continued having a huge influence over Europe in cultural, economic and also political terms. The Italian Maritime Republics played a pivotal role in trade, and following the Crusaded they established outposts in the Outremer that became one of the main vehicles of contact with the more advanced Islamic world. Italy was also an important manufacturing centre, and modern finance finds its roots in its economic activities, notably those of Venice and Florence. This, of course, had a political spillover. The Fourth Crusade, which ended with the occupation of Constantinople for nearly sixty years, was largely driven by Venice’s economic interests. A family of businessmen, the Medici, managed to transform their wealth in political influence and took power in Florence. Italy’s northern cities played a central role in the long struggle between the Papacy and the Holy Roman Empire, and their quest for autonomy kept the latter busy for decades. As a result of this economic prosperity, culture flourished: be it in literature, art, philosophy or other fields. In Europe, only the cities in the Flanders and those of the Hanseatic League could rival the Italians. As for the South, it was the setting of intense cultural interchanges, especially with the Byzantines and the Arabs; which made of Sicily a major cultural centre that, along with Spain, allowed the reintroduction in Europe of many Classical works that had been forgotten. All this gave a fundamental contribution to the period of cultural and economic revival known as the Renaissance; which left an immense heritage to today’s Europe.

Yet, Italy was politically divided. Various city-states rose and fall, but none of them could become powerful enough to unify all the land, as others always formed a coalition to block its expansion; often with the aid of foreign powers that frequently invaded the Peninsula. Starting from the XVII century, its economic and cultural prominence also started declining in favour of the rising nation-states like France, Spain and England.

Reunification & World Wars

After centuries of division, Italy was finally unified in the 19th century following a long process known as Risorgimento. Under the able statesmanship of Cavour, the Kingdom of Sardinia (whose centre was actually in Piedmont) managed to unify most of the Peninsula; thus proclaiming the Kingdom of Italy in 1861. The new state soon started a modernization process that marked its rise among Europe’s main powers; even though it never got close to France, Britain, Germany or Russia. Its industry developed, and with it the military. With time, it also managed to gain some colonies in Africa.

Italy fought alongside the Allies in WWI, and was among the victorious powers. But right after the conflict, Italy found itself in a troubled economic situation due to the huge costs of the war. In the early 20s, the country was in social turmoil. The socialists and the recently-created Communist Party were gaining influence; resulting in mass demonstrations during the “Red Biennium” of 1919-1920. Fearing a revolution, the government attempted to exploit another movement to counter the left’s rise: the Fascists led by Benito Mussolini. However, the situation soon went out of control. In 1922, the Fascists marched in arms on Rome; and with a decision that would later cause much debate, the King appointed Mussolini as head of the government to avoid a civil war. Soon, Mussolini dismantled the democratic order and established a dictatorship. Its legacy is highly controversial, notably as it ended up allying with Nazi Germany and collaborating with it during the Holocaust; but in terms of power politics Mussolini managed to extend Italy’s territory, to strengthen its armed forces and to make of Italy one of the main players in the international politics of the time. Yet, as before, the country remained globally weaker when compared to other powers.

Yet, the overall balance of the fascist regime is definitely negative. In 1940 it brought Italy in a conflict it was unprepared for and which ended up in a catastrophic defeat. Additionally, since September 1943 Italy was split in two: the south, liberated by the Allies, joined them in the war against Germany; while the north and centre of the country became a puppet state controlled by the Nazis. This resulted in a civil war; not only between the two states, but also between the partisans on one side and Fascist supporters plus the German troops on the other. This conflict left a deep mark on post-war Italy and on its national identity.

Italy after WWII 

When WWII ended, Italy was in ruins. After a complex political process, it became a Republic in 1946 and adopted a new Constitution two years later. Like Germany and Japan, this also included provisions meant to avoid that the country may undertake once again an expansionist policy; but it was still authorized to have its own armed forces for strictly defensive purposes. The Christian Democracy became the party around which Italian governments would be formed for the decades to come. In foreign policy, Italy joined NATO in 1949 and the European integration process in 1951. But in spite of its alignment with Western powers, the Communist Party was very strong, and it remained the main opposition force until the 90s. In economic terms, Italy soon experienced an extraordinary GDP growth: during the 50s, its size grew of almost 6% per year on average, and this figure was constantly higher in the five years between 1958 and 1963. This expansion was equal or superior to that of most European countries, and it completely transformed Italy by making of it one of the continent’s main economies. The factors behind the “economic miracle” are multiple; and include the large and cheap labour force, foreign aid received via the Marshall Plan and the advantages of economic integration with fellow Western European countries.

Yet, with time this growth slowed down, and Italy was surpassed by other economies. Again, there are multiple reasons. The oil shocks in the 70s hit the country, as it was (and remains) dependent on energy imports. But Italy also lost its competitive advantage as salaries and costs grew. To counter this, the governments used to devaluate the lira to make exports cheaper; but this was just a short-term and ineffective solution, because it soon caused inflation which in turn had detrimental effects on competitiveness and on foreign debt. In the end, also in the optic of adopting the Euro, starting from 1987 Italy decided to respect the communitarian monetary rules and stabilize the Lira, thus ending decades of devaluation-inflation cycles to appreciate the currency, reduce inflation and converge with other countries. But a series of factors caused a crisis of the Lira in 1992, which resulted in a severe devaluation. Still, after implementing corrective measures, the path towards adopting the Euro continued. Italy tried to align its macro-economic parameters with those of fellow countries and to respect the rules on debt and public deficit. So, in spite of the scepticism of other states (notably Germany) and of not respecting completely the convergence criteria, Italy was allowed to adopt the Euro in 2002.

In the meanwhile, significant changes also occurred in international and domestic politics. Right after the dissolution of the USSR and the Warsaw Pact, the Italian Communist Party was dismantled. But the Christian Democracy was also fundamentally shaken by a series of investigation on corruption, and it disappeared as well. The political order that had lasted since the late 40s was over, and even though the Constitution was not modified, this marked the passage to the “Second Republic”. In the new context, media magnate Silvio Berlusconi rapidly became a prominent politician by exploiting his wealth and the very media he owned. Another emerging political force was the North League: evoking the struggle of the northern cities against the Empire during the Middle Ages, it advocated for secession of the rich regions of the north or at least for more autonomy. Yet, Italy continued to experience political fragmentation and frequent changes of government.

In 2011, the country was shaken by the debt crisis that had begun in Greece, itself a consequence of the US financial crisis of 2008. The government in charge resigned and was substituted by a “Government of Experts” chaired by economist Mario Monti, who soon adopted austerity measures to restore financial stability. Still, the economic recovery was sluggish. This, combined with the immigration crisis, finally led to the victory of two populist and Eurosceptic parties in the 2018 elections, namely the Five Star Movement and the League (which had unofficially dropped the label “North” in an attempt to become a nation-wide party). After a long deadlock, they formed a coalition government whose orientations have created concerns in Brussels, especially over economic policy.

Italy and the EU

The Italian government has recently presented a budgetary manoeuver that is considered too risky by the EU, and this has led to a vivid political skirmish between the two sides.

The Italian executive wants to implement expansionary policies to boost domestic consumption and consequently economic growth. These include tax cuts and a much-debated basic income for the lower classes. But this would bring the public deficit to 2.4% of the GDP; which, even though it does not exceed the legal gap of 3%, is considered too high by the EU. As a matter of fact, the Commission fears that the stimulus will not be sufficient to foster growth and that the only result would be to put further strain on Italy’s public debt, which is already at almost 132% of GDP against a limit of 60% demanded by EU rules; thus damaging its financial credibility and nullifying the progress it has struggled to make in a decade of austerity. But the Italian government has rejected the requests to modify the budgetary manoeuver, on the basis that it is up to Italians to decide and that they are not compelled to respect the demands of EU institutions, often portrayed as a diktat in the executive’s discourse. Italy has also found some international support, notably from US President Donald Trump, who in August had offered to buy Italian bonds. While it is legally possible, considering that Italy is now challenging the EU, the Union’s institutions may perceive this as an unnecessary intromission.

Assessing what will happen to Italy is hard, but the government’s economic policy does present some risks that may harm the country’s growth, which may result in new EU-backed austerity measures. But the greater danger is political: if the feud continues escalating, unpredictability will damage both parties and in the worse scenario may even lead to Italy’s exit from the EU, which would be another severe blow to the European integration project in a moment where Brexit is also unfolding along with vivid discussions between the Visegrad countries and the EU institutions. As we examined in another video, this divergence over the nature and the powers of the EU is the kind of “civil war” that may ultimately threaten its tenure, with unpredictable economic and political consequences.

Will there be a EUROPEAN ARMY? – KJ Vids

In an era of mounting rivalry between great powers, and with the Trump administration raising doubts over the America’s commitment to protect Europe, the recent declarations by French President Emmanuel Macron over the need of a “European Army” to protect the continent against Russia, China and even the United States have caused much political debate. But will there ever be a European Union Army?

The evolution of the EU policy on defence

The debate over the establishment of a European common policy on defence and therefore over the creation of a unified armed force is as old as the European integration process itself. The first step in this sense was came with the Brussels Treaty of 1948 which established the Western Union, an alliance that included the United Kingdom, France and the three Benelux countries. Knowing that their military forces would be insufficient to defend the continent from a Soviet invasion, one year later these and other countries (including the United States) formed NATO, which soon became the main collective defence pact in Europe. Still, the European countries wanted to increase their cooperation in defence in order not to be completely reliant on America. In 1952, France, Italy, West Germany and the three Benelux states signed a treaty to form the European Defence Community. This was an ambitious project that was supposed to create a unified European Army. However, it ended in a failure: the French Parliament did not ratify the Treaty and consequently it never entered into force; which is quite notable considering that today France’s Macron is calling for a common military structure. At that point, the European countries opted for a revision of the Western Union. In 1954 its founding Treaty was modified, transforming the organization into the Western European Union, which included the original members plus Italy and West Germany. This was essentially a political-military mutual defence pact, and did not include any plans for a common armed force. The WEU continued existing as a separate organization until 2011, when it was finally dismantled.

All these initiatives ran in parallel to the European integration process that would later create the EU, which back then was simply the European Coal and Steel Community and therefore had a primarily economic connotation. In 1957, its scope was enlarged and it became the European Economic Community (EEC), whose aim remained essentially that of creating a common market as a premise to greater political cooperation, but which had practically no military ambitions. But various international crises raised the need to at least coordinate the foreign policy actions of its member states. Because of this, the European Political Cooperation was launched in 1970. Yet, it was merely a mechanism to attempt coordinating the positions of members states on foreign policy issues. It did not devolve specific competences to communitarian institutions, did not oblige member states to comply with the decisions that were taken (provided a common agreement was reached) and had essentially no military content. After a series of other international crises in the late 70s and early 80s, the EPC was gradually improved and was finally renamed as Common Foreign and Security Policy (CFSP) by the 1992 Maastricht Treaty that transformed the EEC into the European Union. The CFSP was one of the three pillars of the Treaty, something that signalled the willingness to do more on foreign affairs but also, and quite notably, on defence issues. As a matter of fact, the CFSP included the European Security and Defence Policy (ESDP), that was conceived as the crisis management component of the CFSP. Later, the ESDP was transformed into the Common Security and Defence Policy (CSDP) when the Lisbon Treaty entered into force in 2009.

However, the name “Common Foreign and Security Policy” is highly misleading, as seems to imply that such issues are treated via the communitarian procedures and therefore that member states devolved at least part of these core sovereign competences to the EU institutions; as it is the case with trade or agricultural policies. In reality, it is exactly the opposite: the CFSP remains under the intergovernmental procedure, so security and defence are still competences of single member states. As the EPC before it, the CFSP is essentially a mechanism to coordinate the action of EU members in security and defence issues.

The military means of the EU

Even though defence remain a competence of member states, and in spite of the fact that the EU is and wants to appear essentially a civil power, this does not mean that it has not its own military means. In particular, in the framework of the CSDP, the Union can deploy troops under its mandate for accomplishing the so-called “Petersberg Tasks”, established by the now-extinct Western European Union in 1992 and integrated in the EU’s juridical body since the 1997 Amsterdam Treaty. These missions are essentially humanitarian aid, peacekeeping and crisis management, which includes peace enforcement. The decision-making procedure is based upon four bodies. The first is the European Union Military Staff (EUMS), whose task is to monitor international crises, evaluate the situation, raise the alert, plan operations according to the Petersberg Tasks, and in general to provide military expertise. On the basis of its assessments, a second organ (the European Union Military Committee, EUMC) advises the Political and Security Committee (PSC); which in turn advances its proposals for EU military actions that are ultimately approved by the member states via the Foreign Affairs Council, a particular formation of the EU Council. As of today, the EU has launched a series of missions abroad; notably in Africa, the Balkans, Ukraine, Georgia, Iraq and Afghanistan. Some of these had a military nature and were meant to provide either peacekeeping or training; whereas the others were civilian operations.

The broader strategic vision upon which the whole of the CFSP is based (therefore including military operations in the CSDP framework) is defined by the European Security Strategy, whose first version was released in 2003 and that has been updated and enlarged twice in 2008 and finally in 2016. As a matter of fact, it is possible to note an evolution in scope through time. The 2003 paper was rather vague and simply presented the EU’s view on the world and its main threats (notably terrorism and the proliferation of weapons of mass destruction). The 2008 version was essentially an update of the previous: it included more issues, notably energy security, but remains a declaration of objectives rather than a proper strategy. The latest document is the most complete one. It describes the challenges that the EU is facing in various domains and regions, notably in the Middle East and Africa but also in trans-Atlantic relations, in Asia and in regards to Russia. It also declares the EU’s objectives: to promote security, stability, prosperity, state resilience and the rule of law. A notable point to note is that it states that Europeans should take the responsibility to defend themselves and that they should be ready to deter external threats; adding that in NATO’s framework they must become more capable of participating to collective self-defence but also – and this is the most interesting part – to act autonomously if necessary.

This raises the issue of the coordination between the EU and NATO on security. By now, the matter is regulated by the so-called “Berlin Plus Agreement”, which can be summed up by the “Three Ds”: no discrimination, no decoupling and no duplication. In practice, they mean that both the EU and NATO can perform peacekeeping and crisis management operations, that non-EU states can participate to missions managed by the Union, and that if one of the two organizations intervenes the other will restrain from doing so. The EUMC ensures the military coordination between NATO and the EU. However, the Berlin Plus arrangements only regulate the interventions that fall in the scope of the Petersberg Tasks, as in spite of the declaration that Europeans must be able to act on their own that appeared in the 2016 EU Strategy, by now collective self-defence remains a prerogative of NATO, and the EU has neither the juridical powers nor the practical means for this.

Yet, the EU has its own military units: the EU Battlegroups. Established in 2005, the first of them became operational two years later, but have still not seen any actual action. The Battlegroups are multinational battalion-size units established at the EU level; in contrast to multinational forces created by member states outside of the EU framework but that can still be deployed for EU missions as well as for those of other organizations. The Battlegroups’ composition varies, but normally they consist of around 1,500 infantrymen plus support personnel. They are under the political control of the Council, while operational command goes to the “leading country” that gives the main contribution to the Battlegroup in terms of personnel and equipment. Non-EU countries can also participate. Today, a total of 18 Battlegroups exists, and they rotate on a six-months period so that there are always two of them ready for deployment. As of today, the Battlegroups are what gets closer to a EU Army, but they are essentially rapid intervention forces meant for crisis management operations and they are clearly not sufficient for protecting Europe from an external invasion in the optic of collective self-defence; a task that by now only be carried out by NATO.

Will there be a EU Army?

Over the decades, the EU has slowly increased the capabilities and the scope of its military means, but its foreign policy tools remain largely civilian and it is still very far away from having its own armed forces. As a matter of fact, there are various challenges along this path.

The first are political and juridical: according to the norms introduced by the Amsterdam Treaty, giving the EU collective defence competences requires a decision of the European Council, which is an institution that acts by unanimity; notably for what concerns the CFSP and consequently the CSDP. Also, creating a EU Army would require a higher level of political integration and a common defence budget, which may exist in parallel with national ones or substitute them. This demands in turn to establish the rules related to drafting and approving the budget, to weapons procurement, to strategic planning and command, and others. Considering the political divergences and the different strategic needs of member states, reaching a common position on such matters is very difficult. For instance, other member states may likely oppose or at least refuse to support Macron’s EU Army project by interpreting it as a French-centric initiative aimed at expanding France’s influence and at pursuing its national interests in the EU and abroad.

Second, there are the actual military aspects. Having a single EU Army would require the coherent standardization of equipment, doctrines, practices, trainings, uniforms, denominations, and more. Again, given the different national priorities of member states, this is complicated to achieve.

Finally, there is the linguistic dimension: the number of idioms used in the EU makes creating a unified Army more complicated. This could be solved with relative ease by adopting a single “official” language for the military, but there would still be disagreements over which one to choose.

As such, it is extremely unlikely and probably impossible that a EU Army will be created anytime soon, if ever. At best, some progress may be made over expanding the number, size, capabilities and roles of the Battlegroups; which after all would already be a quite considerable achievement considering all the obstacles towards some form of collective defence. As the international context becomes more challenging, the EU member states may find the political willingness to deepen their defence cooperation, but this will surely be a long and complicated process.

Will the EU Collapse and lead to a Civil War?

The last decade has been a difficult one for the European Union. In the wake of the 2009 debt crisis, much debate has arisen around its nature, its powers, its governance and its policies.

The situation got only worse when the migrant inflow boomed in 2015, triggering a EU-level crisis.

In this strained socio-economic context, diverging views on the EU as a polity have emerged at the political level both inside the single member states and inside the organization’s institutions.

Recently, two events have revived once more the debate. The first is the re-election of Viktor Orbán, a prominent conservative and Eurosceptic politician, as Prime Minister of Hungary.

The second is the statement by France’s President Emmanuel Macron that the EU is facing a “civil war” on its fundamental values resulting from different opinions between its Western and Central-Eastern members.

This affirmation seems exaggerated, at least at a first glance. But in such a turbulent political context, it raises a legitimate question: is the EU on the edge of a civil war?

The Conditions of a Civil War

To answer this question, the first thing to do is determining in which conditions a civil war does start. Essentially, this happens when two or more socio-political groups belonging to the same political entity disagree on the existing and/or future institutional order; and, being unable or unwilling to peacefully find a compromise through the existing institutional mechanisms, opt for armed conflict to impose their view and determine who will (re)shape the existing order by the use of coercion. Usually, a civil war opposes one group fighting to preserve the standing institutional framework (along with the prerogatives it enjoys thanks to it) and another group who wants to dismantle it (and set up a new order more favourable to its interests).

That said, history is full of examples of civil wars; from those which paved the way to the end of the Roman Republic centuries ago to the ongoing conflicts in Syria and Yemen. But one is particularly significant due to its similarities with the situation the EU is facing today: the American Civil War.

The American Civil War

The US Civil War, also known as War of Secession, was an armed conflict that split the United States between 1861 and 1865.

The contenders where two: one was the Union (the North), formed by states that remained loyal to the government of the United States;

and the other was the Confederacy (the South), made up of states which seceded from the US and form a separate political entity known as the Confederate States of America (CSA).

Usually, this war is portrayed as a fight over the issue of slavery, with the Union supporting its abolishment and the Confederacy favourable to its preservation.

But even though slavery was indeed a central issue in sparking the conflict, the situation was far more complex than a clear-cut black-vs-white clash between conservative and progressist ideals. As a matter of fact, there were also major political, juridical-institutional and economic factors linked to the debate over slavery and human rights.

To understand this, it is necessary to perform a rapid historical overview on the prelude to the conflict. After being recognized as a sovereign polity by the Paris Treaty that officially ended the War of Independence in 1783, the United States began developing and expanding to the West. Rapidly, new states were founded and admitted to the Union.

But the economic outlook of the member states started diverging: those located in the North embraced industrialization, whereas the states in the South remained essentially agricultural.

There, rich landlords owned vast plantations, and exploited a large workforce of black slaves to work them. With time, this North-South gap became more and more marked, and it ultimately assumed a political dimension as well.

As a matter of fact, the Northern states needed cheap manpower to sustain their rapid industrialization. The mass of black slaves living in the South was the ideal solution, but it was impossible to hire them since they were a private property of the Southern landowners.

Consequently, the North states started calling for slavery to be abolished, provoking the firm opposition of the Southerners who needed slaves to cultivate the plantations that were the base of their local economy.

Besides, the two sides also diverged over trade policies: the North wanted protectionist measures to shelter its developing industry, while the South supported free trade as a mean to continue exporting its agricultural products abroad.

This led to an intense constitutional debate over slavery, and ultimately over the power of the federal government to introduce and enforce legislation on the matter all over the US territory.

Again, the opinion diverged between the North and the South: essentially, the former claimed the central government had this authority, whereas the latter considered this as a violation of the constitutional limitations on the powers of the federal institutions.

So, the debate took a dimension that went beyond the issue of slavery and focused on the nature of the US as a polity. The Union favored a strong central government having large powers,while the Confederates defended the rights and prerogatives of the single member states. The combination of all these factors finally led them to secede from the US in 1861 and form an alternative polity, the Confederate States of America (CSA).

The name itself is significant, as it reveals the different way these states interpreted the Constitution and conceived America as a political entity: they wanted a Confederation, so a polity granting more powers to the member states; in contrast to a Federation where the central authorities have larger constitutional competences.

Striking Similarities

Now, there are striking similarities between the situation of the US before the Civil War and that of the EU today.

The latter has also expanded during the previous decades by admitting new member states, with the most important “enlargement wave” taking place in 2004 with Central and Eastern European countries; and the most recent new member being Croatia, which joined the organization in 2013.

Again, similarly to America at the eve of the Civil War, the EU is also facing an intense debate over human rights that has greater economic, political and “constitutional” implications (there is not a proper EU Constitution, but the general sense of the term is still applicable to the Treaties at the base of the EU). In this context, two camps are identifiable, the complexity of reality notwithstanding.

Differences

As I argued in another article, one is formed by the original (or at least more ancient) members of the EU, concentrated in Western Europe; while the other includes the more recent ones, located in the Central-Eastern part of the continent and whose core is made of the four countries forming the Visegrád Group (Poland, Hungary, the Czech Republic and Slovakia; known also as V4).

The starting point to understand the divergence between these two “factions” is the migration crisis. As a matter of fact, the former group is demanding the Central-Eastern partners to accept a larger share of migrants. But the Visegrád states oppose these requests. As in the 1850s America, the issue is not merely humanitarian, since there are economic and political reasons behind the respective positions.

Countries like Italy, Greece and others (including France and Germany to some degree) worry that the migrant flow will put their socio-economic order under stress and that it may hamper the sluggish recovery from the recent debt crisis.

In contrast, the V4 and other states oppose such policies of migrant redistribution because they may slow down their ongoing economic development. But the divergence is also a matter of past experiences. Western countries have a long tradition of immigration from abroad (often as a consequences of their colonial past) and their societies are more used to the presence of foreigners; thus explaining their softer stance on immigration. This is not the case of Central-Eastern European states, that therefore prefer stricter measures in regard to immigration.

Finally, similarly to America before the civil war, the current debate in the EU also has a prominent institutional dimension. This can be explained from a historical perspective. Countries from the Western part of the continent took their current form as a result of a centralization process, which makes them more willing to accept devolving parts of their sovereignty to a supranational entity like the EU. That is why (in spite of mounting Eurosceptic forces) they remain favorable to further European integration; especially in the case of France, that appears willing to become the driver of deeper integration through devolving more powers to supranational institutions and by crating a true fiscal union (even though this met resistance from Germany).

On the contrary, the Visegrád states and those aligned with them oppose strengthening the powers of the EU institutions and want to preserve their fundamental sovereign rights. The reason lies in their past: these countries arose after the collapse of larger multinational polities affected by severe institutional deficiencies, and also had a long history of foreign domination and meddling which ended only in 1991 with the fall of the Soviet Union. As a result, they see the EU as another cumbersome supranational entity that will put them in a subordinate position and are therefore unwilling to devolve more powers to it.

Can they Compromise?

This underlying contrast over the powers of European institutions is the most important aspect in the current debate, because it will have direct repercussion over the future of the EU. Now, the problem is that, while opinions are discordant among the member states; the complex institutional mechanisms of the EU do not facilitate the search for a compromise

Introducing deep changes (both in the sense of increased integration and of more protection of the states’ sovereignty) requires a revision of the Treaties that form the bloc’s “constitution”; but this demands in turn a long and multi-stage procedure where reaching a consensus is hard and where a single “wrong” step can block the entire process (think of the French and Dutch referenda that sunk the proposed Constitutional Treaty in 2005).

Considering that the divergences are growing, finding a common agreement over the EU, its powers and its values may be impossible; and this could lead to an institutional stalemate.

Is a Civil War Inevitable?

And what then? Will the EU plunge into civil war as the US did in the past? Not necessarily. Modern-day European states and their societies are strongly averse to war, which is already a huge safeguard against extreme solutions.

And if it is true that European powers have been fighting themselves for centuries, it is also true that the EU was established after the trauma of WWII also as a mean to put a definitive end to that continuous bloodshed.

Moreover, in spite of its slowness and difficulties, the EU proved capable to adapt and preserve itself during the past. In more cynic terms, since the EU is not a state, even if one or more of its members decided to unilaterally “secede”, it would not have its own military means to enforce its rule and re-bring them in as the Union eventually did with the Confederates in 1865. Finally, this scenario is unlikely for the simple fact that the Treaty on the European Union (Art. 50) contains provisions allowing a member state to withdraw; as the United Kingdom decided to do after the 2016 vote on Brexit

But it is exactly a mass Brexit-like scenario what can raise concerns over the long-term tenure of the EU.

A full-scale civil war seems unlikely (unless the international situation becomes so severely deteriorated in economic and political terms to bring states to the point of using war to secure their interests); but if the existing divergences continue to mount and no solution is reached, then it is still possible that some member states (most likely the V4 ones) will decide to leave the EU.

The consequences are difficult to predict, ranging from an easier path to greater integration between the remaining like-minded members to a dissolution of the organization. In any case, the EU would be weakened at the international level, possibly leaving room for alternative blocs. All this would bring uncertainty in political and economic terms, and (especially if the EU were dismantled), it would certainly be a turning point in European History, as the Civil War was in America’s.

Will China take over Europe?

For over a decade, Chinese political and corporate leaders have been hunting for investment opportunities around the globe with bottomless wallets. From Asia, to Africa, the U.S and Latin America, China has asserted itself as an emerging world power. The multi-billion dollar belt and road initiative which some have called as the “Chinese Marshall Plan,” is designed to encourage economic connectivity and integration to the Eurasia strategic landscape, by linking Europe and Asia by land.

Europe is a key piece in China’s grand ambitions and China has been significantly expanding its economic footprint in Europe. So much so that it has led the EU to devise a counter-strategy in order to prevent the creation of political and financial dependencies. I’m Kasim, welcome to KJ Vids and in this video we take a look at China’s investments in Europe.

Since 2008, the landscape of Chinese foreign direct investments in the European Union has changed dramatically. From $840 million invested in 2008, China’s annual FDI in Europe grew to $42 billion in 2017. According to a recent compilation by Bloomberg, total Chinese investments in Europe, including both mergers and acquisitions (M&A) and greenfield investments, amount to $318 billion, 45 percent more than Chinese investment in the U.S. between 2008 and 2017.

China has taken over approximately 360 European companies. In the first six months of 2018, research by global law firm Baker McKenzie found that the value of newly announced Chinese merger and acquisitions in Europe hit $22 billion by the mid-point of the year, nine times higher than in North America where it was just $2.5 billion.

China’s investments are broadly spread geographically, although the largest European economies – the United Kingdom ($70 billion in cumulative Chinese investment), Italy ($31 billion), Germany ($20 billion), and France ($13 billion) – attract the largest share of Chinese capital. Among China’s iconic investments in Europe is the Hinkley Point nuclear plant in southern England, which is one third funded by China.

For over a decade now, the City of London has been a magnet for Chinese cash as Beijing tries to build its currency, the Yuan, into a world currency. By and large, Chinese money has been going into real estate and finance, with Chinese state banks well represented and active in the bond market and the international exchange market. Chinese citizens represent almost half of the investor visas the UK granted in 2017, outnumbering Russians, the next largest group of investor visa recipients, by 250 percent. Despite the largely uncertain future of the UK as a market once it exits the EU, China is betting on the British capital as an emerging hub of Chinese finance.

In Germany, China’s investments started with the purchase of family-run industrial companies, such as machine-tool maker Putzmeister in 2010, and continued with the Chinese company Midea’s acquisition of robotics company Kuka AG in 2016 for $5.2 billion. More recently, a Chinese investor’s $1 billion acquisition made it became the top shareholder of Daimler AG. German debate over Chinese FDI has intensified since the launch in 2015 of China’s Made in China 2025 strategy, a national plan that aims to make the country a champion in key high-tech industries such as aerospace, robotics, and artificial intelligence. Many Chinese companies have eyed German companies with the goal of acquiring technologies and orchestrating transfers of these technologies.

In Italy, China’s Silk Road Fund helped China National Chemical Corporation, also known as ChemChina, buy tire maker Pirelli in 2015 for $7.7billion. ChemChina has also acquired a string of industrial and energy related companies.

In the EU’s immediate neighbourhood, Switzerland has captured the lion’s share of Chinese FDI with ChemChina’s acquisition of Syngenta, one of the world’s largest agri-business conglomerates. The deal was finalized in 2018 for $46 billion, making it the world’s single largest acquisition by a Chinese company.

The islands of Cyprus and Malta, both full EU member-states, are throwing open the gates to Chinese investors, especially in finance and real estate. Both have also become strong supporters of China. Then there are the cases of Greece and Portugal, two Southern European countries that together account for a modest 2.5 percent of the EU’s GDP in 2017.

China has become a key-investor in Greece, mainly through a central investment project. In 2016, a Chinese state-owned corporation, China Ocean Shipping Company (Cosco), took over 67 per cent of Athens’ Piraeus harbour. China has signalled that it intends to use this port as the main platform for its maritime Silk Road, part of Beijing’s “Belt and Road” Initiative. Most Chinese companies are now using Piraeus as their principal port of entry in Southern Europe. Visiting China in 2016, Prime Minister Alexis Tsipras declared that Greece intends to “serve as China’s gateway into Europe”.

To the west, Portugal has become a key recipient of Chinese investment. Per capita, it is one of the largest in Europe. During a Euro region’s crisis in 2011, the Lisbon government was under pressure from the European Commission, the European Central Bank, and the International Monetary Fund (IMF), the so-called “troika,” to sell state assets. China stepped forward to offer foreign investment. As part of the bailout, China Three Gorges bought 26 per cent of EDP, and State Grid Corp. of China bought a stake in Portugal’s power distributor, REN-Redes Energeticas Nacionais SA. Fosun Group, a privately-owned Shanghai-based company, controls the Portugal’s largest insurer, Fidelidade, and a group of private hospitals. The list of Chinese investments seem endless, but does any of this translate into political influence?

According to Thomas Wright, the Director of the Centre on the United States and Europe at Brookings, the Chinese leadership’s seeking of political influence in the EU is driven by two interlocking motivations: ensuring regime stability at home and presenting its political concepts as a competitive way of political and economic governance to a growing number of third countries.

Unlike the current Russian government, Beijing is interested in a stable — but pliant and fragmented —EU and the large and integrated European single market that underpins it. Properly managed, the Chinese leadership has concluded, parts of Europe can be a useful conduit to further its interests. Politically, it is seen as a potential counterweight to the U.S. – one that is even more easily mobilized in the era of the Trump administration’s “America First” approach. Beijing is also acutely aware that Europe has many assets like technology and intellectual property, which China needs for its industrial upgrading, at least in those domains in which it has not yet established its own technological leadership. The EU is also useful as a ‘legitimizer’ of Chinese global political and economic activities, such as the Belt and Road Initiative (BRI).

Beijing pursues three related goals. The first is aimed at building support among third countries like EU member states on specific issues and policy agendas, such as gaining market economy status from the EU or recognition of territorial claims in the South China Sea. A part of this short-term goal is to build solid networks among European politicians, businesses, media, think tanks, and universities, thereby creating layers of active support for Chinese interests. Recent Chinese attempts to discourage individual EU countries from taking measures that run against Chinese interests, such as supporting a coordinated EU response to China’s territorial claims in the South China Sea, meeting with the Dalai Lama, or criticizing Beijing’s human rights record, are cases in point.

According to Thomas Wright, the second related goal is to weaken Western unity, both within Europe and across the Atlantic. Beijing realized early on that dividing the U.S. and the EU would be crucial to isolating the U.S., countering Western influence more broadly, and expanding its own global reach. China senses that a window of opportunity to pursue its goals has opened, with the Trump administration seen as withdrawing from the role as guardian of the liberal international order that the U.S. has long played. This comes in addition to the challenges Western liberal democracies face from the rise of illiberal-authoritarian political movements.

The third goal is broader in terms sense of “making the world safe more China’s autocratic model.” This means creating a more positive global perception of China and presenting its political as well as economic system as a viable alternative to liberal democracies. In large part, this is motivated by China’s continued fear of the appeal of so-called Western ideas like liberal and democratic values. From the vantage point of Beijing, European and Western ‘soft power’ has always had a sharp, aggressive edge, threatening the Chinese regime. At the same time, this goal is based on the idea that as China rises in economic and military terms, it should command more respect in the court of global public opinion. Activities geared towards long-term shifts in global perceptions include improving China’s global image through measures like media cooperation, making liberal democracy less popular globally by pointing out real or alleged inefficiencies in democratic decision-making processes, and supporting illiberal tendencies in European countries.

Given the rapidity of China’s economic development in the past 30 years it has taken the EU some time to acknowledge the growing power and influence of Beijing. Not only has China become a trading giant, it sits on the world’s largest currency reserves and is an increasingly important provider of foreign investment including in Europe.

Recently, however, a number of developments have generated a sense of caution among European politicians and policymakers. On 19th September 2017, the EU published its much-anticipated strategy to counter China’s increasing economic influence in Europe.

China’s refusal to tackle the dominant position of its state-owned enterprises led the EU to refuse to grant China market economy status. Beijing’s targeting of European technology has also led to plans for screening of Chinese investments in Europe. But it was the massive infrastructure investments under BRI that raised concerns in Brussels, as well as Washington, Delhi and other capitals about the implications of China’s approach.

In the spring of 2018 EU ambassadors in China penned a report critical of the BRI for being economically, environmentally, socially and financially unsustainable. It also criticised China for discriminating against foreign businesses, the lack of transparent bidding processes and the limited market access for European businesses in China.

China’s involvement in the EU and its neighbourhood also rang warning bells. In 2014, Montenegro concluded an agreement with China Exim Bank on the financing for 85% of a highway construction project, with the estimated cost equalling 25% of the country’s GDP.

The IMF has repeatedly stated that construction should only continue on the basis of concessional funds. Many believe that a debt default is likely, which may result in the involuntary handover of critical infrastructure to China.

Likewise, China’s entire or partial acquisition of ports in Belgium, the Netherlands, Spain, Italy and most notably Greece has not gone unnoticed. Without serious hindrance, China is buying up critical infrastructure in Europe, whereas European foreign direct investment in China is decreasing.

China has already reaped some political benefit from these investments with some member states blocking resolutions critical of human rights in China or condemning Beijing’s conduct in the South China Sea.

Similarly, European officials have also questioned the environmental and economic sustainability of various Chinese connectivity projects. The planned construction of six coal-based power plants in Pakistan whose joint output capacity equals 27% of the country’s current capacity has been criticised as environmentally unsustainable.

Sri Lanka has been unable to repay Chinese loans for the construction of the Hambantota port. As a result, the port and surrounding acres of land, strategically located at the crossroads of the Indian Ocean, the Bay of Bengal and the Arabian Sea, will now be under Chinese control until the year 2114.

Malaysia and Myanmar are also seeking to renegotiate loans taken out under the BRI.

These examples have increased EU concerns as China has expanded its influence in Asia, Central Asia and Europe. But the EU was well aware that mere peer pressure would not drive China to reconsider its strategy. To secure its own political and economic interests, the EU had to put forward an ambitious and comprehensive response, which was to strengthen its own links with the host countries and to present them with a credible and sustainable alternative offer for connectivity financing.

The new strategy will give Asian and European states a much clearer idea on the basis of which the EU wishes to engage with them, and what they can expect. Although some financing is mentioned in the EU paper, we will have to wait and see how the ongoing negotiations for the next EU budget will be in allocating sufficient EU funds to connectivity financing in order to mobilise additional investment from private and multilateral investors. The EU strategy will also need united support from member states, a solid public communications strategy, and broad bi- and multilateral outreach programmes to the EU’s partners.

Geopolitical competition in Eurasia will undoubtedly increase with China, Russia, the US and the EU competing for influence. The connectivity strategy of the EU has set down a marker that the EU is part of the Great Game.

Thanks for watching another KJ Vid, see you next time.

Will France remain a great power?

In recent years, France’s geopolitical environment has dramatically deteriorated. With the rise of populism in all corners of the Western world from the Brexit vote to the election of Donald Trump, the migration crisis in Europe as a result of the Arab Spring, the Libya and Syria crisis have created an atmosphere of insecurity . France has also deployed troops to Estonia as part of NATO battalions in response to an emboldened Russia.

Twelve months ago, in October 2017, the Ministry of Defense published a national security strategic review that intended to address the most immediate challenges France faces as well as clear vision of long-term geopolitical and technological trends. I’m Kasim, this is KJ Vids and in this video, we will look at France’s role in the world and the direction in which it is heading. Will France remain a GREAT POWER?

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