United Kingdom Moves Away from the European Project

January 22, 2013 | 1000 GMT

By Adriano Bosoni

British Prime Minister David Cameron will deliver a speech in London on Jan. 23, during which he will discuss the future of the United Kingdom's relationship with the European Union. Excerpts leaked to the media suggest that harsh EU criticism will figure prominently in the speech, a suggestion in keeping with Cameron's recent statements about the bloc. But more important, the excerpts signal an unprecedented policy departure: renegotiating the United Kingdom's role in the European Union. London has negotiated exemptions from some EU policies in the past, even gaining some concessions from Brussels in the process; this time, it is trying to become less integrated with the bloc altogether.

Cameron has pledged to hold a referendum after 2015 on the United Kingdom's role in Europe. He has also said he would reclaim powers London surrendered to the European Union. While they no doubt reflect similar anxieties across the Continent, such statements are anathema to the European project, and by making them, Cameron could be setting a precedent that could further undermine the European Union.


Cameron's Compromise

Cameron's strategy partly is a reaction to British domestic politics. There is a faction within the ruling Conservative Party that believes the country should abandon the European Union entirely. It was this faction that pressed Cameron to call a referendum on the United Kingdom's EU membership. Some party members also fear that the United Kingdom Independence Party, the country's traditionally euroskeptic party, is gaining ground in the country.

Such fears may be well founded. According to various opinion polls, roughly 8-14 percent of the country supports the United Kingdom Independence Party, even though it received only 3.1 percent of the popular vote in the 2010 elections. These levels of support make the party a serious contender with the Liberal Democrats as the United Kingdom's third-largest party (after the Labour Party and the Conservative Party). Some polls show that the United Kingdom Independence Party already is the third-most popular party, while others suggest it has poached members from the Conservative Party, a worrying trend ahead of elections for the European Parliament in 2014 and general elections in 2015.

Its growing popularity can be attributed to other factors. Beyond its anti-EU rhetoric, the United Kingdom Independence Party is gaining strength as an anti-establishment voice in the country, supported by those disappointed with mainstream British parties. Similar situations are developing elsewhere in Europe, where the ongoing crisis has weakened the traditional political elite.

The debate over the United Kingdom's role in the European Union is also causing friction with the Conservatives' junior coalition partner, the Liberal Democrats. Party leader and Deputy Prime Minister Nick Clegg has repeatedly criticized the Conservatives' push for a referendum, arguing that the proposal is creating uncertainty in the country and by extension threatening economic growth and job creation. Several of the country's top businessmen share this belief. On Jan. 9, Virgin Group's Richard Branson, London Stock Exchange head Chris Gibson-Smith and eight other business leaders published a letter in the Financial Times criticizing Cameron's plan to renegotiate EU membership terms.

British citizens likewise are conflicted on the subject. In general, polls have shown that a slight majority of Britons favor leaving the European Union, but recent surveys found that opinion was evenly split. Conservative Party voters particularly support an EU withdrawal.

Given the issue's sensitivity, Cameron has sought to please everyone. He said there would be a referendum, but it would entail the United Kingdom's position in the European Union, not British membership. Despite his criticisms of the bloc, Cameron has said he does not want to leave the European Union outright; rather, he wants to repatriate from Brussels as many powers as possible.

Cameron believes the United Kingdom still needs direct access to Europe's common market but that London should regain power regarding such issues as employment legislation and social and judicial affairs. Most important, the referendum would take place after the general elections of 2015.

London's Costs of Membership

London also believes that the United Kingdom has surrendered too much of its national sovereignty to supranational EU institutions. The United Kingdom is a net contributor to the European Union, and London feels that the costs of membership exceed the benefits. The Common Agricultural Policy, which subsidizes agricultural sectors in continental Europe, does not really benefit the United Kingdom, and the Common Fisheries Policy has forced the United Kingdom to share its fishing waters with other EU member states.

Yet the United Kingdom is a strong defender of the single market. Roughly half of its exports end up in the European Union, and half of its imports come from the European Union. While the United States is the United Kingdom's single most important export destination, four of its five top export destinations are eurozone countries: Germany, the Netherlands, France and Ireland. Germany is also the source of about 12.6 percent of all British imports.

Some critics suggest that the United Kingdom could leave the European Union but remain a part of the European Economic Area, the trade agreement that includes non-EU members, such as Iceland and Norway. However, the country would still be required to make financial contributions to continental Europe and adapt its legal order to EU standards, but it would not have a vote in EU decisions. According to Cameron, the United Kingdom must be part of the common market and have a say in policymaking.

The issue points to the United Kingdom's grand strategy. Despite an alliance with the United States, the United Kingdom is essentially a European power, and it cannot afford to be excluded from Continental affairs.

Throughout history, London's foremost concern has been the emergence of a single European power that could threaten the British Isles politically, economically or militarily. Maintaining the balance of power in the Continent -- especially one in which London has some degree of influence -- is a strategic imperative for the United Kingdom.

The United Kingdom's Strategic Dilemma

The United Kingdom's push to renegotiate its status in the European Union threatens the European project. In the past, the bloc granted special concessions to the British, such as allowing them to keep the pound sterling during Maastricht Treaty negotiations. These concessions inspired other EU members to ask for similar treatment -- most notably Denmark, which also managed to opt out of the euro.

However, this is the first time that London has openly demanded the return to a previous stage in the process of European integration. At no other time has a country tried to dissociate itself from the bloc in this way. The decision not only challenges the Franco-German view of the European Union but also makes a compromise extremely difficult and risky between France and Germany and the United Kingdom.

Most important, Cameron is framing his proposals not in terms of national sovereignty but in terms of social well-being. In doing so, he acknowledges the social implications of the European crisis.

Cameron has even said that the European Union currently is hurting its citizens more than it is helping them. According to leaked portions of his upcoming speech, he believes that there is a "growing frustration that the EU is seen as something that is done to people rather than acting on their behalf" and that the issues are "being intensified by the very solutions required to resolve the economic problems."

The excerpts also cite Cameron as saying "people are increasingly frustrated that decisions taken further and further away from them mean their living standards are slashed through enforced austerity or their taxes are used to bail out governments on the other side of the Continent." This rhetoric could become highly attractive in Europe, where people from Germany to Finland believe that taxpayers' money is being used to bail out inefficient peripheral countries.

And many Greek, Spanish and Portuguese citizens probably would sympathize with the notion that austerity is worsening their quality of life. Cameron's rhetoric suggests that he is positioning the United Kingdom to be the leader of a counternarrative that opposes Germany's view of the crisis.

But this strategy is not without risks for the United Kingdom. In recent years, the country's veto power in the European Union has been reduced substantially. With each reform of the European treaties, unanimous decisions were replaced by the use of qualified majority. Even in cases where unanimity is required, Berlin and Paris have managed to bypass London when making decisions. For example, Cameron refused to sign the fiscal compact treaty in 2011, but Germany and France decided to proceed with it, even if only 25 of the 27 EU members accepted it.

Moreover, the "enhanced cooperation mechanism," the system by which EU members can make decisions without the participation of other members, increasingly has been used to move forward with European projects. Currently, the EU's Financial Transaction Tax is being negotiated under this format. In recent times, London has been able only to achieve exemptions without real power to block decisions.

Meanwhile, the ongoing crisis has compelled the European Union to prioritize the 17 members of the eurozone over the rest of the bloc. This has created a two-speed Europe, where core EU members integrate even further as the others are neglected somewhat. 

London could try to become the leader of the non-eurozone countries, but these countries often have competing agendas, as evidenced by recent negotiations over the EU budget. In those negotiations, the United Kingdom was pushing for a smaller EU budget to ease its financial burden, but countries like Poland and Romania were interested in maintaining high agricultural subsidies and strong development aid.

The dilemma is best understood in the context of the United Kingdom's grand strategy. Unnecessary political isolation on the Continent is a real threat to London. The more the European Union focuses on the eurozone, the less influence the United Kingdom has on continental Europe. The eurozone currently stretches from Finland to Portugal, creating the type of unified, Continental entity that London fears.

For the British, this threat can be mitigated in several ways, the most important of which is its alliance with the United States. As long as London is the main military ally and a major economic partner of the world's only superpower, continental Europe cannot afford to ignore the United Kingdom. Moreover, London also represents a viable alternative to the German leadership of Europe, especially when France is weak and enmeshed in its own domestic problems. And even if the United Kingdom chooses to move away from mainland Europe, its political and economic influence will continue to be felt in the Continent.

The United Kingdom's grand strategy has long been characterized by balancing between Europe and the United States. Currently, London is not so much redefining that grand strategy as it is shifting its weight away from Europe without completely abandoning the Continent.

The American Comeback Kid

Alfred Gusenbauer

Jan. 21, 2013

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               Illustration by Paul Lachine

VIENNAAs is customary at the start of a new year, imposing statistics and trend forecasts are being trumpeted worldwide. For example, in 2016, China is expected to replace the United States as the world’s largest economy. And, by 2040, India’s population will have reached 1.6 billion, surpassing China’s, which will have stagnated a decade earlier.

Perhaps the most startling projection is that the US will become an energy exporter by 2020, and will become energy self-sufficient 15 years later, owing to the plentiful supply of inexpensive shale gas and the discovery of massive oil reserves everywhere from North Dakota to the Gulf of Mexico. Despite opposition from environmental groups, these reserves will be easier to exploit than those in Europe, because they are largely located in sparsely populated areas.

As a result, energy will be significantly cheaper in the US than in Europe or China for the foreseeable future. Indeed, shale-gas extraction is so economically favorable that even American gas exported to Europe would cost 30% less than what the Russian energy giant Gazprom currently charges.

Cheap energy provides a powerful incentive for energy-intensive industries – from steel and glass to chemicals and pharmaceuticals – to locate in the US. In fact, the decreased cost of manufacturing in America, combined with the country’s business-friendly regulations, strong rule of law, and political stability, will eliminate the competitive advantage that has driven China’s rapid economic growth over the last several decades.

Meanwhile, American universities still attract the world’s best and brightest in many fields, most notably in science and technology. And the country’s other longstanding advantagesflexibility, capacity for renewal, economic mobility, international regulatory strength, and the world’s main reserve currency – remain in place.

Given these favorable conditions, the US has already begunon-shoring” its industry – a process that will most likely continue for several decades. As other advanced economies become increasingly services-based, the US is reindustrializing.

The resulting added value will bolster policymakers’ ability to find long-term solutions to persistent problems, including an inefficient health-care system, inadequate primary and secondary education, and blatant social injustice. Success in these areas would further enhance America’s appeal as an industrial center.

As part of the Harvard Business School’s US Competiveness Project, Michael Porter and Jan Rivkin recently published an eight-point plan, which could be implemented within the next two to three years. Each proposed measure has generated broad, bipartisan agreement among policymakers (at least behind closed doors).

The plan highlights the need to take advantage of the opportunities afforded by shale gas and newly discovered oil reserves. Low-cost domestic energy could help to lower the trade deficit, spur investment, and decrease America’s economic exposure to volatile oil-exporting countries. A strong federal regulatory framework could help to ensure this result, while minimizing the environmental and safety risks associated with extraction.

Other proposals include easing the immigration of highly skilled individuals, particularly graduates from US universities; addressing distortions in international trade and investment; developing a more sustainable federal budget framework; streamlining taxes and regulations; and initiating an ambitious infrastructure program. By pursuing these strategies, President Barack Obama could restore America’s position as the engine of the global economy.

But implementing the eight policy proposals would also widen further the wealth gap between the US and Europe, which has been growing for the last three decades. In 1980-2005, the US economy grew by a factor of 4.45 – a level that no major European economy even approached. In 2011, Norway and Luxemburg were the only European countries with higher per capita national income than the US in purchasing power parity terms.

And, by 2040, European countries’ populations will have stagnated or shrunk (with the exception of the United Kingdom, which will have a population of roughly 75 million, comparable to Germany), while America’s will have grown to 430 million, from 314 million today.

The political consequences of the US economy’s renewed strength will reverberate worldwide. But maintaining this economic revival will require greater reluctance to intervene in foreign conflicts or engage in new wars.

This recognition has already dampened US policymakers’ support for the Arab Spring uprisings: witness Obama’s hesitation to intervene in Libya and his unwillingness, at least so far, to involve America directly in Syria’s bloody civil war. Although the Arab Spring’s historic significance was initially likened to that of the fall of the Berlin Wall, mounting concern about the Muslim Brotherhood’s increasing political influence is overshadowing the positive potential of change in the region.

Likewise, while the US will not relinquish its bilateral relationship with Israel, relations between Israeli Prime Minister Binyamin Netanyahu and Obama have reached a new low. In this context, a major American peace initiative in the Middle East is unlikely in the foreseeable future.

Meanwhile, America’s former rival, Russia, is struggling to restore its hegemony over many of the ex-Soviet countries. And conditions in Africa and Latin America are generally stabilizing.

Given this, America’s foreign-policy priorities have shifted to the Asia-Pacific region, where the most pressing economic, political, and security challenges – including the threat of North Korean missiles and rising tensions between China and its neighbors over competing sovereignty claims in the South and East China Seas – are emerging. Other global challenges appear relatively minor in comparison.

Although the weight of global politics, economics, and, in turn, influence is largely shifting from the Atlantic to the Pacific, it would be a mistake to underestimate America’s role in the new world order. America never really stepped out of the spotlight, and it will continue to play a leading role.

Alfred Gusenbauer was Chancellor of Austria in 2007-2008.

Note from the editor

US emerges as a commodities bright spot

By Javier Blas, Commodities Editor


Ask the boss of any major commodities trading house for a bright spot in raw materials demand and the answer may surprise you. It is not China, India, Brazil or any other superfast growing emerging country, but the US.

Commodities trading executives say that the US economy, boosted by cheap credit and even cheaper energy, is starting to pull ahead after years of lacklustre growth, pushing up demand for anything from copper to corn to crude oil.

“The US is doing very nicely. Demand is up,” says a commodities boss in New York. Another in Switzerland adds: “People are not realising it, but it is just happening: cheap energy, low interest rates… it is all propelling the US economy.”

The renewed optimism in US commodities demand comes as lawmakers and the White House take the initial steps to avoid the so-calledfiscal cliff” – the potential for draconian spending cuts and tax hikes. There are problems ahead. To be sure, economic growth is still low. And unemployment remains stubbornly high. Of course, the starting point for many commodities is low after years of falling consumption.

But there are anecdotal signs in the physical market that confirm the optimism among commodities trading executives. Take oil.

Consumption has fallen significantly from the peak of 2007-08, but the latest weekly figures – with the caveat that they are always imperfect and subject to multiple reviews – suggest a strong rebound. US oil consumption has been running 1-2 per cent higher year-on-year, at around 18.5m barrels a day since early December, a strong change from the beginning of 2012, which witnessed year-on-year drops of 5-7 per cent.

The International Energy Agency, the western countries’ oil watchdog, earlier this month acknowledged that recent US oil demand figures have “surprised on the upside”, adding: “Diminished pessimism has emerged in recent months.” The IEA believes that after US oil demand contracted an average 1.6 per cent through 2012, consumption will remain flat year-on-year in the current year.

Metals is another area of strength. Consumption of copper, aluminium and steel is up significantly over the past year – and the signs of a rebound in the housing market suggest more growth is ahead.

US lumber – or sawn timber – is also benefiting from the strong economic growth. The price of the commodity is near an eight-year high as demand for the staple of the American house sector rises again.

The renewed economic strength is even filtering into the agricultural market. The US Department of Agriculture recently revised up its estimates for domestic consumption of corn, even in the face of near record prices, as the US livestock and ethanol industry swallows more corn than expected only a few months ago.

Would it last? Commodities executives openly acknowledge they do not know. But they highlight that the US, long considered a source of negative consumption rates, could be a positive demand surprise for 2013.

Pacific Group to Convert 1/3 of Hedge-Fund Assets to Gold

By Bei Hu

Jan 20, 2013 8:14 PM ET


The Pacific Group Ltd., founded by a former PaineWebber Inc. trader, is converting one-third of its hedge-fund assets into physical gold, betting that prices will go up as governments print more money to pay off debt.

The Hong Kong-based asset manager plans to take delivery of $35 million worth of gold bars that can be traded on the London Bullion Market Association and other international markets, William Kaye, its founder and chief investment officer, said in a telephone interview on Jan. 18. It has secured vault space at Hong Kong International Airport to store the gold, he said. 

Investors disillusioned with government money printing to serviceinsurmountable public debt may seek alternatives to fiat currencies, Kaye said. Asset managers, including Soros Fund Management LLC, Paulson & Co. and Sprott Inc., are betting on the precious metal even after a 12-year rally has cemented the longest bull market in at least nine decades.

Gold, the way we look at it, is anywhere from being undervalued to being seriously undervalued,” Kaye said. “We’re in the early stages, in our judgment, of what would likely be the world’s largest short squeeze in any instrument.”

Fiat currencies have no tangible backing, such as gold or silver, except governments’ good faith and can become worthless due to hyperinflation or loss of public faith.

Pacific Group’s $95 million Greater Asian Hedge Fund, which started trading in 2001, returned 2.8 percent last year, taking the cumulative net return since its February 2000 inception to 195 percent. It suffered two down years in 2008 and 2011, according to its December 2012 newsletter.

Soros, Paulson

Gold for immediate delivery finished last year up 7 percent at $1,675.35 an ounce, off the high of $1,900.23 reached on Sept. 5, 2011. Prices retreated for three consecutive months to December, as the easing European debt crisis and faster growth from the U.S. and China spurred speculation that central banks will scale back stimulus. Spot gold finished last week up 1.3 percent at $1,684.30 an ounce, a second consecutive weekly advance.  
Soros Fund Management, founded by the billionaire George Soros, raised its stake in the SPDR Gold Trust (GLD), the biggest gold-backed exchange-traded product by 49 percent in the third quarter to about $215 million, U.S. Securities and Exchange Commission filings show. Paulson & Co., led by John Paulson whose wager against the subprime mortgage market made him a billionaire in 2007, has a bet of about $3.6 billion through the trust, according to the filings. 
Investors would seek the safest assets while governments spend to stimulate their economies, raising the risk of accelerating inflation, Eric Sprott, the founder and chairman of the Canadian fund manager said in July. Sprott manages funds that invest mainly in gold, silver and precious-metals equities.

‘Financial Catastrophe’


Central banks have so far been able to manipulate interest rates to allow governments to service their debt at low costs, averting market seizures, Kaye said. Still, the next big rally in precious-metal prices may be 18 months to two years away, triggered by a “financial catastrophe,” he added.
Ownership of gold through financial instruments based on it, such as Comex futures contracts, now represents more than 100 times the physical gold that exists above ground worldwide, Kaye said, citing the Pacific Group’s own analysis.
All you actually need for a major upward revaluation of gold is for a small fraction of people to physically reclaim from major central banks or other depositories that are holding your gold and using it for their purposes,” he added.
The Pacific Group has just converted the first tranche of such investments, buying gold bars from local refineries, Kaye said without giving the exact value of the delivery.

Kaye was a manager of the arbitrage department of PaineWebber in New York and also worked in the mergers and acquisitions department of Goldman Sachs Group Inc., according to a biography posted on his company’s website. In 1991, he set up the Pacific Group, which also has made private-equity investments.