By Dawn's Early Light

Holding the Russian Energy Bear at Bay

The WSJ had an encouraging piece last week on Georgia's economic development.  President Mikhail Saakashvili has been taking on autocratic Russian President Vladimir Putin over Europe's growing energy dependence on Russian natural gas supplies through the Ukraine.  Russia's strategy, according to the WSJ, (subscription required) is:

"Gazprom -- the leading vehicle of Kremlin energy influence -- has accelerated a three-pronged strategy. First, it is campaigning to bottle up its control of Central Asian gas resources. Second, it is consolidating and expanding its hold on energy infrastructure among countries that were once part of the Soviet Union. Finally, it is trying to use a deepening war chest to acquire private and privatizing energy assets elsewhere in Europe.

Rising tensions with Moscow reached a crescendo last week when Mr. Putin, before meeting with German Chancellor Angela Merkel in Tomsk, Siberia, accused the West of "unfair practices" and agreed with Mr. Miller that it would redirect supplies elsewhere if its European expansion plans were blocked. A senior EU official says Mr. Putin's "pipeline rattling" is in direct response to EU pressure that Russia ratify an International Energy Charter requiring it to open pipeline access to competitors -- much as telecommunications companies share their bandwidth.

Secretary of State Condoleezza Rice, who said at a Senate hearing recently that energy politics is "warping" international diplomacy, joined the battle in Ankara, Turkey, urging Turkey and Greece to reduce their dependence on Russia by favoring new pipeline plans that rely on Azerbaijan. Vice President Dick Cheney flies to Kazakhstan this week as part of a continued effort to get it and Turkmenistan to join pipeline plans that would reduce Russia's near-complete dominance of Central Asian resources."

Europe's growing dependence on Russian natural gas was brought home to the average European when Russia cut off supplies to Ukraine during the last winter season, demanding steep increases in payments.  According to the Washington Post:

"Europe relies on Russia for about a third of its natural gas supplies. Those supplies arrive via two major pipeline routes constructed in the 1980s over the objections of the Reagan administration. Today the United States realizes that Russian gas will remain vital to Europe, but it is pushing nations to diversify supplies so that Russia cannot exploit Europe's energy dependence for political purposes....

At the same time, however, Russia sells 80 percent of its natural gas to Europe and is worried about European plans to increase gas purchases from Algeria and Libya, as well as about liquefied natural gas from Qatar, which plans to triple its exports."

Mr. Saakashvili is working with Germany's Angela Merkel and other European countries, including Turkey, to bypass the old Soviet system.  In today's Wall Street Journal story "In Russia's Shadow, Georgia's Leader Remakes Nation":

"Mr. Saakashvili, who has strong backing from the U.S., is trying to transform Georgia's economy in a hurry. His aim is to end centuries of Russian domination and to forge new ties with the West. Corruption is down, and tax revenues have at least doubled since 2003, due in part to a new flat tax and improved collection, helping to pay for the government's many projects. The nation's gross domestic product rose 8.5% during the first quarter....

New pipelines that pass through Georgia are coming on line this year, giving Western nations access to oil and gas from the Caspian Sea area, one of the world's few significant new sources of energy outside of the Middle East and Russia. Georgia also is a key plank in the Bush administration's efforts to promote democratic governments in the former Soviet bloc."

The US embassy in Tbilisi supports a 650 person staff.  The United States is very committed to economic and energy reform in Georgia to counter Mr. Putin's impressive efforts in consolidating state control over Russia's energy and using it as a political weapon with Europe, the West and Asia.  To counter this, ahead of the upcoming G-8 summit, the US has been working to support alternative routes that bypass Russia and its reserves of natural gas.  Referring back to the Washington Post article:

"Bryza and more senior U.S. officials have been promoting pipeline routes that would bring gas from fields in Kazakhstan, Turkmenistan and Azerbaijan near the Caspian Sea through Turkey to Europe. One such pipeline, from Azerbaijan through Georgia to Turkey, opens Oct. 1. U.S. officials have been saying that reserves in Azerbaijan alone could justify bigger pipelines even if territorial disputes over the Caspian Sea are not resolved. (Missing from the U.S. vision: supplies from Iran, whose natural gas reserves are second to only Russia's.)

Former Soviet Bloc countries are enthusiastic, especially since Russia has boosted prices on gas sold to Moldova and Belarus. Georgia President Mikheil Saakashvili said during a recent visit here that he supports a pipeline that would bring gas from the Caspian Sea basin through Azerbaijan and Georgia, then under the Black Sea (to avoid Russia) to Romania and then north to Poland. Building that line would take at least five years."

Germany would be one of the largest beneficators of an alternative route for energy, and Ms. Merkel has met with the Georgian President to discuss these options.  It will be interesting to see if Turkey's desire to provide an alternative route for energy supplies could become an important area of leverage in their often troubled bid to become a member of the European Union.

Regardless, Georgia represents an improved US and European ally in trying to roll back Russian advances in energy control.

EU in the Headlights: Blair's Challenge

Fighting in the Family

United Kingdom and EU rotating President Tony Blair has a tough road ahead of him as he seeks to get the 25 nations of the European Union to agree on a seven-year budget.  The Common Agriculture Policy or CAP is loathed by the British, loved by the French, and attractive to the 10 new members of the union.  Margaret Thatcher, in 1984, was faced with a Britain that was much poorer and with little farming compared to the other EU members.  She negotiated the British rebate on UK membership dues, loathed by the French, loved by the British, and a growing drain on EU coffers. 

What complicates the entire framework of discussion is the current Doha round of trade talks that is stalled after Jacque Chirac killed even the lackluster EU offer to reform agriculture trade policies [see DEL: "Note to Brazil and India:Blame France!"].  According to The Economist, Tony Blair:

"proposes to increase Britain’s net contribution by a total of €8 billion ($9.4 billion) over the six-year budget period, either through a lump-sum payment or a reduction of the rebate. In exchange, he wants to see the overall budget cut. His plan trims about €24 billion off the €871 billion figure proposed by Mr Juncker, largely through cuts in rural-development aid and assistance to the EU’s new members in central and eastern Europe.

But though the proposal avoids direct confrontation on the CAP, the issue still looms large. Britain wants to keep the bulk of its rebate as compensation for the EU keeping the CAP. And Mr Blair’s plan calls for a review of all EU revenue and spending in 2008, when Britain will presumably once again go after the CAP with a carving knife."

To put the CAP in perspective, only 2% of the European workforce farm, the CAP sucks up 40% of Europe's budget (did you think it was going towards technology?), while 80% of the subsidy goes to 20% of the richest farmers. 

Why do people not in the EU care about how the Europeans want to misguidedly spend their citizens' taxes?  Because the subsidy significantly impedes development in the third world and is blocking an agreement on free trade.

What EU Stagnation Means to the Developing World

In 2003 the Europeans attempted a compromise that demonstrates how far the divide still is.  The Economist writes:

"In 2003, the EU agreed to replace a blizzard of farm-support payments with a single payment scheme, which subsidises farmers' incomes directly, rather than by paying higher prices for their crops and livestock. This should remove the worst trade-distorting aspects of the CAP. Farmers now get paid an average of only one-third above world market prices, compared with 80% in the mid-1980s. Overall subsidies are down: from over two-fifths of farm receipts in the 1980s to one-third and falling in 2004.

The trouble is that the 2003 changes were a classic case of only partial reform, as everyone knew at the time. They were too little both for Europeans and for Europe's trading partners. They did not affect tariff levels, which are now the main subject of dispute between the EU and the rest of the world. Nor did the 2003 reforms do enough to resolve looming budget problems. Even so, they went too far for many farmers, who now see themselves as an endangered species."

Given the recent French rejection of the EU Constitution and their desire to not create more political turmoil to compete against the Paris riots, there is little likelihood of any political willingness to promote change.

However, farm subsidies in the developed world are not constrained to just Europeans.  Another Economist article illustrates how beholden the OECD is to farm subsidies.

"There is, though, wide variation between OECD members. Producer support is worth less than 5% of farm receipts in New Zealand and Australia, but amounts to roughly 20% throughout North America, 34% in the European Union, and a whopping 60% in Japan. And while the overall value of support has fallen from 2.3% of GDP in 1986-88 to 1.2% now, the reductions have been uneven. Canada and Mexico have made deep cuts in their farm supports, for instance, while Turkey has actually increased its supports."

The developed world is worried about the spread of AIDS, radical Islam, avian bird flu, and a host of other troubles in the developing world.  However without radical farm subsidy reform, starting in Europe (as proposed by the United States) and followed by Japan, the Doha round will accomplish little.  If the developing world continues without the opportunity for sustainable development and the ability to trade for hard currency with the industrialized world, it will find other exports that may be far more costly to the world.

Terrorism, drugs, diseased and impoverished immigrants are the likely exports the third world will trade with the industrialized nations if a fair trade round is not concluded.  This will be far costlier than sustaining 2% of the European workforce.

Germany's Angela Merkel the Next Bismarck?

November 26, 2005 - Welcome Instapundit and Belmont Club readers.  Make sure you click on the comments section to read some challenging ideas by Joe Katzman and M. Simon of Winds of Change along with UK's Peter Gentle of the up and coming Polish based blog Beatroot and systemic thinker Dan from tdaxp.  Also see DEL post "The Belmont Club Weighs In on Merkel" as a follow up to the Belmont Club piece (above).

Prussian Bismarck's Strategic Genius

Otto von Bismarck was the brilliant leader of Germany (1862-1890), responsible for unifying the country, building an empire and securing peace in Europe through a complex system of alliances that his successors could not maintain.

"His most significant policy objective was that of securing German unification; he took advantage of skillful diplomacy and a series of wars to achieve this goal...  In foreign affairs, opposed to his previous "Blood and Iron" policies before the unification, Bismarck pursued the goal of uniting Germany under Prussia's leadership, and as 'honest broker' securing the German Empire's position by maintaining peace in Europe with a complicated system of alliances."

Bismarck built a strong German military, sought to not compete with the British with its colonies or navy, contain the French by securing alliances with Austria, Italy and at times Russia.  He was the leading statesman of Europe, being responsible for such treaties as the "Three Emperors' League" (Germany, Austria-Hungary, Russia), "Triple Alliance" (Germany, Austria-Hungary, Italy), "Reinsurance Treaty" (Germany, Russia).  What Bismarck created in Europe with him at the helm provided great stability for Europe (though not necessarily needed economic reform), but was too complicated a system for leaders of less than his caliber to grow, let alone maintain.  The result of the failure of European leaders to continue the balance of power in Europe led directly to the First World War [DEL strongly recommends Pulitzer Prize winning, Barbara W. Tuchman's Guns of August as an exceptional novel on WWI, Dr. Henry Kissinger's Diplomacy and noted Military Historian John Keegan's The First World War] and changed civilization forever.

Former German Chancellor Schroeder's French Folly

The balance of power in Europe changed radically after the collapse of the Soviet Union.  Germany became focused on integrating its two separate countries.  The United Kingdom continued its Atlantic focus while slowly moving towards European integration.  This left France coyly attempting to leverage German strength yoked to Franco-diplomacy, thereby creating a new center in Europe.   

Once Gerhard Schroeder defeated Helmut Kohl for leadership of the German state and her diplomacy, his goals where short term in nature.  Attempting to secure his position in power domestically appeared often his only long-term goal.  Chancellor Schroeder tacked every which way the wind blew to gain domestic support, including anti-American positions, such as colluding with the French to thwart US efforts in Iraq.  He succeeded in damaging the US-German relationship and threw his efforts behind Franco-Russian diplomatic enterprises, even creating a "special relationship" with Vladimir Putin, to the rightful frustration of Poland. 

While UK Prime Minister Tony Blair was often described as America's "Poodle" in the British media, Chancellor Schroeder proved himself far better as Chirac's "Poodle".  German foreign policy was marked by stagnation in the past decade without pushing forward major economic reforms other than European Union integration (with an anti-American bent) that moved along until the French "Non" vote and betrayal of the German position over the EU Constitution [See DEL posts "Why France's Self-Destruction Matters" and "France and the EU Constitution"].

Germany's economy, much like France's, was marked by chronic high unemployment and a growing welfare system, and was unable to support a future Germany that was robust in world affairs.

German Chancellor Angela Merkel's Brilliant Diplomacy - Another Bismarck?

Social Conservative Wins Polish Election

Warsaw's socially conservative mayor, Lech Kaczynski, came back from a 12% deficit to defeat economic conservative lawmaker Donald Tusk in the Polish presidential runoff.  Mr. Kaczynski will replace two-term, ex-communist President Aleksander Kwasniewski who is term-limited out.

This WSJ Europe (subscription required) article, written before the elections results were announced, relates some of the appeal of Mr. Kaczynski:

"The race has also turned on personalities, with the mild-mannered Mr. Tusk saying he wants to play a unifying role, while the more aggressive Mr. Kaczynski has talked tough about standing up to Russia and Germany and purging former communists from positions of influence. He has also stressed traditional Roman Catholic values such as opposition to gay rights and abortion...

Mr. Kaczynski trailed Mr. Tusk in the first round two weeks ago and lagged in polls immediately afterward, but has been helped by an endorsement from populist anti-European Union candidate Andrzej Lepper, one of those eliminated."

The WSJ goes on to note the different economic philosophies of the two:

"Mr. Tusk, head of the Civic Platform party, wants a 15% flat-tax rate on personal and corporate earnings, while Mr. Kaczynski, from Law and Justice, favors a greater role for the state in the economy. He wants tax cuts, but would maintain a system under which high earners pay more and large families enjoy deductions."

Mr. Kaczynski has defeated Mr. Tusk by a likely 10% or better margin, which is considerable given his prior 12% deficit.  Mr. Kacyznski's campaigning to get the support of voters nervous about Germany and Russia should help in befriending Germany's new Chancellor Angela Merkel.  This may not seem obvious at first, given expressed worries about Germany.  However, Polish nervousness about Germany was heightened by former Chancellor Gerhard Schroeder's cozy relationship with Vladimir Putin.  Ms. Merkel will be friendlier toward Washington than Moscow. 

"Merkel's friendlier attitude toward Washington will set the new transatlantic tone.... Schroeder's departure also means that Russian President Vladimir Putin has lost his closest ally and most voluble apologist in the West."

The Washington Post article (above) goes on to quote outgoing President Aleksander Kwasniewski with some interesting observations on where Polish and German relations will lead.

""The grand coalition should work out to be the best solution for Germany," Polish President Aleksander Kwasniewski said in our conversation in Washington last week. "Germany will remain close to Russia but will no longer depend on the very personalized symbols of Schroeder's politics. Germany under Merkel will work to establish the broad framework for a European Union policy toward Russia."

Merkel will make no abrupt changes on Iraq, Kwasniewski predicted. The Polish leader committed troops to the multinational force in Iraq and hopes his successor will keep them there after Kwasniewski leaves office in December. "You have elections and a new government in Iraq after December, and there will be a chance for new steps, perhaps a new United Nations resolution and a new international presence in Iraq," he said. "That is when a Germany that is more open to arguments from the United States could be helpful."

It is important, Kwasniewski continued, that Merkel has personally experienced the transformation of totalitarianism into democracy. Raised in communist East Germany, she tenaciously made her way to the top of the Christian Democratic Union after Germany's reunification.

"She understands the driving force of our times, the move to democracy, because she has lived it," said Kwasniewski, whose career traces the same arc. His successful mediation of the Ukraine crisis last December, as Poland's neighbor teetered on the edge of great bloodshed, has received too little international recognition."

Mr. Kaczynski's ant-communist bent should fit in well with Ms. Merkel's philosophy considering she grew up under communism in Eastern Europe.  This doesn't bode well for Putin's conservative, non-democratic ways.  The net effect of this election and the recent German election is to move Eastern and Central Europe closer to the United States and away from the Russians.  It also means greater support for the US-UK desire to see a stable democracy emerge in Iraq. 

Now if only France was ready for an election.

UPDATE: For a more indepth look at the Polish elections, visit The Beatroot's post.  His commentary comes from a Londoner's perspective living in Warsaw. (October 24, 2005)

Balance of Power in Europe

The fallout from the French and Dutch votes against the EU Constitution is growing.  Small fractures in the union have grown and are visible for the world to see.  The recent failed EU summit, chaired by strong EU supporter Jean-Claude Juncker, the Prime Minister of Luxembourg, prompted Mr. Juncker to describe the union as being in "a deep crisis".

What should have been a summit to think about and discuss the demise of the constitution was instead focused on the 2007-2013 EU budget, which has until next year to be worked out.  Mr. Chirac, handed a huge personal defeat during the constitution voting, looked not to heal the European divide his government partially caused but to shift blame elsewhere.  There are two conflicting economic systems competing for primacy in the EU: the United Kingdom, with an economic model closer to American capitalist standards of competition, and the current Franco-German socialist model.  The philosophies are so different that it is extremely difficult to build an EU budget and formulate policy among the 25 member nations, that have widely different views of the world and economics.  Winning the heart of this debate in favor of the United Kingdom model is vital to Europe's future prosperity and security.  Mr. Chirac coldly attacked the British rebate in the EU, a deal that Margaret Thatcher cut with a smaller EU in 1984.  The British rebate compensates the UK for its disproportionate payments into the EU budget and grows annually.  The rebate is expected to be about 4.5 billion euros ($5.5 billion) this year. 

Mr. Chirac's attack was clever on several fronts.  There is no love lost between Mr. Chirac and Mr. Blair, who have clashed on issues regarding the leadership of Europe and, more noticeably, the Iraq war, where France effectively blocked UN support for the war against a strong British desire.  PM Blair was not willing to give up or renegotiate the rebate unless the French were willing to revise their own generous subsidy in the form of the Common Agricultural Policy (CAP).  Mr. Chirac, not willing to give an inch, ruled it out.  A proposal from Luxembourg would have ended the British rebate and left open the French CAP benefits to discussion midway through the next budget.  This proposal could not be taken seriously by the English. 

What was so clever in Mr. Chirac's attack is where it put the English with their allies in Eastern Europe.  Towards the end of the failed summit, Poland and the other Eastern European nations proposed paying more into the EU budget so the British rebate could be preserved.  Mr. Chirac effectively drove a public wedge between the UK and "New Europe". 

Why didn't PM Blair cut a deal?  Mr. Chirac likes to think big in the long term but conducts policy in the short term, which explains his 24% approval rating.  He is not willing to make long-term political choices that are painful and instead is working to detract attention from his failed policies and wound his neighbor across the channel. 

Mr. Blair, who is set to take over the EU presidency for 6 months, thinks long term as well but is willing to make painful short-term moves to accomplish long-term change.  Mr. Blair, sensing a weak Mr. Chirac and an even weaker German leader, likely to be replaced by a more friendly Angela Markel, is willing to wait to reform Europe.  In order to do that, Mr. Blair must work out a framework for Europe not in an 11th hour room in Brussels, but by building an alliance with New Europe along with Germany to push the EU in a more competitive and US-cooperative direction. 

That type of vision takes time and dedication.  Mr. Chirac will continue to play the obstructionist.  But if the Europeans want a "closer union", they would be wise to follow the Blair model.

Suggested Reading for more insight:

1. The Economist "Europe's identity crisis deepens"
2. The Guardian "Blair defends rebate stance to MPs"
3. The New Zealand Herald "French press put boot into Chirac"
4. Financial Times "Blair takes diplomatic line over EU budget"
5. Der Spiegel "EU Summit Collapse is 'Historic Failure'"

Blog Pool - Thanking our New Allies

Secretary Rice's next stop after Berlin was Warsaw to thank our Polish ally.  She met with Prime Minister Marek Belka and thanked Poland for its sacrifice in Iraq (Poland has contributed over 2,500 soldiers to the effort).

It is important that Rice went to Poland, and hopefully the State Department will treat Poland as a full-fledged American ally and allow them to be a part of our Visa Waiver Program like these 27 nations.  Poland is an important stop for these reasons:

• Home of the Solidarity movement during the Cold War, Poland understands how vital freedom is to those who are denied it.
• Poland is a rising US ally in Europe with more traditional conservative values that are in many ways closer to our own than Western Europe's.
• Poland played a vital role in supporting the Orange Revolution in the Ukraine and, with its Western-looking focus, will help pull the Ukraine and the EU closer together, acting as a bridge between them, away from the increasingly more non-democratic Russia.
• Poland is a model for governments that are transitioning from totalitarian, centralized rule to democratic, capitalist governments that are responsible to their citizens.

Poland was divided by the Germans and Russians at the outset of the Second World War, and Britain, her defender, was too late and unable to come to her rescue.  The horrible acts inflicted by the Nazis and Soviets on Poland and subsequent communist rule leaves Poland with a sharper memory of the pain of tyranny and a natural US ally in Europe, NATO, and beyond.  Secretary Rice was right to give Poland the respect it deserves with a visit to Warsaw.