Saturday, December 24, 2011

New Government of Spain: Right Priorities, Right Direction, Right Choices?

It's hard to tell. After the national parliamentary elections a month ago, won decisively by the conservative PP (Partido Popular), Spain's new government under Prime Minister Mariano Rajoy was sworn in this week (December 21). The uncertainties surrounding the Spanish economy have made it imperative for the new government to start its mission in a convincing manner. Some characteristic changes became visible from the start: 1. reduced government size, 2. concentration of functions in fewer hands. Rajoy's first signal a few days before revealing his new team was that there would be cuts in every governmental sector except for pensions.

Indeed, according to many commentators a concentration of official power is taking place which is unprecedented in the recent democratic period. First, economic policy is shifted towards the Prime Minister (“President of the Government” in Spain's official parlance). The cabinet's interministerial council for economic policy (Comisión Delegada de Asuntos Económicos) is normally chaired by the Minister of Finance. Rajoy has decided to chair it himself. Second, the Spanish intelligence service is normally part of the Ministry of Defence. Rajoy has decided to move it to the Presidency of the Government, the cabinet secretariat, under the direct oversight of his chief of cabinet, Soraya Saenz de Santamaria (40), who is also a ministerial appointment and Rajoy's deputy (Vice President of the Government).

Finally, adding to the above is the fact that this is not a government of independent-minded technocrats (unlike the new governments of Italy and Greece). The new Ministers are highly competent and experienced, but they are PP loyalists. They are Rajoy's close collaborators from many years before. The facts seem to bode for a tight-knit, centrally steered operation, with one possible exception: The all-important Ministry of Finance.

The Ministry of Finance has now been split in two, an “externally oriented” Ministry of the Economy and Competitiveness, with Luís de Guindos as the new minister, and an “internally oriented” Ministry of Finance and Public Administration – where the new appointee is Cristobal Montoro. In its long history the Spanish ministry of finance has several times and for considerable periods actually been two units, most recently with the José Maria Aznar government of 1996-2004, so the split may be in line both with historical precedent and with a preference of the Partido Popular. But why? And are two heads better than one?

My speculation is only that, but I believe Rajoy has made the best of a difficult situation where the judgement of the markets and the international community were primary: he had one fully capable man (Montoro) who could well have filled the job alone, but had inadequate foreign language skills, and a somewhat academic profile. Then he had another (de Guindos) who had the requisite skills for (at least) part of the job, an image of investment banking experience (Lehman Brothers in Iberia, no less!) and the language abilities to go with it. So the ministry was divided to fit the needs of the situation and the capabilities of the two men, while Rajoy in doing so also ensured that he would put himself in a stronger leadership position, which was further underlined by his taking the reins of the economic policy council into his own hands.

The question then is: Can the cabinet center manage it all? There is no doubt about Rajoy's motivation, nor about the clarity of his goals. He intends to drag his country out of this crisis no matter what. However, what we know of the new Prime Minister so far is that he is not given to Reaganesque free reins and lofty thinking. His performance in parliamentary debates of the past four years – as well as in the previous election debate with Zapatero of 2008 – shows a man who is polemic and does not hesitate to dive into detail. My suspicion is that here we may have a man of pedantic leadership, a nitpicking micromanager.

Possibly to compensate for this tendency, the Vice-President of the Government has been charged with the top managerial position. She certainly has both formal competence and experience, and she has worked for ten years with Rajoy. But with all these diverse responsibilities thrust upon her, one may well ask: Is Soraya up to it? As I see it, this can only work well if Rajoy comes out as a stronger visionary than he has appeared to be in the past.

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Sunday, December 11, 2011

Germany and France: Mainstays or Loose Cannons?

The infamous role of the dominant twins of Europe has been much in the news recently. In jest, someone named the monster “Merkozy” to signify the leaders of Germany and France grasping jointly at the dominance of Europe.

I am not so sure this gets at the reality of their relationship, nor at their role in the wider European Union. In my view, one needs a different angle. I shall look into the nature of their role in Europe by using the naval metaphors of the headline: Are Germany and France the main supports of the good ship Europe - without whom all is in risk of failing, or are they two dangerous heavyweight power players only looking out for their own good, to the point of wrecking anything that comes in their way? (No, I'm not going to end up somewhere in the middle, so you can keep reading.)

Have a look in the rear view mirror. In early 1990 Germany was not yet united, but just about to. It was clear to everyone that merging the two Germanies would produce a new magnum power, a fear-inspiring European giant. France and Britain evidently tried to block the move, but were too late. Soon, at Germany's request, its four occupying powers (Britain, France, the US and the USSR) started unification talks with German representatives in Berlin. At the talks, the Soviet Union was pushing for united Germany to be neutral and demilitarized, while the US Bush-I Administration pulled in the other direction, to have all of Germany, the East included, as part of NATO. For their new-found harmony to endure, the two Cold War opponents had to agree. While the talks were going on I visited Moscow in March as junior company to Johan Jørgen Holst, former Minister of Defence and later Minister of Foreign Affairs of Norway and at that time my boss. Lithuania had just declared its independence and everything in the USSR was floating around and hanging loose. Holst had a time-out from official duty and used the time to check up on (inter alia) the situation in the USSR. In all our meetings with Soviet officials and analysts Holst pushed his theme that a neutral united Germany would be the worst thinkable solution - “a loose cannon on the decks of Europe” as he put it, the strongest power in Europe with no compelling structures to tie it down. Mr. Holst was already well known and respected in Moscow. His line was that only NATO and the European Communities could keep a united Germany in check. By July 1990 the Soviet leadership finally came around to that way of looking at it. Mr. Gorbachev gave his assent to united Germany's membership in NATO.

Loose cannon aside, was the 1990 image of a dominant new Germany a realistic danger? Moscow, for sure, has later regretted allowing the NATO move, which has shifted Germany further out of reach of Russia's influence. The rest of Europe has probably benefitted. In retrospect it is indeed an open question whether it was necessary to tie united Germany down, because the task of absorbing East German lands into the existing structures of federal Western Germany took an unprecedented toll on the Federal Republic's resources, dragging its economy into the doldrums for more than a decade. Moreover, now that the German economy is back in high gear, it is reassuring to know that the attitude of most Germans towards Europe was and is (in my personal estimation) an ideal mix of caution, standard-setting stringency and optimism.

France saw its role in post-World War II Europe from the earliest time as building a strong European house to contain (West) Germany so that German militarism would never more be a threat. France was the architect and the master builder of the European institutions we have since come to know so well. Hand-in-hand with integration came the development of the special Franco-German relationship, which to the French always was about gently guiding the Germans along the path to peace and democracy. The Germans, from Adenauer on, played along wisely and always prioritized the Franco-German relationship, never letting on that they might be able to find their way alone. This fiction legitimized West Germany's place as free Europe's solid but boring number 2, always a step behind the shining example of its western neighbor. To Germany the cost was not excessive - partly a matter of foregone prestige, but mainly a patient indulgence of being left to pay the lion's share of the cost of France's excessive benefits from European integration. The Common Agricultural Policy was (and is) waste hole number one, and Germany the biggest contributor. Hence, as long as Germany was divided the French (and European collective) mission of containing Germany remained a credible one.

But that figleaf suddenly disappeared with German unification, which is also why the French instinctively opposed the project when it emerged after the fall of the Wall. When that failed, they grasped at the nearest straw, the notion of stepping up the European ambition to the federalist level with the 1991 Maastricht Treaty creating the European Union, thus ensuring Germany's continued entanglement in European institutions. Since this was most Germans' wish anyway, there was no conflict here.

The slow progress and immense cost of Germany's unification on the ground during the 1990s made the reality of the coming tilt in German favor harder to see. Hence, France continued to act as if the new world of the European Union and united Germany was pretty much the same as the one before 1989. Moreover, most of the attention of the EU was focused on the process of dealing with the new applicant states in East Central Europe. The first opportunity to test the new Franco-German relationship came in 2000 when votes were to be weighted in the new expanded union (Nice Treaty) according to population. The sudden addition of 11 million East Germans to Germany's count made the former equals at one go unequal. Germany with 82 million inhabitants was 25 million ahead of Britain and France and demanded a corresponding voting weight. France refused to budge and won, helped by the reluctance of Chancellor Schroeder to challenge President Chirac. All the four biggest countries (Italy as well) were weighted equally at the top. At the same crucial summit a long prepared and much-needed drawdown of the agricultural policy was postponed for 10 years, again due to French resistance.

Actually, France was soon (from 2002) also in trouble with the euro by exceeding the debt limit, but nobody dared to raise the issue. The euro had just been introduced at this time and several countries, France at the head, but Germany too, were soon above the limit. German embarrassment over exceeding its own external debt limit probably discouraged Schroeder from raising the problem. So France's sins were forgotten along with the rest. Dealing with the problem was postponed, and it grew bigger - and bigger - and is haunting us, with a vengeance, today.

At the same time, the willingness of Germany and the rest to indulge French excesses is probably the secret of what keeps France in line.

What has changed after Angela Merkel and Nicholas Sarkozy entered the scene? Have they twinned their control of Europe and set themselves up as the mainstays of the good ship? If you take a closer look at what has been happening during the euro crisis, you will see that with Merkel at the helm Germany does not let France make major statements alone, thus gaining a closer grip on French policy positions. Berlin strives all the time to ensure that the two agree (not always succeeding). Most of the time Germany has been pushing for tougher financial controls than France wants.

Indeed, looking at the French record in public finance since the euro was introduced, and its stance in agricultural policy matters, I for one suspect that leaving France unfettered would certainly be to have a loose cannon on the decks of Europe. With Britain now effectively defining itself out of Europe, Germany alone is the indispensable controlling agent, keeping France in line and mobilizing French support for the badly needed leadership of the euro zone.

Therefore, to talk about dominance begs the question of what Europe's and the euro-zone problem is: a long-term lack of responsible leadership and fiscal discipline.

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