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5 4December
RomanianJournal of European AffairsVol. 15, No. 4, December 2015
European Institute of Romania
Founding Director - Niculae IduDirector - Gabriela DrăganEditor-in-Chief - Oana MocanuAssociate Editors - Mihaela Moncea, Mihai Sebe, Eliza Vaş
Editorial BoardFarhad Analoui – Professor in International Development and Human Resource Management, the Center for International Development, University of Bradford, UKDaniel Dăianu – Professor, National School of Political Studies and Public Administration, Bucharest, former MEP, former Minister of FinanceEugen Dijmărescu – Deposit Guarantee Fund RomaniaGabriela Drăgan – Director General of the European Institute of Romania, Professor, Academy of Economic Studies, BucharestSergiu Gherghina – Lecturer, Goethe University FrankfurtAndras Inotai – Research Professor of the Institute of World Economics, Research Center for Economic and Regional Studies, Hungarian Academy of Sciences Mugur Isărescu – Governor of the National Bank of RomaniaAlan Mayhew – Jean Monnet Professor, Sussex European InstituteCostea Munteanu – Professor, Academy of Economic Studies, BucharestJacques Pelkmans – Jan Tinbergen Chair, Director of the Department of European Economic Studies, College of Europe - Bruges Andrei Pleşu – Rector of New Europe College, Bucharest, former Minister of Foreign Affairs, former Minister of CultureCristian Popa – Former Vice Governor of the National Bank of RomaniaTudorel Postolache – Member of the Romanian AcademyHelen Wallace – Emeritus Professor, European Institute, London School of Economics and Political Science, UK
© European Institute of Romania, 2015
Romanian Journal of European Affairs is published by the European Institute of Romania7-9, Regina Elisabeta Blvd., Bucharest, Code 030016, RomaniaTel: (+4021) 314 26 96, 314 26 97, Fax: (+4021) 314 26 66E-mail: [email protected], Web: http://rjea.ier.ro
DTP and cover design: Monica Dumitrescu
Print: Alpha Media Print, http://www.amprint.ro/
ISSN print: 1582-8271ISSN online: 1841-4273
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Contents
Assessing the European Parliament’s Democratic Credentials ..................Stephen Vitkovitch
In the Shadow of Grexit: A Short Story of Long (and Failed) Negotiations, January-July 2015 ...............................................................Antonis Klapsis
Mapping the EU–Republic of Moldova Trajectory: Roadblocks on the Way to Economic Integration with the EU ...............................................Gabrielle G. Bulgari
Management of Regional and International Crises by the European Union .............................................................................Antonio Manrique de Luna Barrios
The Future of Private Equity in Europe – The Determinants Across Countries.......................................................................................Mihai Precup
Guidelines for Authors
Romanian Journal of European Affairs (RJEA) is a quarterly publication, issued by the European Institute of Romania, which deals with a wide range of topics pertaining to the realm of European Affairs. Its articles focus on issues of significance in the EU today, such as: institutional building, economic and monetary affairs, internal market, energy, migration, security, neighbourhood policy, the effects of the European integration process on the new member states (with a particular focus on Romania), as well as the EU’s relations with other global actors.
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We warmly welcome submission of articles or book reviews.The articles (written in English or French) must have between 4,000 and 8,000 words,
followed by a 200-word abstract in English, a very brief autobiographical note, keywords and JEL classification (if the case). Book reviews should be no longer than 2, 000 words.
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For more general information on the journal, please visit http://rjea.ier.ro or contact us at [email protected].
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ROMANIAN JOURNAL OF EUROPEAN AFFAIRS Vol. 15, No. 4, December 2015
Assessing the European Parliament’s Democratic Credentials
Stephen Vitkovitch1
Abstract: Doubts persist about the democratic legitimacy and role of the European Parliament in EU decision-making – this article takes a critical look at the body’s democratic credentials. An analysis of voter turnout and the impact the ‘Spitzenkandidaten process’ had on the second-order nature of European elections suggests that the European Parliament suffers from lower turnout than national counterparts, and that the 2014 European elections remained a second-order affair, in spite of the Parliament’s efforts. Existing data and analysis show that while the European Parliament to does a reasonable job translating citizens’ views in relation to left/right issues, the Parliament is more supportive of EU integration than citizens – new data gathered suggest the lack of congruence is pronounced. The European Parliament’s institutional framework set by the Treaties affects its choices, its more limited role in certain areas may lead it to adopt policy positions that are at odds with citizens’ views and security. Ultimately, the European Parliament does not enhance the democratic nature of the EU. The adoption of a more intergovernmental approach to EU decision-making at the expense of the European Parliament would help improve the democratic credentials of EU decision making, and as a minimum further expansion of the Parliament’s powers should be avoided.
Keywords: European Parliament, democracy, legitimacy, democratic deficit, elections
It is an article of faith for certain academics (for example Føllesdal, p.85, 2000; Loewe, 2014; Wessels and Diedrichs, 1997; Borchardt, 2010) and MEPs that the European Parliament (EP) enhances the democratic nature of the EU. The European Parliament has recently made a concerted push for greater involvement in oversight of the Greek bailout deal, which Gianni Pittella, Chair of the Group of the Progressive Alliance of Socialists and Democrats in the EP sees as “a matter of democratizing the procedures” (Michalopoulos, 2015). In many instances the belief in the democratizing power of the EP is based on the fact that it is “the only directly elected EU institution” (Crombez, 2003). Counterclaims are made by those such as British Prime Minister, David Cameron who believe that national parliaments are “the true source of real democratic legitimacy and accountability in the EU” (Cameron, 2013). I use this piece to take a critical look at whether the EP enhances
1 Stephen Vitkovitch has been a UK civil servant for a number of years in EU facing roles covering taxation, climate change, and criminal justice, as well as other multilateral fora. He has a Masters in Politics in the EU from Leicester University. At present he works for the Home Office (UK Interior Ministry), acting as delegate to a number of working groups. The views expressed here are personal to the author. E-mail: [email protected].
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the democratic functioning of the EU, arguing that the EP’s democratic legitimacy and role is open to question in several regards. The article proceeds as follows:
First, I chart the rise in power of the EP and its role in EU decision-making under the Lisbon Treaty. Second I briefly examine what constitutes democracy and democratic legitimacy, and look at the EU’s democratic deficit, and the second-order nature of elections to the Parliament. I then analyse whether the EP meets ordinary standards of democratic legitimacy, considering the issues of voter turnout and the congruence of MEPs’ and citizens’ views – broadly concluding that the EP suffers from a shortfall in democratic legitimacy, and compares unfavourably to national parliaments in this regard. Moving beyond this analysis I explain how the EP’s more limited role compared to national governments in certain areas may lead it to adopt policy positions that are at odds with citizens’ views and security. I then draw together these arguments to come to a critical view of the EP’s role in enhancing the democratic nature of the EU. Finally, I offer solutions to address the problem, advocating the adoption of a more intergovernmental approach to EU decision-making at the expense of the EP, or as a minimum avoiding any further expansion of the Parliament’s powers in future Treaties.
The rise and rise of the European Parliament
The EP’s predecessor, the Parliamentary Assembly of the European Economic Community began life in 1957 with the merging of the ECSC Joint Assembly, the EEC Assembly and the Euratom Assembly (Borchardt, 2010). Each new EU Treaty has seen the EP’s power increase, with Corbett, Jacobs, and Shackleton (p.4, 2011) elegantly describing the transformation of the EP as “from fig leaf to co-legislator”.
Kreppel (p. 7, 2002) points to two key events in the history of the EP that saw its power and influence increase: First, the inaugural direct election of its Members in 1979; and second, the agreement of the Single European Act in 1987, which introduced the co-decision procedure, giving the EP “partial decision-making power”. These events are also cited as seminal in the development of the EP by Corbett, Jacobs, and Shackleton (p.4, 2011).
The Lisbon Treaty marks the latest stage of the empowering of the EP, under which the ‘co-decision process’ between the EP and the Council becomes the default position for negotiating legislation (Verdun, 2013; Bonde, 2011) known as the ‘ordinary legislative procedure’. The EP also used changes associated with the Lisbon Treaty to secure a greater role in selecting the President of the Commission via the so called ‘Spitzenkandidaten process’ (Hobolt, 2014; Reestman, Eijsbouts and Beukers, 2014), which I consider in more detail later.
The EP is a powerful EU institution (Volacu, 2012), with MEPs playing a key role in relation to a majority of EU legislation. However, in some important areas it is not granted a full role under the ordinary legislative procedure. Instead under the special legislative procedures the Council decides on matters on the basis of unanimity, with the need to only obtain the consent of the EP to act (or in the case of foreign and common defence policy, not at all) (EUR-Lex, 2010). This affects the policy positions it adopts, a point covered later in the article.
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Assessing the European Parliament’s Democratic Credentials
Democracy, second-order elections, and the democratic deficit
There is no one, universally accepted definition of democracy (Osborne, p.3, 2012; Moghadam, 2013). Most academics and observers tend to agree that free and fair elections are an integral part of democracy (Dahl, 2005; Newberg and Carothers, 1996; Touraine, 1992; Rice, 2006). Delanty (2009) offers the helpful clarification that democracy must be grounded in a legal framework to function effectively. Touraine (1992) notes that there must be a genuine choice of Government, a theme taken up by Vachudova in her notion of “political competition” (p.3, 2005).
A considerable body of work exists looking at whether a given democracy can be considered as an embedded, ‘consolidated’ democracy (for example, Svolik, 2008; Schedeler, 2001; Diamond, 1994). There is little debate about whether elections to the EP are free and fair, which suggests it is thought to be a given that they are. This is understandable as most EU Member States are considered to be consolidated democracies (Spendzharova and Vachudova, 2011), although some lingering questions remain in relation to possible ‘backsliding’ by Member States such as Hungary away from liberal democracy (Spendzharova and Vachudova, 2011; Sedelmeier, 2014).
Although politicians or officials may be installed via free and fair elections (thereby opening the door to democracy), this is no guarantee they will act in a way that matches the will and expectations of citizens. The idea of representation acts as a compliment to the basic criteria to be considered a democracy (free and fair elections). Significant work has been undertaken looking at the extent to which citizens’ preferences are translated into action by the EP and the congruence between the views of citizens and MEPs (for example, Mair and Thamassen, 2010; Lefkofridi and Katsanidou, 2014). Congruence between European citizens and the Parliament is cited in positive terms for the institution’s representativeness (Mair and Thamassen, 2010).
Elections to the EP are widely considered to be ‘second-order’ in nature (Majone, 2014; Hix, Marsh, 2009; Bellamy, p.67, 2012; Sasmatzoglou, 2013; Jacobs, 2014; Bressanelli, 2014; Hobolt and Wittrock, 2011; Moravcsik, 2002). Mair and Thamassen (2010) explain that “elections [to the EP] are fought by national political parties and on mainly national issues [not European issues]” and that citizens often “‘abuse’ … elections [to the EP] to express a judgment on the incumbent national government”, the result of which is that the elections can be classed as ‘second-order’. European issues do not form a significant part of the public debate surrounding EU elections (Habermas, 2015; Majone, 2014), with one consequence of this paucity of debate being that few voters actual understand the role of the EP (Dinan, 2012).
A sizeable body of work is devoted to analysis of the EU’s perceived ‘democratic deficit’, looking at whether such a deficit exists, and if it does what the appropriate response is, if any (Zimmerman and Dür, p.63, 2012). But in spite of (or perhaps because of) the large amount of academic thinking addressing the EU’s democratic deficit, no one definitive definition exists, with the idea meaning different things to different people (Crombez, 2003). This is perhaps unsurprising, because although the Treaty on European Union contains “Provisions on democratic principles” (European Union, 2012), the citizens of different
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EU Member States value, weigh and implement principles such as democracy differently (Bellamy, p.67, 2012), the natural consequence of which is that different definitions of the democratic deficit exist.
Habermas’ (2015) notion of “the increasing distance separating the decision-making processes of the EU authorities from the political will formation of European citizens in their respective national arenas” is perhaps the best conception of the democratic deficit. The difficulty of holding MEPs accountable for their actions via democratic means, notably elections, must be at the core of our conception of the EU’s democratic deficit.
Original research
New empirical data obtained from a survey of MEPs bolster and challenge the arguments made here. Similar surveys have previously been undertaken (for example Hix, Scully, and Farrell, 2011). The survey was conducted via the internet. On 5 July 2015 all MEPs for whom addresses were readily available were emailed an explanation of the survey’s purpose with questions in English (see https://stephenvitkovitchepdata.wordpress.com/ for the questions put to MEPs, their responses, and the composition of the sample). A reminder was sent to MEPs on 20 July. A commitment was given that any responses would be anonymised and filtered by (1) Member State, and (2) European Political group. Seven of the eight questions put to MEPs were multiple choice.
Limitations
A total of 26 MEPs from 15 different Member States and from all 9 political groups (including non-attached members) provided responses to the survey. There are a number of limitations associated with the data. First, the sample size is small at only 3.46% of the total number of MEPs. Second, the data set does not include MEPs from nearly half of the Member States and for those that are included, the ratio of MEPs per Member State in sample does not correspond to their respective populations – for example, Belgian MEPs represent 11.54% of the sample, but Belgium only represents 2.22% of the EU’s population (Eurostat (2), 2015). Moreover, there are no MEPs from the fourth largest Member State, Italy, (Eurostat (2), 2015) and twelve other Member States. Thirdly, while it is welcome that all 9 political groups are represented in the data set, unsurprisingly the ratio of MEPs per political group in sample does not correspond to that in the EP as a whole.
The European United Left - Nordic Green Left and the Liberals and Democrats are overrepresented in the data set, largely at the expense of the underrepresented Socialists and Democrats. In spite of these significant limitations, the empirical data obtained is of some value for the purposes of my analysis and argument, although clearly any conclusions drawn on the basis of the data must be treated with caution and should be validated by existing published data.
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Assessment of the European Parliament’s democratic legitimacy
In assessing the democratic legitimacy of the EP, first we consider the issues of voter turnout and the second-order nature of elections to the body, and second the congruence of MEPs’ and citizens’ views.
Voter turnout and the second-order nature of elections to the European Parliament
The 2014 elections to the EP were supposed to be “different” – the EP boldly trumpeted the fact to Europe’s media and citizens (European Parliament (1), 2013). These claims were based in large part on the changes introduced by the Lisbon Treaty to the process for electing the President of the European Commission (Hobolt, 2014). Article 17(7) of the Treaty on European Union states that the European Council is obliged to “[take] into account the elections to the European Parliament” in “[proposing] to the European Parliament a candidate for President of the Commission” (European Union, 2012). The EP used this change to argue successfully for a significant role in the selection of the President of the Commission. Its rationale and vision were as follows: “In order to ‘Europeanise’ the elections and to boost the democratic legitimacy of EU decision-making, [the European] Parliament called on the political parties to nominate candidates for the Presidency of the [Commission] allowing for citizens to influence directly, through their vote in the European elections, the choice of the head of the European executive” (European Parliamentary Research Service, 2014). This was referred to as the Spitzenkandidaten process (Decker, 2014). The EP’s success in using the Spitzenkandidaten process to assert itself can be viewed as confirming Lake‘s argument (2003) that sovereignty is not necessarily fixed and can be established through practice.
Most academics agree on the second-order nature of elections to the EP, but much of the analysis completed in this regard is based on elections prior to those conducted in 2014. Can the 2014 elections to the EP still be considered second-order?
Academics and MEPs alike were certainly hopeful that the 2014 elections would be “different” and move beyond being considered a second-order affair. European People’s Party MEP Kostas Sasmatzoglou (2013) argued that the Spitzenkandidaten process would lead to elections “conducted in a true European setting … [with] greater interest on the part of the general public”. Hix and Crombez were hopeful of seeing “genuine ‘European’ elections” (Hix and Crombez, 2013). Holbolt (2014) explains that the EP expected the Spitzenkandidaten process to “increase interest and participation in European democracy”. One concrete fact we can look to in considering whether the 2014 elections remained second-order is the turnout. This fell slightly to an all-time low of 42.61% (European Parliament, 2014). Dinan (2014) rightly links citizens’ interest to voter turnout – if people are interested it is reasonable to assume (all other things being equal) that they will turn out to vote. This suggests that the 2014 elections did not mark a break with the past in terms of public interest. Nor did the 2014 elections offer a significant break in the pattern of the contest being fought on national issues by national parties, with the “political footprint” of EU level political groups left unchanged (Peglis, 2015). Research undertaken by the Commission (2014) suggests that the majority of national parties made their Affiliation
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to an EU level political group “visible in a limited way only” (original emphasis). This corroborates the European Policy Centre’s analysis that national parties campaigning in the elections did not focus on European issues (or the Spitzenkandidaten process) (European Policy Centre, 2014). Ultimately, the 2014 elections to the EP continued the established second-order pattern.
Certain academics (for example, Decker, 2014) argue that in spite of the (record) low turnout in the 2014 elections, the Spitzenkandidaten process enhanced the democratic legitimacy of the EU, amounting to “a democratisation of the European system of government” (Decker, 2014). There are strong arguments to the contrary. As Hobolt (2014) argues, for the EP’s grand statements about “a new era for European democracy” and a “concrete step in addressing the democratic deficit” (Schulz (1), 2014) to carry weight, voters need to have been aware of and bought into the process. A variety of data suggest this was not the case. Half the voters or more were aware of the Spitzenkandidaten process in only four of the fifteen Member States surveyed (Hobolt, 2014); in Germany, a Member State in which the process was relatively well known, only 15% of voters were aware that Jean-Claude Juncker was the European People’s Party Group’s candidate (Cameron, 2014); and only 5% of respondents to the EP’s post-election survey stated they voted “to influence the choice of Commission President” (European Commission, 2014). All of this points to a marked lack of engagement by the public with the Spitzenkandidaten process. It is hard to accept that the Spitzenkandidaten process marked a great breakthrough in democratisation and addressing the democratic deficit.
Confirming the continued second-order nature of European elections is important because if EU citizens do not select their MEPs (when they vote at all) on the basis of the role they will play in the EU’s legislative and decision-making process, but instead base their choice on other concerns – often national parties and national issues – then it renders the prospect of their MEPs effectively representing them remote. Elections to the EP are not the forum through which the public engage and express their views on EU issues (Mair and Thomassen, 2010), and MEPs’ chances of re-election by the public are less dependent than those of national Members of Parliament (MPs) on their performance in office (Rittberger, 2012). In simple terms there is no “strong electoral connection in the European Parliament” (Hix and Høyland, 2013). This is important as it gives MEPs more of a free hand than their counterparts in the Council to pursue their own ends without the brake or sanction provided by scrutiny by the electorate to keep them in check. In short, the second-order nature of European elections opens the door to less democratic outcomes, giving MEPs scope to adopt positions that are at odds with citizens’ views. The extent to which this occurs in practice is explored in the later section on congruence of citizens’ and MEPs’ positions.
Rather than considering the EP in isolation, the democratic legitimacy of the EP should be seen against Member States’ national Parliaments. Averaging a level of 68% across the EU during the period 2012-2014 (Eurostat (1), 2015), elections to the national Parliaments of the Member States benefited from a significantly higher voter turnout than elections to the EP for which the turnout was 42.61% in 2014 (European Parliament, 2014). The link between voter turnout and democratic legitimacy has been made by both academics
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and politicians (Euractiv (1), 2014, 7 August; Stylianou and Burn-Murdoch, 2014; Hill, 2006). When discussing the incorrect first estimate of the turnout in the 2014 European elections, which showed a slight increase, influential MEP Guy Verhofstadt stated that “the eighth legislature of the European Parliament will be more representative than the previous one as average turnout across Europe is an improvement on 2009” (Euractiv (2), 2014, 26 May). The survey data gathered suggest that a majority of MEPs agree that voter turnout is linked to representativeness and legitimacy, with 79% of respondents agreeing with the statement that ‘all other things being equal, a higher turnout in elections would lead to a more representative and legitimate legislature’. In addition, a majority of MEPs I surveyed (70%) agreed that it is national governments that EU citizens hold principally responsible for their well-being and quality of life, with only a small number (9%) suggesting that citizens hold the EP responsible for these matters. Elections to national Governments can be characterised as first-order (Lefevere and Van Aelst, 2014; Elgie and Fauvelle-Aymar, 2012), which should lead to better representativeness. The significantly higher voter turnout in elections to national parliaments than to the EP suggests that it is the former that benefit from greater democratic legitimacy. Moreover, the legitimacy gap suffered by the EP as compared to national parliaments is widened by the second-order nature of European elections. The pertinence of these conclusions will vary across the EU – voting is compulsory in Belgium and Luxembourg for example, leading to a high turnout in European elections, whereas turnout is incredibly low at 13.1% in Slovakia and 18.2% in the Czech Republic (as compared to 59.1% and 59.5% in national elections) (Eurostat (1), 2015). My arguments around legitimacy should resonate most in Member States where the gap between turnout in European and national elections is widest.
Congruence of MEPs’ and citizens’ views
In seeking to measure the congruence of the positions of the EP and EU citizens a number of academics have taken a two dimensional approach looking at (1) the left/right dimension, and (2) the pro-/anti-EU dimension.
A significant body of academic work argues that the EP does a good job of translating the preferences of the public in terms of the left/right dimension into legislative and policy positions (Mair and Thomassen, 2010; Lefkofridi and Katsanidou, 2014; Costello, Thomassen, and Rosema, 2012; Hix, Noury, and Roland, 2006). However, the picture is less definitive in relation to the pro-/anti-Europe dimension. Views in relation to the pro-/anti-Europe dimension can be equated with support for further EU integration. Delanty (2005) highlights the dominant academic perspective that the “EU is a multi-levelled polity that does not supersede the nation-state but exists alongside it in constantly changing relations”. In practice, EU integration can be viewed as a transfer of decision making power, or “sovereign rights” (Leuffen, Rittberger and Schimmelfennig, p.5, 2013) from a national level to a level governed by EU structures – Stone Sweet and Sandholtz (1997) describe this as the process of increasing “supranational governance - the competence of the [EU] to make binding rules in any given policy sector”. This transfer of decision making power to the EU level can be seen as deepening EU integration (Leuffen, Rittberger and Schimmelfennig, p.13, 2013).
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Academics by and large agree that congruence of the positions of the EP and EU citizens is less pronounced in terms of the pro-/anti-Europe dimension than in relation to the left/right dimension (Mair and Thamassen, 2010; Costello, Thomassen, and Rosema, 2012; Hix, Noury, and Roland, 2006; Walczak and van der Brug, 2012; Lefkofridi and Katsanidou, 2014). The survey data suggest a lack of congruence on the pro-/anti-EU dimension. A number of the multiple-choice questions put to MEPs were identical to those put by ComRes (2015) to a representative sample of 4,564 adults from different Member States during the period 12-19 December. This provides for a direct comparison between the views of the public and by MEPs, albeit based on a small sample, and allows us to draw some tentative inferences in relation to representation on the pro-/anti-Europe dimension.
The extent to which respondents favoured the EU having more, less, or about the same level of involvement in the affairs of their country provides a good basis on which to estimate congruence in relation to the pro-/anti-Europe dimension. MEPs displayed markedly more pro-EU tendencies than the public, with 43% agreeing that the EU should have more involvement in the affairs of their country as compared to 25% of the public. A greater proportion of the public is seemingly content with the present level of EU involvement in their country’s affairs – 33% as compared to only 17% of MEPs. Similar numbers of MEPs and the public agreed that the EU should have less involvement in the affairs of their country (39% and 43% respectively).
In relation to the future of the EU, MEPs were again more pro-EU than the public, with 36% stating themselves in favour of Europe becoming a single country: a United States of Europe, as compared to 19% of the public. And while 15% of the public supported the idea of disbanding the European Union, only 4% of MEPs took this position.
The data also suggest the public is more satisfied with the status quo than MEPS. Given the choice of a) Very dissatisfied; b) Fairly dissatisfied; c) Neither satisfied nor dissatisfied; d) Fairly satisfied; or e) Very satisfied, the most popular choice by the public was c) Neither satisfied nor dissatisfied at 38%. Only 9% of MEPs shared this opinion. Taken with the fact that more of the public were seemingly content with the present level of EU involvement in their country’s affairs (33% versus 17% of MEPs), this suggests a potentially significant mismatch between the public and MEPs in relation to contentment with the status quo.
We can conclude that the survey data gathered indicate that MEPs and the EP are more supportive of EU integration than European citizens and that congruence between the public and the EP in relation to pro-/anti-Europe positions is poor. These conclusions broadly corroborate the data and analysis of Lefkofridi and Katsanidou (2014), Costello, Thomassen, and Rosema (2012), and Hix, Scully and Farrell (2011).
An assertive European Parliament
The EP’s actions translate this lack of congruence into action at EU level by strongly asserting its interests and pressing for a greater role, thereby increasing power at the supranational level seemingly against the preferences of citizens.
The EP’s power has increased significantly with time (Kreppel, p.4, 2002; Mair and Thomassen, 2010; Kohler, 2014), in large part due to its success in fighting for it (Corbett,
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Jacobs, and Shackleton, p.4, 2011). Data gathered in 2010 by Hix, Scully, and Farrell (2011) suggest that the EP will continue to press for further powers - 75% of MEPs supported the proposition that the EP should have equal power with the Council in all areas of law-making, and 76% of MEPs supported the EP having the right to initiate legislation.
How is the EP able to assert its interests so effectively? MEPs’ chances of re-election do not rest as heavily as those of their national Government counterparts on the public policy positions they take, which gives them more scope to play a long-term game in negotiations with Council, holding out for more power with less likelihood of being punished by the electorate (Rittberger, 2012). As Leuffen, Rittberger and Schimmelfennig (p.74, 2013) highlight, the EP is “less sensitive to failure” than national governments, because citizens hold the latter responsible for EU failures. This argument would seem to be borne out by the fact that “MEPs are prepared to vote without regard to party programmes in order to enact legislation that promotes the common good of increasing EP influence on the course of European integration” (Rose and Borz, 2013). In short, somewhat counter-intuitively, the second-order nature of elections to the EP enhances the institution’s negotiating hand against the Council.
In addition, at the instigation of powerbrokers within the Parliament such as President Martin Schulz and Secretary General Klaus Welle (Dinan, 2014), the institution has often been successful in advancing its own interpretation of the Treaties – which of course plays to its advantage at the expense of national governments (Benedetto and Hix, 2007). The Spitzenkandidaten process provides a good example of this (Hobolt, 2014).
Some academics have argued that a lack of congruence in relation to the pro-/anti EU dimension is not necessarily significant in terms of a negative impact on the EP’s ability to represent citizens. Mair and Thamassen (2010) argue that a lack of congruence on “issues relating to European integration … is not necessarily a problem” because these issues are “largely intergovernmental”. In similar terms, Costello, Thomassen and Rosema (2012) argue that congruence on the pro-/anti-EU dimension is less important “as long as the majority of the European Parliament’s legislative workload relates to economic issues such as the regulation of the single market”. Such arguments are difficult to accept. In practice, much of the EU’s legislative work is about “the level of integration” rather than strict left/right issues (Kreppel, p.39, 2002). In its daily legislative activities the EP plays a fundamental role in deepening EU integration in advancing EU solutions over those at a national (or intergovernmental) level. Legislation adopted to regulate or harmonise the internal market has the effect of deepening EU integration, and the creation of EU-level organisations and structures clears the way for a stronger supranational influence (Jevnaker, 2015). A lack of congruence in relation to the pro-/anti-EU dimension does matter and has strong negative consequences for the EP’s representation of Europe’s citizens.
How do the Treaties incentivise the European Parliament?
Three factors influence an actor’s strategic choices: (1) preferences, (2) relations with other relevant actors, and (3) institutional constraints (Volacu, 2012). The previous section provided an analysis of MEPs’ preferences. Both the EP’s relations with other relevant actors and institutional constraints are defined by the Treaties, so this is the focus of our analysis.
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As Jose (2010) notes, “sovereign authority no longer rests exclusively with the state and its publicly accountable apparatuses, but is dispersed along several axes of organised power” – and for EU states, this includes sharing power with the EP. However, the Heads of State and Government agreeing the Treaty in 2007 maintained the primacy of the Council, and thereby the role of national Governments, in certain areas by retaining a special legislative procedure for EU decision making, under which the Council is “in practice, the sole legislator” (EUR-Lex, 2010), with the role of the EP “limited to consultation or approval depending on the case” (EUR-Lex, 2010). This gives the Parliament only “weak input” (Turk, p.69, 2012). The extent to which Member States are willing to share sovereignty in a given area is a function of importance they place on that issue (Leuffen, Rittberger and Schimmelfennig, p.51, 2013). States’ preferences in relation to areas in which they are content to share sovereignty will be shaped by domestic social actors (Moravcsik, 1997; Schimmelfennig, 2015), although the EU’s institutions and framework may cause states to alter how they view their own interests (Haas and Haas, 2002). The areas in which special legislative procedures involving decision making by unanimity in the Council and a reduced role for the EP are:
“Common foreign and security policy (with the exception of certain clearly defined cases which require qualified majority, e.g. appointment of a special representative); citizenship (the granting of new rights to EU citizens); EU membership; harmonisation of national legislation on indirect taxation; EU finances (own resources, the multiannual financial framework); certain provisions in the field of justice and home affairs (the European prosecutor, family law, operational police cooperation, etc.); harmonisation of national legislation in the field of social security and social protection” (Council of the European Union, 2014)
While the EP is excluded from or plays a reduced role in certain key areas of national sovereignty, it does possess significant power in the area of regulatory policies with “the steady expansion of regulatory policy-making at the European level” (Majone, 2014). Two areas in which the EP plays a more limited role under the Treaties – taxation, and security and defence policy – prove instructive as case studies in understanding the impact this has on the Parliament’s positions.
Moravcsik (2002) has examined the impact of the EU’s “fiscal constraints” noting that they have “important consequences”, but only goes as far as stating that those fiscal constraints mean that the EU has a limited capacity for “discretionary funding” and can be outspent by Governments seeking to reverse the effects of EU policies. The EP has very little power in relation to taxation, and any decisions on tax matters at EU level are on the basis of Directives, meaning they require transposition into national law (European Union, 2012). This represents an institutional constraint that influences the EP’s strategic policy choices. But while the EP has little responsibility for raising tax, a role that rests with national Governments, it plays a full role in agreeing the EU’s Budget and is able to call for increased spending while being absolved of the need to raise more money to fund it. The link between tax and spending is therefore broken, creating a skewed incentive structure for the EP. This skewed incentive is compounded by the fact that the second-order nature of elections to the body mean that the actions of MEPs in advocating more EU spending
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and a bigger EU Budget are not punished by voters when there is a lack of alignment with their own position.
The logical outcome of this disconnect is that MEPs campaign for increased EU spending – which they generally do (BBC, 2012, 23 October) – because they are not responsible for raising taxes that fund EU spending, but do have some control over the level and direction of EU spending. Greater EU spending means more power for the EP, and as Rose and Borz (2013) highlight, “MEPs are prepared to vote without regard to party programmes in order to enact legislation that promotes the common good of increasing EP influence on the course of European integration”. Advocating greater EU spending is at odds with the views of EU citizens, with a majority feeling their country should contribute less to the EU Budget (51%), and only 9% feeling that their country should contribute more (ComRes, 2015).
The EP has very limited influence in relation to security and defence policy (Leuffen, Rittberger and Schimmelfennig, p.55, 2013). Under Article 4(2) of the Treaty on European Union “national security remains the sole responsibility of each Member State” (European Union, 2012), a competence Member States guard jealously from encroachment by the Commission and the EP, as can be seen from the fact that the EU’s Renewed Internal Security Strategy (Council of the European Union, 2015) does not include the Commission’s “European Agenda on Security”. While the EP has a minor role in relation to security and defence policy it plays a full role as co-legislator in a majority of areas under the Lisbon Treaty (Hix and Høyland, 2013). And although the EP also has concluded an Interinstitutional Agreement with the Council that gives one of its Committees access to some sensitive documents (Rosén, 2015), the Parliament has less access to intelligence than national Governments, as exemplified by the comparison that while there is no EU intelligence service, the British Government alone spent £2.3bn in the 2010-2011 financial year on its intelligence agencies (Secret Intelligence Service, 2015). As such the EP has a less complete picture of the security threat facing the Member States and the EU, and may therefore underestimate the need to act to protect citizens’ security.
An analysis of the EP’s approach to the Commission’s proposal for a Directive on the use of Passenger Name Record (PNR) data for the prevention, detection, investigation and prosecution of terrorist offences and serious crime suggests that the EP’s limited role in relation to security and defence matters (but a fuller role elsewhere), and its lack of full information influence its strategic choices in relation to security matters. The EP is a co-legislator with the Council in the negotiation of data protection legislation. In order to enhance its power vis-à-vis the Council, which the EP has shown itself keen to do (for example see Rittberger (2012) or Decker (2014)), the Parliament has an incentive in the negotiations on PNR to place greater importance to the areas in which it plays a full role, namely data protection and citizens’ rights, and less importance on national security matters, which are the responsibility of Member States. Moreover, with less access to intelligence than the Council, the EP may not fully grasp national security threats. Negotiations on PNR do suggest the EP is privileging of citizens’ rights and data protection concerns over security (at least compared to the Council): the Parliament has blocked and voted against the Commission’s proposal (Charlemagne, 2014; European Parliament (2),
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2013), and has been entreated by the President of the European Council, Donald Tusk to accept the legislation in order to help protect the security of EU citizens (Euractiv, 2015, 14 January). British Prime Minister David Cameron goes as far as saying that in blocking PNR legislation “the European Parliament is letting us down in terms of keeping our people safe” (Holehouse, 2014).
In general terms the EP has sought to set itself up as a champion of data protection matters against national Governments, as can be seen from the Parliament’s President’s statement on following the body’s first reading of the Data Protection Package: “In a world where big data increasingly combined with big government, the European Parliament is leading the fight to ensure that people regain sovereignty over their privacy” (Schulz (2), 2014). As Servent and MacKenzie (2011) comment, “the [EP] has its own set of interests, which have often been at odds with those of the Council (especially in data protection)”. This championing of data protection concerns by the EP in the face of opposition by the Council on counter-terrorism and security grounds is arguably rational in terms of maximising the Parliament’s power. The EP ultimately weighs concerns differently to the Council as can be seen by its blocking of intra-EU PNR and the reaction this has drawn from the Council (Euractiv, 2015, 14 January; Holehouse, 2014). It is questionable whether the EP’s championing of data protection matters is in line with the preferences of citizens. 66% of the public tend to trust or totally trust national public authorities to protect their data – a higher level of trust than is placed in banks and financial institutions (56%), European institutions (51%), and Shops and stores (40%) (Eurobarometer, 2015); and more EU citizens (13%) believe terrorism rather than civil liberties (6%) should be one of the top three priorities for their government at the moment (ComRes, 2015).
The above case studies suggest that the fact that the Parliament is not an equal partner with the Council may affect the policy positions it adopts, given the EP’s tendency to fight for further powers (Corbett, Jacobs, and Shackleton, p.4, 2011). The slightly more consensual approach in terms of balancing data and security concerns adopted by the EP when it gained some limited powers in relation to security under the Lisbon Treaty (Servent and MacKenzie, 2011) seems to support this analysis. Moreover, the survey data collected show that 87.5% of MEPs agreed that the adoption of the ordinary legislative procedure as a basis for decision making in relation to matters currently governed by special legislative procedures such as common foreign and security policy, harmonisation of national legislation on indirect taxation, and harmonisation of national legislation in the field of social security and social protection would lead to the EP taking a different position on these and other EU matters, with 50% stating this would be to a significant extent, and 37.5% stating this would be to some extent.
Is there a solution to the problem?
The EU suffers from a democratic deficit, and that this is largely due to the role of the EP. The charge sheet against the EP is a serious one: it suffers from a lack of legitimacy as a result of low turnout in European elections (as compared to national parliaments), and the fact that the elections are second-order affairs; it provides unsatisfactory representation of citizens’ views in relation to pro-/anti-EU matters, being significantly more supportive of
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further integration than the public; and it suffers from a skewed incentive structure which can lead to it adopting positions that are at odds citizens’ preferences or puts their security at risk (Euractiv, 2015; Holehouse, 2014). The EP undermines, rather than enhances the EU’s democratic legitimacy. The question is, what to do about it?
Rittberger (2012) also identifies that the EU has a “legitimacy gap” and suggests that a solution will either involve strengthening the EP or the role of national Parliaments in EU decision making. On the face of it, strengthening the EP would seem a logical way to improve the EU’s democratic legitimacy. The argument runs that because of its unique position as “the only directly elected European institution” (Schulz, 2015), the EP benefits from democratic legitimacy (Borchardt, 2010), and therefore giving it more power necessarily creates more democratic outcomes. However, arguments that favour further empowerment of the EP are difficult to accept. Direct elections to the EP and past changes to empower it as an institution have failed to deliver democratic legitimacy (Majone, 2014; Menon, 2014) – there is little reason to expect a different outcome with further empowerment of the Parliament.
The public at large is hostile to further EU integration (Lekofridi and Schmitter, 2015) with 76% of the public supporting either maintaining the current level of EU involvement in their country’s affairs, or reducing the level of involvement (ComRes, 2015). Further EU integration is likely to come at a high cost to national “autonomy and identity” (Leuffen, Rittberger and Schimmelfennig, p.268, 2013) and cause further politicisation of and opposition to the EU. Consequently, further empowerment of the EP seems against the will of citizens and may well lead to increased disenfranchisement with the EU, which could exacerbate its democratic deficit.
National parliaments and governments benefit from greater democratic legitimacy than the EP: national elections on the basis of which they are formed benefit from a higher turnout than their European counterparts (Eurostat (1), 2015; European Parliament, 2014), and can be characterised as first-order (Lefevere and Van Aelst, 2014; Elgie and Fauvelle-Aymar, 2012). Providing a greater role for national parliaments in EU decision-making could enhance the democratic legitimacy of the EU, as has been proposed by Cameron (2013), Menon (2014) and others. This would also have the positive effect of ensuring a stronger link between revenue raising (conducted at a national level) and EU spending. Arguably, prescribing how national parliaments need to be involved in EU decision making would not comply with the principles of subsidiarity and proportionality, runs counter to Protocol 1 to the Treaties, and might be opposed by certain national parliaments such as the UK – which has opposed the EP’s attempts to create a joint scrutiny arrangement for Europol placing obligations on national parliaments (Bradley, 2014). The inescapable conclusion is to advocate a more intergovernmental approach to EU decision-making, thereby privileging the position of national governments, with a reduced role for the EP. This would leave individual Member States to decide on the appropriate level of scrutiny individual parliaments want to maintain in relation to EU matters. Adopting a more intergovernmental approach to EU decision-making at the expense of the EP would also represent a more future-proofed strategy for enhancing the democratic nature of the EU because European elections suffer from a more rapidly increasing rate of abstentions than national elections (Stylianou and Burn-Murdoch, 2014).
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In reality, the adoption of a more intergovernmental approach to EU decision-making at the expense of the EP is unlikely. While Member States adopted an approach to dealing with the Eurozone crisis, which as “overwhelmingly intergovernmental rather than supranational” (Scicluna, 2012) represented a one-off – the last four decades have seen an empowering of the EP with successive Treaties. It seems unlikely that Heads of State and Government will buck the trend and adopt a more intergovernmental approach to EU decision-making at the expense of the EP. As noted, the public appears relatively content with the institutional setup of the EU as it stands; while a more intergovernmental approach would enhance the democratic nature of the EU, a more realistic goal would be to avoid expanding the power of the EP in any future Treaty change, which would also have the benefit of alignment with the preferences of a significant proportion of the public.
Conclusions
Although notions of democracy and the EU’s democratic deficit are contested, questions remain about the EP’s democratic legitimacy as part of the EU’s decision making processes (Turk, p.62, 2012). The EP suffers from a lack of legitimacy because of the low turnout in European elections as compared to national parliaments, which is compounded by the fact that the elections are second-order affairs – a problem the Spitzenkandidaten process failed to solve. The data I gathered corroborates previous findings (Lefkofridi and Katsanidou, 2014; Costello, Thomassen, and Rosema, 2012; and Hix, Scully and Farrell, 2011) in showing the Parliament to be significantly more supportive of further EU integration than the public, which has significant negative consequences for the institution’s representation of citizens. And finally, the EU’s institutional setup creates a skewed incentive structure which can lead to the EP adopting positions that are at odds with citizens’ preferences or put their security at risk. All this leads to the conclusion that the EP does not enhance the democratic nature of the EU, and instead to advocate the adoption of a more intergovernmental approach to EU decision-making at the expense of the EP. However, in reality avoiding any further expansion of the Parliament’s powers is the best that can be hoped for. Looking to the future and the possible Treaty change being discussed to further Eurozone integration once the British referendum on EU Membership is out of the way (Watt and Traynor, 2015), it seems unlikely that discussion about the role of the EP will go away. Further research into the democratic credentials of the EP could focus on a more in depth assessment of the congruence of citizens’ and MEPs’ views on EU integration, providing for a more definitive assessment of the extent of the mismatch between the preferences of the two groups. Given there is virtually no prospect of the European Parliament being disbanded (absent a total break-up of the EU), further work to consider how to ensure better alignment between the views of citizens and MEPs in relation to EU integration would be valuable – for example, tackling the “cartelisation” of EP Groups in favour of further EU integration, as highlighted by Rose and Borz (2013) – in short moving from diagnosis to cure.
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• Sasmatzoglou, K. (2013) ‘2014 European elections: European political parties, presidential candidates and the pan-EU campaign’; European View, Vol. 12, pp. 67-74
• Schedler, A. (2001) ‘Measuring Democratic Consolidation’; Studies in Comparative International Development, Vol. 36, No. 1, pp. 66-92
• Schimmelfennig, F. (2015) ‘Liberal intergovernmentalism and the euro area crisis, Journal of European Public Policy’; Vol. 22, No. 2, pp. 177-195
• Schulz, M. (1) (2014) ‘Juncker and the Spitzen-revolution’; 23 July [online] accessed at: https://www.linkedin.com/pulse/20140723091355-239623471-juncker-and-the-spitzen-revolution on 1 August 2015
• Schulz, M. (2) (2014) ‘Schulz on European Parliament’s approval of the Data Protection Package’; 12 March [online] accessed at: http://www.europarl.europa.eu/former_ep_presidents/president-schulz/en/press/press_release_speeches/press_release/2014/2014-march/html/schulz-on-european-parliament-s-approval-of-the-data-protection-package on 20 August 2015
• Schulz, M. (2015) ‘Informal meeting of the Heads of State and Government - Speech by Martin Schulz, President of the European Parliament’; 12 February [online] accessed at: http://www.europarl.europa.eu/the-president/en/press/press_release_speeches/speeches/speeches-2015/speeches-2015-february/html/informal-meeting-of-the-heads-of-state-and-government---speech-by-martin-schulz--president-of-the-european-parliament;jsessionid=8886CE9DE17EBD0C01850FB9864F67C4 on 25 July 2015
• Scicluna, N. (2012) ‘EU Constitutionalism in Flux: Is the Eurozone Crisis Precipitating Centralisation or Diffusion?’; European Law Journal, Vol. 18, pp. 489-503
• Secret Intelligence Service (2015) ‘FUNDING AND FINANCIAL CONTROLS’; [online] accessed at: https://www.sis.gov.uk/about-us/legislation-and-accountability/funding-and-financial-controls.html on 19 August 2015
• Sedelmeier, Ulrich (2014) ‘Anchoring democracy from above? The European Union and democratic backsliding in Hungary and Romania after accession’; Journal of Common Market Studies, Vol. 50, No. 1, pp. 105-121
• Servent, A., and MacKenzie, A. (2011) ‘Is the EP Still a Data Protection Champion? The Case of SWIFT’; Perspectives on European Politics and Society, Vol. 12, No. 4, pp. 390-406
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Assessing the European Parliament’s Democratic Credentials
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ROMANIAN JOURNAL OF EUROPEAN AFFAIRS Vol. 15, No. 4, December 2015
In the Shadow of Grexit: A Short Story of Long (and Failed) Negotiations, January-July 2015
Antonis Klapsis1
Abstract: The article gives an outline of the failed strategy followed by the Greek government under Alexis Tsipras during the six-month negotiations with Greece’s creditors (January-July 2015). It is argued that Mr. Tsipras’ government had no concrete plan during these negotiations and that its moves were largely based on a combination of ignorance, misconceptions, and wishful thinking. The prolongation of negotiations was made at the expense of creating huge problems for the Greek economy and making the Greek position worsen with each passing day. The final blow was the proclamation of the Greek referendum which was held on 5 July 2015. Because of this failed strategy, Greece was found at the edge of default and exit from the Eurozone, a development which was avoided literally at the last moment.
Keywords: Greece, Economic crisis, European Union, Eurozone, Grexit, Greek crisis, Greek referendum, SYRIZA, Alexis Tsipras
1. Introduction
In the last few months, developments in Greece have attracted international attention. The victory of the Coalition of the Radical Left (better known by its acronym SYRIZA) in the elections held on the 25th of January 2015 led to the formation of a coalition government with its leader, Alexis Tsipras, as Prime Minister. This article tries to describe in a nutshell the challenges that the SYRIZA-led government faced in the months that followed the formation of Mr. Tsipras’ cabinet especially in relation with the great economic and financial problems affecting the country. More specifically, it will be argued that in the first six months after its establishment, Mr. Tsipras’ government failed to deliver its big promises, including the most important task it has given to itself: to successfully negotiate with Greece’s creditors and to reach a favourable agreement with them for Greek’s interests.
1 Antonis Klapsis, Ph.D., is an Adjunct Lecturer at the Hellenic Open University and at the Open University of Cyprus. He is the author of five books and co-author of another, and has published numerous papers in distinguished peer-reviewed international academic journals. His latest book An Unholy Alliance: The European Far Right and Putin’s Russia was released in English in May 2015. E-mail: [email protected].
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In the Shadow of Grexit: A Short Story of Long (and Failed) Negotiations, January-July 2015
2. The origins: Economic crisis and political upheaval
A crisis before the economic crisis
Unlike all its Northern Balkan neighbours, during the Cold War, Greece remained an organic part of the Western world. In May 1979, Greece signed an Accession Agreement to the European Economic Community (i.e. the predecessor of the European Union). Less than two years later, on the 1st of January 1981, Greece officially became the 10th member state of the European Economic Community. Being a member of this Community and of the European Union starting 1993, Greece was immensely benefited. One of the most important benefits –yet not the only one– was the influx of money from European funds most of which were allocated for the improvement of the country’s poor infrastructure. In the first three decades of Greece’s participation in the European integration process, the standard of living of the Greek people improved immensely and Greece was among the 30 richest countries in the world.
Chart 1 – Greece, GDP (in billion euros)
However, under the surface of prosperity, structural problems became bigger and bigger: the state expanded its economic activities (the phenomenon of economic statism became endemic) whereas the private sector of economy shrank, political clientelism and populism prevailed, public administration was ineffective, tax evasion became a menace for public revenues, productivity rates fell drastically, public debt grew immensely, the pension system gradually became unsustainable. These phenomena were the results of the establishment of ‘a misleading model of political, economic and institutional development’2.
2 Pantelis Sklias, The Deep Roots of the Crisis, in: Vít Novotný (ed.), From Reform to Growth. Managing the Economic Crisis in Europe (Delft: Eburon, 2013), pp. 226-234.
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Chart 2 – Greece, Government debt to GDP ratio, 1981-2010
The first bailout (2010)
Because of the abovementioned structural inefficiencies, Greece was severely hit by the global financial crisis that started in 2007 after the bursting of the US housing bubble. In April 2010, facing the prospect of default, the socialist Prime Minister George Papandreou accepted a bailout package of roughly 110 billion euros. This financial assistance agreement (commonly known as the ‘first Memorandum’) was concluded between the Greek government on one hand, and the European Commission, the European Central Bank and the International Monetary Fund on the other hand. In exchange for this huge amount of money, the Greek government promised to undertake measures for Greece’s fiscal consolidation and to implement a series of deep and much-needed reforms.
Mr. Papandreou’s government followed only the first part of the agreement. Harsh austerity measures were indeed implemented, including cuts in wages and pensions, which inevitably led to the decrease of the standard of living of many Greeks. However, structural reforms were never implemented in the way they should have; thus Greece was trapped in a vicious circle of recession and depression. To make a long story short, the medicine given (more accurately: imposed) to Greece by its creditors was not absolutely the right one to cure the illness – there were mistakes in the drafting of the program, and that was mainly the fault of Greece’s creditors. But on the other hand, the treatment was never fully implemented by the Greek side – and that was mainly the fault of the Greek government.
The second bailout (2012)
Implementing an imperfect program in the wrong way was the recipe for failure. In November 2011, Mr. Papandreou’s single party government was replaced by a coalition government between the socialists (PASOK), the centre-right New Democracy, and the populist right-wing National Orthodox Rally (LAOS). Given the critical situation of the Greek economy, in March 2012, the coalition Greek government accepted the conclusion
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In the Shadow of Grexit: A Short Story of Long (and Failed) Negotiations, January-July 2015
of a second bailout agreement (i.e. the ‘second Memorandum’) which valued around 130 billion euros3. In the elections that took place the same year in May, the three parties involved in the coalition government paid a huge price: New Democracy took the first place but with a historic low percentage (18.85%), PASOK under a new leadership lost more than two thirds of its voters in relation to the elections of October 2009 (from 43.92% to 13.18%), and LAOS did not manage to reach the threshold of 3% and thus did not secure any seats in the Parliament even though it had withdrawn from the coalition government as early as February 2012. On the contrary, the parties that opposed the two memoranda were quite successful: for the first time in its history SYRIZA got the second place with 16.78% quadrupling its percentages in relation to the elections of 2009, whereas in its first appearance ever in elections the populist right wing party of Independent Greeks got 10.61%4. The inability to form a government led to new elections in June 2012 in which the new political landscape was confirmed: New Democracy was again first with 29.66%, SYRIZA was second with 26.89%, PASOK third with 12.28%, the Independent Greeks fourth with 7.51%; other parties followed, three of which managed to secure seats in the Parliament (the neo-Nazi Golden Dawn, the moderate Democratic Left, and the Communist Party)5.
Chart 3 – Greece, Unemployment rate
After the elections of June 2012 a coalition government composed of New Democracy, PASOK and the Democratic Left with the former’s leader, Antonis Samaras, as the Prime Minister was formed6. The new government was more successful than its predecessors meaning that the number of reforms that were implemented was a bit higher, primary surpluses in the state budget were achieved, the economy was stabilized, and by the end
3 Stephen Castle, With Details Settled, a 2nd Greek Bailout Is Formally Approved, 14 March 2012, accessed at http://www.nytimes.com/2012/03/15/business/global/greece-gets-formal-approval-for-second-bailout.html?_r=0 on 30 July 2015. 4 Ministry of Interior and Administrative Reconstruction, Results of the General Elections of 6 May 2012 (in Greek), accessed at http://ekloges-prev.singularlogic.eu/v2012a/public/index.html#“cls”:”main”,”params”: on 28 July 2015. 5 Ministry of Interior and Administrative Reconstruction, Results of the General Elections of 17 June 2012 (in Greek), accessed at http://ekloges-prev.singularlogic.eu/v2012b/public/#“cls”:”main”,”params”: on 28 July 2015. 6 The Democratic Left withdrew from the coalition government in June 2013.
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of 2014 the prospect of returning to economic growth after six years of recession became obvious. However, it did not manage to tackle the real sources of the problem. Thus, its achievements were far from enough to heal the deep wounds that the recession had caused which had led to a cumulative decrease of the Greek GDP by approximately 25% and to unemployment rates of over 25% (which was more than double for the young people).
From the very first day of the existence of Mr. Samaras’ government, SYRIZA (as well as the Independent Greeks and the rest of the opposition parties) bitterly opposed the austerity policies which were associated with the implementation of the ‘Memoranda’. In fact, SYRIZA was not only talking against the ‘Memoranda’ but went a step further: the ‘pro-Memoranda’ coalition government was described as nothing more than a puppet in the hands of Greece’s creditors. According to the same analysis, the ‘Memoranda’ had imposed a sort of junta, a term with great historical significance in Greece as it is associated with the military dictatorship of 1967-1974. If –as SYRIZA was arguing– the ‘Memoranda’ were an instrument in the hands of Greece’s creditors to impose their will on the Greek people, then it was no surprise that those who were implementing the ‘Memoranda’ were described as Quislings and German collaborators: again the symbolism was profound given the suffering of the Greek people during the period of the Nazi occupation of Greece (1941-1944) and the fact that in the public mindset, Germany was now thought to be the main driving force behind the austerity policy. SYRIZA’s officials often described Greece as a debt colony and the Greek public debt as unsustainable: the latter would become sustainable only after a deep haircut. Some even talked openly about the prospect of Greece stopping from paying its debts even if that meant that it would have to exit the Eurozone. In the same context, Mr. Tsipras himself repeatedly stated that the decisions taken by Mr. Samaras’ government (e.g. concerning privatizations of state property) were not binding for Greece and that any new government (i.e. a government of SYRIZA) would not feel obliged to fulfil any agreements associated with the policies of its predecessors.
3. The SYRIZA-led government
January 2015 elections
Only a few months after the June 2012 elections, SYRIZA asked for new elections claiming that Mr. Samaras’ government no longer had the support of the majority among Greek people. For some time, SYRIZA’s tactics did not seem to pay off. When, in March 2013, the crisis hit Cyprus, a country closely related to Greece, SYRIZA received a severe blow in its popularity. However, not only that it quickly managed to recover but by the end of 2013 it was firmly established in first place of the polls, ahead of New Democracy7. The results of the May 2014 European Parliament elections confirmed the predictions. For the first time ever SYRIZA took the first place in a major election with a lead of approximately 3.8% from New Democracy8. It was not a triumph, but it was a clear victory. The demand for national elections was once again put forward, now with even more emphasis.
7 Yiannis Mavris, The Fluctuation of SYRIZA’s Post-Electoral Influence (2012-2014) (in Greek), 25 January 2014, accessed at http://www.mavris.gr/3843/syriza-vote-share-2012-14/ on 31 May 2015. 8 Ministry of Interior and Administrative Reconstruction, Results of the European Parliament Elections of 25 May 2014 (in Greek), accessed at http://ekloges-prev.singularlogic.eu/may2014/e/public/index.html#“cls”:”main”,”params”: on 29 July 2015.
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Mr. Tsipras had a weapon in his hands: the election of the new President of the Hellenic Republic. By not giving his consent to the government, the election by the Parliament was almost impossible to happen. As a result of the Parliament’s inability to elect a new President of the Republic, national elections were proclaimed for 25 January 2015. Even though all the polls agreed that SYRIZA would easily win the elections, Mr. Tsipras and other party officials and leading personalities did not refrain from giving great promises to the Greek electorate which were included in the so-called ‘Thessaloniki Programme’9: end of the ‘Memoranda’ and the austerity policies related to them, immediate increase in public investments, increase in salaries and pensions, decrease in taxes for the vast majority of the Greek population, immediate relief measures for those in need. The Greek voters were eager to accept SYRIZA’s proposals: in the elections SYRIZA got 36.34% and thus secured first place, 7.5 points ahead of New Democracy which came second10.
The left-right coalition government
Despite its big victory, SYRIZA did not manage to secure an absolute parliamentary majority: it needed at least 151 seats and it had only 149. The solution was given in a seemingly surprising and paradoxical way: a coalition government between SYRIZA and the Independent Greeks was formed. The new government, with Mr. Tsipras in the position of Prime Minister, was self-described as a ‘government of social salvation’. From the very first days of its formation, the new government announced an anti-austerity programme, including a freeze on pension cuts, a property tax overhaul, free electricity to those who have been cut off, reinstating jobs and raising the minimum wage. In his first speech before the Parliament, Mr. Tsipras said that his government did not have the right to prolong the five-year bailout agreement as this had foisted austerity on Greece, and felt a duty ‘not to disappoint’ those who had voted him into power11.
The new Prime Minister set as the first priority of the coalition government between SYRIZA and the Independent Greeks the healing of the ‘big wounds’ that the bailout had caused to the Greek economy and to the Greek society. He also reaffirmed the promises given before the elections about tackling the ‘humanitarian crisis’. ‘We see hope, dignity and pride returning to Greek citizens. Our obligation and duty is not to disappoint them’, he told in his inaugural speech before the Parliament. ‘We realise that negotiations [with Greece’s creditors] won’t be easy … but we have faith in our struggle, because justice is on our side’. In this context, the new government refused to accept the prospect of the extension of the bailout agreement and set as a goal the conclusion of some kind of bridging loan with Greece’s creditors to tide the country over12.
9 SYRIZA, The Thessaloniki Programme, accessed at http://www.syriza.gr/article/SYRIZA---THE-THESSALONIKI-PROGRAMME.html#.VW7Sbs_tmko on 29 May 2015. 10 Ministry of Interior and Administrative Reconstruction, Results of the General Elections of 25 January 2015 (in Greek), accessed at http://ekloges-prev.singularlogic.eu/v2015a/v/public/index.html#“cls”:”main”,”params”: on 29 July 2015. 11 Helena Smith, Tsipras Favours Greek Jobless over Creditors in Defiant Policy Speech, 8 February 2015, accessed at http://www.theguardian.com/world/2015/feb/08/greece-prime-minister-alexis-tsipras-unveil-anti-austerity-plan-parliament on 30 May 2015. 12 Ibid.
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A populist hybrid
The formation of the government between SYRIZA and the Independent Greeks appeared to be strange. The coalition between a radical leftist with a nationalist right-wing party seemed to be rather incongruous. However, in reality they weren`t representing such an unlikely political couple as there was a strong uniting force: their common fierce ‘anti-Memoranda’ rhetoric and, most importantly, their populist background. They both blamed the bailout agreements for all the malice affecting Greece ever since 2010, forgetting that the bailout was not the cause but rather the symptom of the economic crisis. For those who deeply understood the power of populism in Greek politics13, the pairing between SYRIZA and the Independent Greeks came as no big surprise. After all, the cooperation between them had been often discussed long before the elections held in January 2015.
This populist hybrid was also fuelled by the power of voluntarism. The partners were absolutely convinced that they could almost immediately reverse the negative effects of the crisis, and at the same time secure a much better deal with Greece’s creditors including a haircut of the Greek public debt. Their reasoning was breathtakingly simplistic: with their vote the Greek people had decided so – and since the Greek people had decided so it would miraculously happen no matter what the others (including the creditors themselves) thought. The establishment of a special Audit Committee of Public Debt by the SYRIZA-Independent Greeks majority in the Greek Parliament was a typical example proving its mission was to examine what proportion of Greece’s public debt could be unilaterally considered ‘odious’ and therefore ‘illegitimate’14: it was no surprise that in mid-June 2015, the Audit Committee announced that according to its preliminary findings the Greek debt was ‘illegal, illegitimate and odious’15.
4. A negotiating fiasco
Dealing with Greece’s creditors
It was in this context that Mr. Tsipras’ government started negotiations with Greece’s creditors. What the newly formed government wanted was a ‘bridge programme’ that would give them the ‘fiscal space’ a ‘sincere negotiation’ was required16. The flamboyant new Minister of Finance, Yanis Varoufakis, went a step further: ‘All we’re asking is for’, he announced, ‘an opportunity to put together a proposal that will minimize the costs of Greece’s loan agreement and give this country a chance to breathe again after policies that
13 See for example Takis S. Pappas, Populism and crisis politics in Greece (Houndmills: Palgrave Macmillan, 2014). 14 The Press Project, Greece Establishes Audit Committee of Public Debt, 18 March 2015, accessed at http://www.thepressproject.net/article/74607/Greece-establishes-Audit-Committee-of-Public-Debt on 30 July 2015. 15 A. Makris, Audit Committee: Greece’s Debt “Illegal, Illegitimate and Odious, 17 June 2015, accessed at http://greece.greekreporter.com/2015/06/17/audit-committee-greeces-debt-illegal-illegitimate-and-odious/ on 30 July 2015. 16 Helena Smith, Tsipras Favours Greek Jobless over Creditors in Defiant Policy Speech, 8 February 2015, accessed at http://www.theguardian.com/world/2015/feb/08/greece-prime-minister-alexis-tsipras-unveil-anti-austerity-plan-parliament on 30 May 2015
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In the Shadow of Grexit: A Short Story of Long (and Failed) Negotiations, January-July 2015
created massive social depravity’17. Mr. Tsipras’ government was not asking for money but for time.
However, it very soon became obvious the Greek government lacked any serious preparation in order to present coherent proposals during the negotiations with the creditors. On top of that, the people of SYRIZA showed total ignorance and disrespect for any kind of procedures to be followed in the European Union. On the contrary, they remained trapped in the catastrophic misconception that a discussion on technical matters was of minimal importance, and that a solution at the top political level would be found and would be enough to overshadow any other technical details. This was one of the reasons why Mr. Tsipras and his Ministers repeatedly misinterpreted the intentions of Greece’s creditors and time after time falsely prophesised the conclusion of a final agreement with the European Union, the European Central Bank and the International Monetary Fund. The only agreement that Mr. Tsipras secured was the one concluded in the Euro group at February the 20th, 2015 which, in fact, foresaw nothing more than the extension of the –much-hated by SYRIZA– ‘second Memorandum’ (which was now referred officially as the Master Financial Assistance Facility Agreement) for another four months18. The negotiating tactics of the newly-formed Greek government were not only inefficient, but it also blew its credibility: Mr. Varoufakis’ inappropriate and provocative behaviour, exhibited when secretly recording his fellow Finance Ministers during the Eurogroup meetings19, among others, proved to be an additional heavy burden for Greece’s position.
Alternative solutions?
Mr. Tsipras’ strategy was based on the assumption that SYRIZA’s victory in the Greek elections would not be an isolated incident in European politics, but rather just the first step towards a radical change in the political scene at a pan-European level. SYRIZA’s leaders were convinced that their success would create a left-wing political avalanche that would sweep away many of the pro-austerity governments in other European countries. According to the same analysis, even if this left political turn did not take place immediately in Europe, Greece could still count on the creation of an ‘alliance’ of the Southern European countries, like Italy, Spain, Portugal and Cyprus, which all faced similar economic difficulties and thus had every reason to form a common front against the Germans and the other members of the ‘inflexible’ Northern bloc within the European Union. And even if this did not happen, then Athens had other alternative solutions in order to secure diplomatic and financial backing: Russia was the first option, while China followed.
17 Liz Alderman, Greece’s Feisty Finance Minister Tries a More Moderate Message, 29 January 2015, accessed at http://www.nytimes.com/2015/01/30/business/international/greeces-feisty-finance-minister-tries-a-more-moderate-message.html?_r=0&module=ArrowsNav&contentCollection=International%20Business&action=keypress®ion=FixedLeft&pgtype=article on 25 May 2015. 18 Council of the European Union, Eurogroup Statement on Greece, 20 February 2015, accessed at http://www.consilium.europa.eu/el/press/press-releases/2015/02/150220-eurogroup-statement-greece/ on 28 May 2015. 19 George Georgiopoulos, ‘Greece’s Varoufakis Admits to Taping Eurogroup Meeting’, 24 May 2015, accessed at http://www.reuters.com/article/2015/05/24/eurozone-greece-varoufakis-idUSL5N0YF0CG20150524 on 25 July 2015.
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In reality all these were nothing more than products of wishful thinking. Despite SYRIZA’s victory, the political landscape over the rest of Europe remained rather stable and even if it changed, it was in the opposite direction than SYRIZA hoped (see for example the results in the recent parliamentary elections in Great Britain and the even more recent presidential elections in Poland). Similarly, no ‘alliance of the South’ was ever created. On the contrary, Greece was repeatedly found completely isolated at the European level, as no South European country ever supported any of the Greek positions. The concept of the Russian or the Chinese alternative proved to be equally illusionary. Despite the efforts of Athens, neither Moscow nor Beijing appeared willing to provide any real help. Once more, Mr. Tsipras’ strategy was absolutely unsuccessful as it became clear that the only real alternative for Greece was a deal with the ‘bad guys’: the European Union, the European Central Bank and the International Monetary Fund. The problem was that a lot of time had been wasted and the agreement would become even more painful for the Greek side with each passing day. To make matters worse, even within SYRIZA there was not an absolute consensus as to whether Greece’s participation in the Eurozone was preferable or not: many prominent members of the party (including Members of the Parliament or even acting Ministers) seemed to prefer a Grexit and a return to the national currency.
External and internal enemies
SYRIZA’s inability to deliver its great promises concerning a favourable compromise with Greece’s creditors, plunged the country into deep recession. A general feeling of uncertainty prevailed. As a result, the Greek economy faced a tremendous lack of liquidity as billions of euros were withdrawn from banks and deposits were drastically diminished. After a very long time the discussion about the possibility of Greece exiting the Eurozone and returning to the drachma became once again a matter of international concern. For the people of SYRIZA the explanation for this dramatic situation was utterly simplistic and conspiracy based: it was part of a plot of Greece’s debtors to overthrow the newly elected Greek government. This approach was consistent with the populist naïveté of a great part of SYRIZA’s leaders. Since Greece’s creditors wanted to continue the implementation of the old ‘Memoranda’ and to impose new harsh austerity measures to the Greek people, it was only natural that they wanted to get rid of Mr. Tsipras and his government.
Moreover, Mr. Tsipras publicly stated that the creditors had deliberately deceived his government as far as the real meaning of the agreement of 20 February 2015 was concerned20.
SYRIZA’s narrative was founded on the existence of an external enemy. It was a convenient solution for the Greek government not to undertake any responsibility for its inability to secure a viable agreement. However, the external enemy alone was not enough. It had to be connected with an internal one which, equally convenient for Mr. Tsipras’s government, was to be impersonated anyone who criticized its tactics: those who did not support the government were ‘evidently’ not behaving in a patriotic way and on
20 Enikos.gr, Full Transcript of Alexis Tsipras Interview to enikos.gr, 28 April 2015, accessed at http://en.enikos.gr/politics/28061,Full-transcript-of-Alexis-Tsipras-interview-to-enikosgr.html on 30 July 2015.
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the contrary they undermined the ‘national effort’. The ‘Troika of the exterior’ supposedly had an equivalent ‘Troika of the interior’ which was comprised by the three pro-European parties of the Greek Parliament, i.e. New Democracy, PASOK and the moderate centre-left To Potami (The River). The Quislings’ theory, which had been very popular among SYRIZA members in the past, was once again openly used.
5. Anomalous landing
Promises and reality
No matter what the explanation given by SYRIZA was, the truth was that they could not deliver the unrealistic promises that they had given the previous years and most importantly right before the elections of 25 January 2015. SYRIZA members had to learn the hard way that money did not grow on trees. In the meantime the situation of the public treasury was becoming hopeless as a result of the collapse of public revenues and of the deficits created by the economic uncertainty caused by the prolonged negotiations. In order to secure payments of pensions and salaries of public servants, Mr. Tsipras’ government resorted to desperate measures such as sequestering the reserves of public bodies, raiding the reserves of the pension funds, seizing EU subsidies destined for farmers, and postponing all payments for state supplies21. For the same reason, the Greek government was forced not to abolish the existing property tax which, its most prominent members were describing as socially unjust only a few months before. .
Little by little, the Greek government found itself with the back against the wall. Mr. Varoufakis’ game theory was not enough to bring cash to the public treasury. The real economy went from bad to worse and the government found it more and more difficult to pay wages and pensions. Serious doubts were raised as to whether Greece would be in a position to fulfil its obligations towards its creditors, such as the International Monetary Fund in the months to follow. With no real prospects of securing some sort of funding without concluding an agreement with Greece’s creditors, Mr. Tsipras’ government gradually reached a final turning point at which it would have to decide which way to go.
Dead end
Despite the prolonged negotiations between Greece and its creditors, by the end of June no agreement was reached. As a result, practically with no money left, Greece was found at the edge of default and on 30 June 2015 it became the first developed country in history to fail to make an International Monetary Fund loan repayment22. Three days earlier the Greek Prime Minister had taken an even worse decision: since he was in a stalemate position, he
21 Helena Smith, Greek Government Takes Desperate Measures in Battle to Stay Afloat, 25 March 2015, accessed at http://www.theguardian.com/business/2015/mar/25/greek-government-takes-desperate-measures-in-battle-to-stay-afloat on 15 July 2015. 22 Mehreen Khan & Matthew Holehouse, Greece Defaults on the International Monetary Fund after Launching 11th Hour Attempt to Agree New Rescue Deal, 30 June 2015, accessed at http://www.telegraph.co.uk/finance/economics/11709473/Greece-defaults-on-the-International-Monetary-Fund-after-launching-11th-hour-attempt-to-agree-new-rescue-deal.html on 15 July 2015.
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thought it was a good idea to overthrow the chessboard. Without any previous consultation with the other Eurozone members, he announced the organization of a referendum on the 5th of July concerning the acceptance or the rejection of a draft bailout proposal made to the Greek government by the European Commission, the European Central Bank and the International Monetary Fund23. Negotiations with Greece’s creditors halted and the Greek government openly supported the rejection of the bailout proposal in the referendum.
It was a catastrophic decision. The referendum had no practical value since the draft bailout proposal was not a final one; on the contrary, it was absolutely certain that it would not even be valid by the time the referendum would take place. To make matters worse, immediately after announcing the referendum, fearing a huge bank run which would result the collapse of the Greek banking system within a matter of hours, the Greek government was forced to shut all Greek banks and to impose capital controls: only 60 euros per day could be withdrawn from each bank account and only through ATMs; payments and transfers abroad were banned24. The effect on the Greek economy was disastrous. However, the referendum was held and resulted in a clear rejection of the draft bailout proposal by the Greek people (61.31%)25.
Contrary to what Mr. Tsipras was publicly stating, the referendum’s result was not an asset for his government. On the contrary, the referendum made Greece’s position even worse. From the EU point of view the referendum was seen as a question as to whether Greece wanted to stay in the Eurozone or not. This had been repeatedly made clear by many European leaders in the week before the 5th of July26.With no money, Greece was now facing the prospect of an uncontrollable default which consequently would lead to Greece’s exit from the Eurozone. Grexit had become a real possibility which was openly discussed.
U-turn
Greece’s position had become hopeless. In the Euro summit of July the 7th, Mr. Tsipras was given an ultimatum by the other Eurozone leaders according to which Greece would either reach an agreement with its creditors within five days or it would have to exit the Eurozone. For the first time ever Grexit was presented as a real possibility in the most open and official way. The European Commission had even drafted a detailed plan concerning the prospect of a Grexit and its implications. In case no agreement was reached, then the
23 Ekathimerini.com, Tsipras Announces Referendum on Lenders’ Proposals, 27 June 2015, accessed at http://www.ekathimerini.com/198431/article/ekathimerini/news/tsipras-announces-referendum-on-lenders-proposals on 15 July 2015. 24 Christos Ziotis, Paul Tugwell & Nikos Chrysoloras, Greece Imposes Capital Controls as Fears of Grexit Grow, 29 June 2015, accessed at http://www.bloomberg.com/news/articles/2015-06-29/greece-imposes-capital-controls-banks-close-to-contain-fallout-ibh78tb7 on 17 July 2015. 25 Ministry of Interior and Administrative Reconstruction, Results of the Referendum of 5 July 2015 (in Greek), accessed at http://ekloges.ypes.gr/current/e/public/#“cls”:”main”,”params”: on 17 July 2015. 26 BBC.com, Greece Crisis: No Vote Would Mean Euro Exit, Leaders Warn, 29 June 2015, accessed at http://www.bbc.com/news/world-europe-33319917 on 29 July 2015.
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In the Shadow of Grexit: A Short Story of Long (and Failed) Negotiations, January-July 2015
European Union would be willing to offer Greece humanitarian aid27: within five days one of the 30 richest countries in the world would be about to become a third world economy.
The amateur negotiating tactics followed by the Greek government for six months collapsed within a matter of seconds – Mr. Varoufakis, one of the main founders of this strategy, had already resigned from Minister of Finance on the 6th of July. Finding himself in the worst negotiating position possible, Mr. Tsipras was obliged to make a u-turn. In the early hours of Monday, the 13th of July he accepted the prospect of a bailout deal of about 85 billion euros; the terms of this deal would be way worse than those rejected in the Greek referendum28: strangely enough, within a matter of a week the ‘No’ vote of the Greek people in the referendum (a vote which was supported by the Mr. Tsipras’ cabinet) was turned by the Greek government into a ‘Yes’. As a result, in the next few days the Greek Parliament adopted a number of harsh economic measures as well as structural reforms only to secure the beginning of negotiations which would lead to the conclusion of a new bailout deal in mid-August 2015. More than one fourth of the Members of Parliament belonging to SYRIZA did not vote in favour of this package of measures and reforms which were only adopted because of the support of the pro-European opposition parties29 – those which in the recent past Mr. Tsipras was accusing as undermining his negotiating efforts…
6. Conclusions
Six months after its establishment, the SYRIZA-led government has failed in delivering its biggest promises: to get rid of the ‘evil Memoranda’ and to reach an agreement with Greece’s neighbours that would be way better than those of 2010 and 2012. In early July 2015, Mr. Tsipras understood the hard way what had been obvious for months to all Greek and international political analysts: in reality he had only two options. The first was to reach an agreement with Greece’s creditors which in practice would mean a ‘third Memorandum’ entailing the adoption of new austerity measures and the implementation of a series of deep reforms in the Greek economy. The second option was default, Grexit, chaos for the Greek economy and despair for the Greek people: in this case the consequences would be irreversible. Facing this dilemma, Mr. Tsipras chose wisely, but unfortunately too late and after causing severe damage to the Greek economy.
Before the elections of January 2015 one of the most common questions posed to SYRIZA members was if they had a plan B in case something went wrong with their initial plan. ‘What will happen if the creditors do not accept your positions?’, they were repeatedly
27 Andrew Higgins & James Kanter, Greece Given Until Sunday to Settle Debt Crisis or Face Disaster, 7 July 2015, accessed at http://www.nytimes.com/2015/07/08/business/international/greece-debt-eurozone-meeting.html?_r=0 on 30 July 2015. 28 BBC.com, Greece Debt Crisis: Eurozone Summit Strikes Deal, 13 July 2015, accessed at http://www.bbc.com/news/world-europe-33503955 on 31 July 2015. 29 Renee Maltezou & Angeliki Koutantou, ‘Greek Parliament Approves Bailout Measures as SYRIZA Fragments’, 16 July 2015, accessed at http://www.ekathimerini.com/199593/article/ekathimerini/news/greek-parliament-approves-bailout-measures-as-syriza-fragments on 31 July 2015; Telegraph.co.uk, ‘Greek Parliament Approves New Reforms, Clearing Way for Bailout Talks’, 23 July 2015, accessed at http://www.telegraph.co.uk/news/worldnews/europe/greece/11757232/Greek-parliament-approves-new-reforms-clearing-way-for-bailout-talks.html on 31 July 2015.
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asked. ‘We will keep on negotiating’, was the stereotypical answer. In this context, negotiations were not the medium to reach a certain goal, but they were rather transformed to the goal themselves. What the first six months of SYRIZA in government proved was that the reason they did not have a concrete plan B was simply because they did not even have a concrete plan A. Even those members of Mr. Tsipras’ cabinet who were in favour of Greece returning to its national currency had not figured out a realistic method on how to do so. Even after securing power, there remained something that had always been deep inside SYRIZA: a minor opposition party whose members had no experience in governance and were intrigued by marginal ideas which had no connection with the real world.
For five years Mr. Tsipras and his party were blaming the ‘Memoranda’ for all the malice of Greece, forgetting that the ‘Memoranda’ had not caused the economic crisis but that on the contrary, the crisis and the prospect of a Greek default in 2010 and in 2012 had made their conclusion unavoidable, just as it happened in July 2015. Now, if all goes well, Mr. Tsipras will be the one to conclude the third and possibly worst ‘Memorandum’ – whether he will implement it successfully is highly doubtful. Being of Marxist ideological origin, he should have known better Karl Marx’s famous statement in The Eighteenth Brumaire of Louis Napoleon that history repeats itself, ‘the first as tragedy, then as farce’.
Bibliography
• Alderman, Liz, Greece’s Feisty Finance Minister Tries a More Moderate Message, 29 January 2015, accessed at http://www.nytimes.com/2015/01/30/business/international/greeces-feisty-finance-minister-tries-a-more-moderate-message.html?_r=0&module=ArrowsNav&contentCollection=International%20Business&action=keypress®ion=FixedLeft&pgtype=article on 25 May 2015.
• BBC.com, Greece Crisis: No Vote Would Mean Euro Exit, Leaders Warn, 29 June 2015, accessed at http://www.bbc.com/news/world-europe-33319917 on 29 July 2015.
• BBC.com, Greece Debt Crisis: Eurozone Summit Strikes Deal, 13 July 2015, accessed at http://www.bbc.com/news/world-europe-33503955 on 31 July 2015.
• Castle, Stephen, With Details Settled, a 2nd Greek Bailout Is Formally Approved, 14 March 2012, accessed at http://www.nytimes.com/2012/03/15/business/global/greece-gets-formal-approval-for-second-bailout.html?_r=0 on 30 July 2015.
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• Council of the European Union, Eurogroup Statement on Greece, 20 February 2015, accessed at http://www.consilium.europa.eu/el/press/press-releases/2015/02/150220-eurogroup-statement-greece/ on 28 May 2015.
• Ekathimerini.com, Tsipras Announces Referendum on Lenders’ Proposals, 27 June 2015, accessed at http://www.ekathimerini.com/198431/article/ekathimerini/news/tsipras-announces-referendum-on-lenders-proposals on 15 July 2015.
• Enikos.gr, Full Transcript of Alexis Tsipras Interview to enikos.gr, 28 April 2015, accessed at http://en.enikos.gr/politics/28061,Full-transcript-of-Alexis-Tsipras-interview-to-enikosgr.html on 30 July 2015.
• Georgiopoulos, George, Greece’s Varoufakis Admits to Taping Eurogroup Meeting, 24 May 2015, accessed at http://www.reuters.com/article/2015/05/24/eurozone-greece-varoufakis-idUSL5N0YF0CG20150524 on 25 July 2015.
• Higgins, Andrew & Kanter, James, Greece Given Until Sunday to Settle Debt Crisis or Face Disaster, 7 July 2015, accessed at http://www.nytimes.com/2015/07/08/business/international/greece-debt-eurozone-meeting.html?_r=0 on 30 July 2015.
• Khan, Mehreen & Holehouse, Matthew, Greece Defaults on the International Monetary Fund after Launching 11th Hour Attempt to Agree New Rescue Deal, 30 June 2015, accessed at http://www.telegraph.co.uk/finance/economics/11709473/Greece-defaults-on-the-International-Monetary-Fund-after-launching-11th-hour-attempt-to-agree-new-rescue-deal.html on 15 July 2015.
• Makris, A., Audit Committee: Greece’s Debt “Illegal, Illegitimate and Odious, 17 June 2015, accessed at http://greece.greekreporter.com/2015/06/17/audit-committee-greeces-debt-illegal-illegitimate-and-odious/ on 30 July 2015.
• Maltezou, Renee & Koutantou, Angeliki, Greek Parliament Approves Bailout Measures as SYRIZA Fragments, 16 July 2015, accessed at http://www.ekathimerini.com/199593/article/ekathimerini/news/greek-parliament-approves-bailout-measures-as-syriza-fragments on 31 July 2015.
• Mavris, Yiannis, The Fluctuation of SYRIZA’s Post-Electoral Influence (2012-2014) (in Greek), 25 January 2014, accessed at http://www.mavris.gr/3843/syriza-vote-share-2012-14/ on 31 May 2015.
• Ministry of Interior and Administrative Reconstruction, [Results of the European Parliament Elections of 25 May 2014] (in Greek), accessed at http://ekloges-prev.singularlogic.eu/may2014/e/public/index.html#“cls”:”main”,”params”: on 29 July 2015.
• Ministry of Interior and Administrative Reconstruction, [Results of the General Elections of 17 June 2012] (in Greek), accessed at http://ekloges-prev.singularlogic.eu/v2012b/public/#“cls”:”main”,”params”: on 28 July 2015.
• Ministry of Interior and Administrative Reconstruction, [Results of the General Elections of 25 January 2015] (in Greek), accessed at http://ekloges-prev.singularlogic.eu/v2015a/v/public/index.html#“cls”:”main”,”params”: on 29 July 2015.
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• Ministry of Interior and Administrative Reconstruction, [Results of the Referendum of 5 July 2015] (in Greek), accessed at http://ekloges.ypes.gr/current/e/public/#“cls”:”main”,”params”: on 17 July 2015.
• Pappas, Takis S., Populism and crisis politics in Greece (Houndmills: Palgrave Macmillan, 2014).
• Sklias, Pantelis, The Deep Roots of the Crisis, in: Vít Novotný (ed.), From Reform to Growth. Managing the Economic Crisis in Europe (Delft: Eburon, 2013), pp. 223-240.
• Smith, Helena, Greek Government Takes Desperate Measures in Battle to Stay Afloat, 25 March 2015, accessed at http://www.theguardian.com/business/2015/mar/25/greek-government-takes-desperate-measures-in-battle-to-stay-afloat on 15 July 2015.
• Smith, Helena, Tsipras Favours Greek Jobless over Creditors in Defiant Policy Speech, 8 February 2015, accessed at http://www.theguardian.com/world/2015/feb/08/greece-prime-minister-alexis-tsipras-unveil-anti-austerity-plan-parliament on 30 May 2015.
• SYRIZA, The Thessaloniki Programme, accessed at http://www.syriza.gr/article/SYRIZA---THE-THESSALONIKI-PROGRAMME.html#.VW7Sbs_tmko on 29 May 2015.
• Telegraph.co.uk, Greek Parliament Approves New Reforms, Clearing Way for Bailout Talks, 23 July 2015, accessed at http://www.telegraph.co.uk/news/worldnews/europe/greece/11757232/Greek-parliament-approves-new-reforms-clearing-way-for-bailout-talks.html on 31 July 2015.
• The Press Project, Greece Establishes Audit Committee of Public Debt, 18 March 2015, accessed at http://www.thepressproject.net/article/74607/Greece-establishes-Audit-Committee-of-Public-Debt on 30 July 2015.
• Ziotis, Christos, Tugwell, Paul & Chrysoloras, Nikos, Greece Imposes Capital Controls as Fears of Grexit Grow, 29 June 2015, accessed at http://www.bloomberg.com/news/articles/2015-06-29/greece-imposes-capital-controls-banks-close-to-contain-fallout-ibh78tb7 on 17 July 2015
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ROMANIAN JOURNAL OF EUROPEAN AFFAIRS Vol. 15, No. 4, December 2015
Mapping the EU–Republic of Moldova Trajectory: Roadblocks on the Way to Economic Integration with the EU
Gabrielle G. Bulgari1
Abstract: This article focuses on EU–Republic of Moldova relations by taking an in-depth look at the Association Agreement and Deep and Comprehensive Free Trade Agreement’s provisions. Specific attention is given to both the political and economic integration aspects, benefits for the agriculture sector and an assessment of risk factors. Within the European Neighbourhood Policy instrument and the policy of Eastern Partnership, the Republic of Moldova has gained a crucial importance over the past 10 years. Having been positioned between two political and economic strong poles, many times it had to decide on which side to be. Moreover, the Association Agreement signed in June 2014 has updated the EU-Moldova relations and gave it a boost towards European integration, economic and commercial development, encouraging the Republic of Moldova to finally break from its Soviet past and move forward.
Keywords: EU, Republic of Moldova, European Neighbourhood Policy, Association Agreement, Deep and Comprehensive Free Trade Agreement (DCFTA), economic integration, agriculture sector, Trade policy, EU-model society, Eastern Partnership
Introduction
The Association Agreement (AA) is an economic and political tool applied by the EU in order to develop its foreign policy and commercial relations with the neighbouring countries and implemented by the later in order to prosper and cultivate the EU core values. In this particular case, the AA is meant to grow closer political relations, as well stronger economic ties between the EU and the Republic of Moldova2, according to former Enlargement Commissioner Štefan Füle3. The AA negotiations between the European Commission and the Republic of Moldova, including the Deep and Comprehensive Free
1 Gabrielle G. Bulgari - graduate of MA in European Interdisciplinary Studies, master program at the College of Europe 2014/2015; with a Master degree in International Law from the University of European Studies of Moldova 2014, as well as a Bachelor degree in Law from the State University of Moldova 2012 and professional experience as Legal Advisor at the American-Romanian law firm VERNON DAVID. E-mail: [email protected] article was written and inspired from the author’s extensive research for the master thesis during her studies at the College of Europe, 2014/2015. Consequently, the author would like to thank her thesis supervisor, Dr. Kerry Longhurst, for her endless support and professionalism. 2 European Commission, European Union supports key reforms in the republic of Moldova, Press release database, 29 July 2014. Available at: http://europa.eu/rapid/press-release_IP-14-886_en.htm. 3 Štefan Füle, Commissioner for Enlargement and European Neighbourhood Policy, in office of Barroso II Commission between Feb. 2010–Nov. 2014.
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Trade Agreement (DCFTA), started back in 2009, and the agreement was finally signed4 on 27 June 2014.5 By replacing the Partnership and Cooperation Agreement (PCA), the AA has moved the political dialogue and economic integration between the EU and Moldova to a new stage. In the aftermath, Moldova has proven remarkable results in implementing all the EU reforms and so far is the most promising of the Eastern Partnership (EaP) partners. This is an important acceleration of the EU–Moldova relationship and reflects the progress of Moldovan society, its openness and readiness to enhance European values, democracy, rule of law and respect for equal rights. However, it was and still is a long and difficult path for Moldova and the constant political instability, pressure from the Russian Federation (e.g. numerous embargoes on wine and other domestic products) and economic difficulties render it extremely challenging. Despite that, Moldova is recognized as the fastest reforming country in the European neighbourhood. For example, Moldova is the only EaP partner that has already achieved a visa-free regime with the EU.6 Indeed, even after signing the AA, Moldova will have to implement numerous internal institutional reforms, take necessary measures in fighting corruption and reach a proper level of transparency in governance structures (i.e. in 2013, the Transparency International Corruption Perception Index placed Moldova on 102 out of 137 positions included).7 Acknowledging its vulnerabilities and tending to radically reform the society in all necessary sectors, the AA was concluded based on general principles (provided in Title I) of democracy, human rights and fundamental freedoms, free market economy, sustainable development and effective multilateralism, rule of law and good governance, good neighbouring relations.8
It is important to highlight that even though the AA was concluded between the EU and the Republic of Moldova, existing and expected relations between the country and certain Member States have been differently established. Nevertheless, Moldova, even before launching into a deeper political and economic association with the EU, had closer partnerships with certain EU MS, for example Romania, Poland and Germany. In case of Poland and the Republic of Moldova partnership, it has been described as the most active interaction through high trade volumes and constant political support, Poland being in TOP-10 as the most valuable partner of Moldova.9 For instance, in May 2014 the Government of Poland provided a soft loan of 100 million Euro for modernizing the agriculture sector through different projects and 1 million Euro funded by the Ministry of Foreign Affairs of Poland through the “Polska Pomoc” platform, for three big projects: alternative energy sources, increasing the competitiveness of the agricultural sector, as
4 The AA was ratified by the Moldovan Parliament on 02 July 2014 and came into provisional application on 01 September 2014. 5 Amanda Paul, Moldova – Heading into a hot autumn, Policy Brief, European Policy Centre, Brussels, 06 October 2014. Available at: http://www.epc.eu/documents/uploads/pub_4880_moldova_-_heading_into_a_hot_autumn.pdf. 6 Amanda Paul, Op. cit. 7 Amanda Paul, Op. cit. 8 European External Action Service, Association Agreement between the European Union and the European Atomic Energy Community and Their Member States, of the One Part, and the Republic of Moldova, of the Other Part, Official Journal of the European Union, no. L260/4, 30 April 2014. Available at: http://eeas.europa.eu/moldova/pdf/eu-md_aa-dcfta_en.pdf. 9 Interview with Mr. Vladislav Nastas, diplomat – Second Secretary, responsible for the economic cooperation at the Embassy of the Republic of Moldova in the Republic of Poland, Warsaw, 06 March 2015.
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Mapping the EU–Republic of Moldova Trajectory: Roadblocks on the Way to Economic Integration with the EU
well as water treatment.10 Moreover, according to the data of National Statistics Bureau of Moldova, in 2013 an increase of approximately 8% of exports of Poland was observed and in 2014, already 64 companies operating in Moldova were launched with a Polish capital which accounts investments of 16 million dollars USA.11 Thus, the AA also aims at extending Moldova’s trading potential by implementing the necessary reforms and structural changes that will support the country on its road towards the Single European market and engage with more EU Member states.
Figure 1. Eastern Partnership Association Agreements, including DCFTAs
Source: Official Journal of the European Union
Nevertheless, the EU acts by the means of the Eastern Partnership at a multilateral level with each neighbouring partner in particular, as well it aims at strengthening bilateral relations between themselves. In this context, sharing similar problems and following the same goal of ensuring prosperity in their society, Georgia, Moldova and Ukraine, the three countries of EaP that signed the AA, consider developing bilateral relations and reinforce the core meaning of the EaP, especially after the EaP summit in Riga12 that took place in late May 2015.13 Currently in Moldova, according to the statistics, about 11% of the AA has been already implemented in the first 6 months and about 10% of the DCFTA by March 2015.14
10 Ibid. 11 Interview with Mr. Vladislav Nastas, Op. cit. 12 The EaP Riga Summit emphasized once again upon the shared values, visions and support for progress that is foreseen from the deeper cooperation between the EU and the six EaP partners. The brand - new approach reflected in this meeting is the equal partnership. 13 Georgia, 07 March 2015. Available at: http://www.civil.ge/eng/article.php?id=28108. 14 Interview with a diplomat from the Department for European Integration at the Ministry of Foreign Affairs and European Integration of the Republic of Moldova, 24 March 2015.
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Figure 2. The Republic of Moldova’s main trading partners (2013)
Source: EU Commission, DG Trade
Objectives and contents of the EU – Moldova Association Agreement (June 2014)
The main objectives of the EU’s Association agenda is to deepen political and economic relations with the Republic of Moldova and following the implementation of the appropriate reforms in different key areas, integrate the country in the “largest single market in the world – EU’s Internal Market”.15 The agreement points out at creating new opportunities for the stagnating economy of Moldova in order to make it more competitive and capable of integrating into the EU economy. Through the DCFTA, the AA is aiming at boosting the economic performance of Moldova and based on some researches it may increase exports to the EU by 16% and imports by 8%, while the GDP is expected to increase by 5.4% annually.16 In this context, an Association Council was established, chaired both by a representative of the EU and Moldova, that shall supervise and monitor the application and implementation of the agreement.17 The Association Council is the main monitoring body that will ensure the adequate and successful implementation of the AA and guide Moldovan authorities especially in regard to the implementation of Title V on trade and trade-related matters (DCFTA) and it is capable of issuing binding decisions.18 Apart from that the agreement also provides for the establishment of an Association Committee that shall assist the Association Council and shall meet at least once a year.19 Moreover, the agreement established a higher level body – the Parliamentary Association –, consisting of Members of both the European and the Moldovan Parliament. The Parliamentary Association has the right to request relevant information on the stage of implementation of the AA from the
15 European Commission, The EU’s Association Agreements with Georgia, the Republic of Moldova and Ukraine, Memo, Brussels, 23 June 2014. Available at: http://europa.eu/rapid/press-release_MEMO-14-430_en.htm. 16 European Commission, The EU’s Association Agreements with Georgia, the Republic of Moldova and Ukraine, Op. cit. 17 European External Action Service, Association Agreement between the European Union (...) and the Republic of Moldova, Op. cit., Title VII, p. 138. 18 Ibid., p. 139. 19 Ibid., p. 139.
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Mapping the EU–Republic of Moldova Trajectory: Roadblocks on the Way to Economic Integration with the EU
Association Council and to make recommendations to the Association Council.20 The EU and Moldova recognize the importance of involving and informing the civil society about the AA and its positive effects, and have created a Civil Society Platform where the civil society can meet, exchange views and make recommendations to the Association Council.21
The AA is composed of the following seven titles: Title I – General principles; Title II – Political Dialogue and Reform. Cooperation in the field of Foreign and Security Policy; Title III – Justice, Freedom and Security; Title IV – Economic and other Sector Cooperation; Title V – Trade and Trade-related Matters; Title VI – Financial Assistance and Anti-Fraud and Control Provisions; Title VII – Institutional, General and Final Provisions.22
Regarding the mutual strengthening of the political dialogue, Title II provides for the following main goals set by the parties: “deepen political association and increase political and security policy convergence and effectiveness, promote international stability and security based on effective multilateralism; strengthen cooperation and dialogue between the Parties on international security and crisis management, foster result-oriented and practical cooperation between the Parties for achieving peace, security and stability on the European continent, strengthen respect for democratic principles, the rule of law and good governance, human rights and fundamental freedoms, including the rights of persons belonging to minorities, and to contribute to consolidating domestic political reforms, develop dialogue and to deepen cooperation in the field of security and defence and promote the principles of sovereignty and territorial integrity, inviolability of borders and independence”23. As one can notice, the political dialogue covers a broad area of mutual interests, not only on the European level, but also on the international level. In the fields of freedom, security and justice cooperation, provided in Title III, it “enhances the importance of promoting the rule of law, including all its aspects (judiciary independence, access to justice and right to a fair trial), stresses the importance of ensuring the protection of personal data, cooperation on migration issues, cooperation on preventing and combating organized crime, corruption, cooperation on tackling illicit drugs, preventing money laundering and financing of terrorism, combating terrorism and legal cooperation”24.
When it comes to economic and social cooperation, provisions included in Title IV, the common consensus is to develop and focus on a spectrum of different sectors. The cooperation in public administration reform seeks to increase its efficiency and transparency, modernizing public services (e.g. introducing e-Governance) and facilitating services delivery to the citizens.25 Within the economic dialogue in order to establish a functioning market economy in Moldova and gradually approximate it to the EU’s policies and facilitate the trade between the two, an exchange of information on macroeconomics policies, analysis and expertise is expected. In order to establish a fair competition and
20 Ibid., p. 140. 21 Ibid., p. 141. 22 Ibid. 23 European External Action Service, Association Agreement between the European Union (...) and the Republic of Moldova, Op. cit., p. 5. 24 Ibid., pp. 8-10. 25 Ibid., p. 11.
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eliminate any existing monopolies, Moldova should approximate its legislation in regard to company law, accounting and auditing and corporate governance, following EU’s rules and recommendations in this area.26 Other important areas for cooperation and development which are covered by the content of the Title IV are the following: employment, social policy and equal opportunities (i.e. where promoting International Labour Organisation principles is envisaged); consumer protection; ensuring a proper management of public finances (i.e. including budget policy, internal control, financial inspection and external audit in order to fight against fraud and corruption); enhancing good governance in tax area, trade investments and fair competition; enhancing proper functioning of financial services that will serve an open market economy and the protection of investors; industrial and enterprise policy with a particular emphasis on small and medium-sized enterprises (SMEs); agriculture and rural development (promoting modernisation of agriculture products); fisheries and maritime policy; energy cooperation (elaborating strategies and policies in order to diversify energy resources, suppliers and transportation routes and reduction of greenhouse gas emissions); transport (improving infrastructure on regional and international level); environment and climate change (improving air and water quality, ensuring better environmental protection, managing industrial pollution etc.); information society (developing ICT tools in governance, e-learning and research, e-commerce, etc.); tourism; regional development, cross-border and regional level cooperation (by decentralization of the decision-making process); public health; civil protection; education, training (modernizing education systems); research, technological development; culture, audio-visual policy and media; civil society and protection and promotion of the rights of the child (by combating all forms of exploitation of a child, abuse and violence).27
Title V which stands mainly for the trade and trade-related matters (DCFTA) which will be analysed below. Regarding financial assistance, anti-fraud and control provisions the EU and Moldova agreed in Title VI that in order to successfully implement, materialize and achieve objects envisaged in the AA, the country shall benefit from financial assistance from the EU through relevant EU funding mechanisms and instruments, as well loans from the EIB, EBRD or other international financial institutions. Yet, Moldova and the EU shall agree and evaluate the priority areas of the EU financial assistance. This should be mentioned in the annual action programmes which represent the agreed policy priorities for each particular year, taking into account the needs of the country, the progress made so far and other aspects. In this case, the Association Council shall be the responsible institution to be informed about the progress of the proper implementation of the EU’s financial assistance, proving conclusions and recommendations.28
On the other hand, Title VI also stresses the importance of the parties to “take effective measures to prevent and fight fraud, corruption and illegal activities”.29 Definitely, it is one of the most important challenges for the Moldova–EU relations, considering the still
26 European External Action Service, Association Agreement between the European Union (...) and the Republic of Moldova, Op. cit., p. 12. 27 European External Action Service, Association Agreement between the European Union (...) and the Republic of Moldova, Op. cit., pp. 13-34. 28 Ibid., p. 134. 29 Ibid., p. 135.
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high level of fraud, corruption and illegal actions. This situation should be addressed and relevant measures should be taken the soonest. For the purpose of eliminating such practices, the AA provides as solutions the following: exchange of information and further cooperation on operational level, providing mutual administrative and legal assistance, conducting proper investigation and prosecution of suspected and potential cases by the competent Moldovan authorities and imposing corresponding administrative measures and penalties.30 Finally, Title VII stands for institutional, general and final provisions of the AA, envisaging the importance of mutual political and policy dialogue, establishes the institutional framework and institutions that should accelerate, supervise and monitor the implementation of the AA and their responsibilities (i.e. Association Council, Association Committee and its sub-committees, Parliamentary Association Committee).31
Prospects of transforming the Republic of Moldova into an EU-model society
Through such instruments as the AA, the EU aims at reforming countries in its near neighbourhood, like the Republic of Moldova, by promoting its values of democracy, rule of law and human rights. Not only the EU implements such policies, but it also provides the necessary support to faster these changes and help Moldova transform into an EU-model society. But what is an EU-model society? And what it takes Moldova to become one? One can find it quite difficult to define what an EU-model society is. The EU-model is a unique contemplation of 28 different countries and cultures aligned together, united by the same history, principles, scopes, agenda and interests. Based on this example of coexistence, collaboration and mutual support, Moldova tends to inspire itself and shape a similar model in its society. By signing the AA with the EU, Moldova entered into a new phase of cooperation with the EU and transformation that will require implementation of reforms in accordance with EU standards for democratic societies (i.e. fighting wide-spread corruption, achieve a larger transparency, rule of law) and a strong market economy. The EU external actions and policies are operating through “soft diplomacy”, which is a way of building external cooperation relations and exporting EU values.32 In this case, the Commission is the “EU agent” to establish, monitor, coordinate and promote external cooperation. There are two distinct approaches/policies that the EU applies towards its neighbouring partners. One is stabilization that aims at fostering regional cooperation, and second is integration that is based on bilateral relations and works through “strict conditionality”. So far “conditionality” has proven to be the most effective tool in modelling neighbouring partners according to the EU’s standards and shaping a sort of “Eastern dimension” of the EU.33 Sharing common interests with the EU, in order to win the “big prize” of economic integration into the Single Market, EU’s political and economic support and may be the
30 European External Action Service, Association Agreement between the European Union (...) and the Republic of Moldova, Op. cit., pp. 135-136. 31 Ibid., p. 138. 32 Franck Petiteville, “EU external co-operation as a ‘soft diplomacy’”, in: Michele Knodt and Sebastian Princen (ed.), Understanding the European Union’s external relations, Routledge, London, 2003, pp. 127-141. 33 Antonio Missiroli, “The EU and its changing neighbourhood: stabilization, integration and partnership”, in: Roland Dannreuther (ed.), European Union Foreign and Security Policy: Towards a neighbourhood strategy, Routledge, London, 2004, pp. 12-26.
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prospect of European membership, Moldova has to implement the acquis communautaire, comply with all the provisions of the AA and follow all recommendations and instructions coming from Brussels.
One important moment in defining the EU–Moldova future relations after signing the AA, was the parliamentary elections that took place on 30 November 2014. The result of the elections was a success, since the three pro-European parties have won 56-58 seats, while pro-Russian parties only 43-44 seats of the total available 101 seats.34 To what the spokesperson on foreign policy of Social and Democrats group – Knut Fleckenstein, commented: “I am confident that it will be possible to build a strong pro-European coalition [in Moldova] that will continue to implement the necessary reforms”.35 Certainly, the outcome of these elections was crucial in determining the goals and political orientation of Moldova on its European path. Thus, Federica Mogherini36 and Johannes Hahn37 issued a statement on 01 December 2014, reflecting the EU’s support for further implementing the AA in the Republic of Moldova and the importance of the European economic and political integration:
“A new impetus to key reforms will be crucial for the Republic of Moldova’s political association and economic integration with the EU. The EU will remain a reliable partner supporting the Republic of Moldova´s reform endeavours and working towards unleashing the full benefits of the Association Agreement in the interest of all its citizens, wherever they live.”38
The EU is keen to support Moldova in reforming and acts through different tools to ensure its progress. For example, via such instrument as Single Support Framework 2014-17, Annual Action Programme 2014 (which is a support package that provides 101 million Euros for two main actions: Support to Public Finance Policy Reforms in Moldova – 37 million Euros, and European Neighbourhood Programme for Agriculture and Rural Development Moldova – Support to Agriculture and Rural Development – 64 million Euros) and Additional support programme (a budget of 30 million Euros aiming at boosting “competitiveness of small business, development of national legislation in line with EU quality standards and promotion of export and investment opportunities, communication and information campaigns on the DCFTA).39 However, is the AA the ultimate phase in transforming the Republic of Moldova into an EU-model society? Indeed, the AA may encourage changes and implementation of the European values, reforms and rules, but it certainly does not set the limit in the EU–Moldova relations progression and according to
34 Jon Benton, MEPs warmly receive pro-EU Moldovan election results, The Parliament magazine, 03 December 2014. Available at: https://www.theparliamentmagazine.eu/articles/news/meps-warmly-receive-pro-eu-moldovan-election-results. 35 Ibid. 36 Federica Mogherini - High Representative for Foreign Affairs and Security Policy/Vice-President of the European Commission. 37 Johannes Hahn - Commissioner for European Neighbourhood Policy and Enlargement Negotiations. 38 European Commission, Joint statement on the parliamentary elections in the Republic of Moldova, Statement 14/2270, Brussels, 01 December 2014. 39 European Commission, European Union supports key reforms in the republic of Moldova, Op. cit.
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Article 49 of Treaty on European Union, Moldova being a European country, may have a European perspective and apply for the European membership in any case.40
The Deep and Comprehensive Free Trade Agreement (DCFTA) and its significance for Moldova’s economy
“The creation of the DCFTA between the EU and Moldova represents one of the most significant benefits of the agreement, bearing incontrovertible importance for trade and economic growth, jobs creation, prosperity and stability in the Republic of Moldova”, Parliamentary Report dated October 2014.41
The DCFTA intention is to enhance the Republic of Moldova’s access to the EU market42, which as a final result will stimulate attracting more investments in the country, sustain the growth of local small and medium businesses and tighten commercial relation between commercial agents of the EU’s Member States and Moldova.43 The DCFTA, as an integral part of the AA, has been provisionally applied since 01 September 201444 and aims at establishing a free-trade area in a transitional period of maximum 10 years, in accordance with the provisions of this Agreement and in accordance with Article XXIV of the General Agreement on Tariffs and Trade 1994 (GATT 1994). It is expected to have long term beneficial effects for Moldova’s economy by implementing the commitments undertook by both the EU and Moldova.45
The areas of priorities and contents of the DCFTA
The content of the DCFTA has a vast application for different areas of trade, customs, competition, development and others. The priorities are envisaged in the idea of reforming and modernizing agriculture sector, small and medium-sized enterprises (SMEs), businesses, investments flows, by introducing structural and institutional reforms at big scale, harmonizing national legislation with the acquis communautaire. This will foster reshaping Moldova’s economy into an open-market economy and make it suitable to integrate in the EU’s market and enhance its capability to absorb more EU products, as well as boosting exports of Moldovan products both on the EU market and further. The DCFTA (trade and trade-related matters), as integral part of the AA, envisaged in Title V, consists of the following fifteen chapters, corresponding to different trade areas or trade-related matters: Chapter 1 - National treatment and market access to goods; Chapter 2 - Trade
40 European Parliament, Report containing a motion for a non-legislative resolution on the draft of Council decision on the conclusion, on behalf of the EU, of the Association Agreement between the EU and the Euratom and their members, of the one part, and the Republic of Moldova, of the other part, Committee of Foreign Affairs, A8-0022/2014, 21 October 2014. 41 European Parliament, Op. cit. 42 Ibid. 43 Ibid. 44 Interview with a diplomat at the Department for European Integration at the Ministry of Foreign Affairs and European Integration of the Republic of Moldova, 24 March 2015 (see Annex 3). 45 European Parliament, Report (…), Op. cit.
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remedies; Chapter 3 – Technical barriers to trade, standardisation, metrology, accreditation and conformity assessment; Chapter 4 – Sanitary and phytosanitary measures; Chapter 5 – Customs and trade facilitation; Chapter 6 – Establishment, trade in services and electronic commerce; Chapter 7 – Current payments and movement of capital; Chapter 8 – Public procurement; Chapter 9 – Intellectual property rights; Chapter 10 – Competition; Chapter 11 – Trade-related energy; Chapter 12 – Transparency; Chapter 13 – Trade and sustainable development; Chapter 14 - Dispute settlement; Chapter 15 – General provisions and approximation under Title V.46
Analysing chapter by chapter the provisions of Title V of the AA on trade and trade-related matters, the EU and the Republic of Moldova agreed on closer cooperation and economic integration by implementing necessary reforms and providing each other support and assistance. Chapter 1 regulates the elimination of customs duties, fees and other charges on both imports and exports. Regarding imports, special provisions are codified in Annex XV and focus mainly on developing agriculture policy on both sides. On the other hand, anti-circumvention procedures and mechanisms shall apply for agriculture products and an annual average volume of imports from Moldova is set in Annex XV-C (e.g. pork – 4500 tones; poultry – 600 tones; dairy products – 1700 tones; cereal processed – 2500 tones; cigarettes – 1000 tones, etc).47 Chapter 2 emphasizes trade remedies through mechanisms such as anti-dumping, countervailing measures and application of bilateral safeguard measures which aim to investigate proper implementation, respect and use of the trade procedures.48 Chapter 3 relates to technical barriers to trade and stresses the importance of strengthening cooperation in the field of “standards, technical regulations, metrology, and market surveillance”.49 Thus, Moldova shall progressively transpose European standards on a national level and comply with marketing and labelling requirements.50 In Chapter 4 the sanitary and phytosanitary (SPS) provisions underline the need for Moldova to approximate its regulatory system in SPS and animal welfare, establish procedures for trade facilitation operating through transparency and information exchange. Also, the certification and verification procedures are included, and establishing of SPS Sub-Committee that shall monitor the implementation of the relevant provisions in this sense, give opinions and formulate recommendations.51
Customs and trade facilitation conditions reflected in Chapter 5 provide for stable and comprehensive legislation and procedures, proportionate, non-discriminatory and impartial rules in order to facilitate trade.52 With the same objective at heart, this chapter reflects the importance of boosting economic performance by enhancing trade. The Republic of Moldova will also apply the Single Administrative Document, as well use modern custom techniques, reduce costs for economic operators, and apply binding rulings on
46 European External Action Service, Association Agreement between the European Union (...) and the Republic of Moldova, Op. cit., pp. 34-134. 47Ibid., pp. 34-39, 210-220. 48 Ibid., pp. 39-42. 49 Ibid., pp. 42-44. 50 Ibid. 51 Ibid., pp. 44-54. 52 European External Action Service, Association Agreement between the European Union (...) and the Republic of Moldova, Op. cit., pp. 54-59.
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tariffs classification and rules of origin, implementing simple requirements and formalities. Moreover, starting from 1st January 2015, any administrative fees with equivalent effect to imports or exports duties and charges shall be prohibited.53 Yet, like in any other cases, Moldova shall approximate its legislation to the Union’s law in the customs matters, in order to benefit from these provisions.
Within Chapter 6, which is divided in 7 sections, Moldova and the EU agreed on provisions of establishment, trade in services and electronic commerce. In order to achieve objectives set in this chapter, parties should undertake commitments under the WTO Agreement; allow and facilitate the establishment of subsidiaries, branches and representatives offices of both judicial persons of the EU and Moldova; assuring market access, provide clear conditions for licensing, qualifications and procedures. In this sense, mutual recognition of qualifications for natural persons is compulsory.54 In the context of this chapter, it is crucial for Moldova to develop and promote computer services, electronic communication networks and services. Electronic commerce represents the future of trade relations; therefore, Moldova will create trade opportunities in many sectors in this regard. In fact, the launch of e-customs represents one of the success projects established as an online tool for electronic services for both the export and the import procedures to facilitate them.55 As per financial services, it is necessary to have a regulatory framework for financial services which needs to be liberalized.56 Chapter 7 entitled “current payments and movement of capital” reflects the importance of ensuring free movement of capital related to direct investments, but also including acquisition of real estate. It also specifies that in the first 4 years after the entry into force of the AA, Moldova shall take necessary measures to create proper conditions for gradual implementation of the Union’s rules on free movement of capital.57 In Chapter 8 provisions related to public procurement are agreed on. They imply mutual access to public procurement (should apply to works, supplies and services) and the need to enable the market to be open to competition and once again prevent any corrupt practices.58 Chapter 9 consists of one of the most important elements in succeeding implementation of the DCFTA – intellectual property rights (IPR). Therefore, it requires achieving in this field a proper and effective level of protection of the IPR, including WTO Agreement clauses. It refers to the protection of authors’ performers, producers of phonograms, trademarks, designs, patents and clear regulation and rules on enforcement procedure of the IPR.59
Provisions related to competition are addressed in Chapter 10. It includes such competition related issues as antitrust and merger control, which need to be monitored and controlled by the relevant authorities from Moldova. It requires free and undisturbed competition in trade relations, in the same time state monopolies or public undertakings
53 Ibid. 54 Ibid., pp. 52-86. 55 Interview with Mr. Vladislav Nastas, Op. cit. 56 European External Action Service, Association Agreement between the European Union (...) and the Republic of Moldova, Op. cit., pp. 52-86. 57 European External Action Service, Association Agreement between the European Union (...) and the Republic of Moldova, Op. cit., pp. 86-87. 58 Ibid., pp. 87-91. 59 Ibid., pp. 91-109.
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cannot be prevented. Moreover, concerning state aid, it is not possible if it has the potential to disturb competition by favouring certain companies.60 The area of competition is very new and feeble in Moldova and is managed by the Council of Competition of Moldova, which acts based on the Competition Law dated 11 June 2012 and several regulations.61 In the framework of this Competition Law formation of cartels, anti-competitive behaviour, abuse of dominant position on the market and not only – are prohibited. Yet, in practice the Council of Competition is still struggling to monitor and cease any anti-competitive actions, also due to the fact that it has not yet established good practices.
Chapter 11 addresses the trade related to energy. In this regard, the EU and Moldova agreed on trade in energy products such as crude oil, electricity and natural gas; but none of them shall interfere in the transit of energy goods through their respective territory; also, dual pricing is not allowed.62 This chapter does not contain any details about how Moldova’s energy demands are met, although this is an issue that may jeopardize the proper implementation of the AA. The Republic of Moldova is heavily (almost 100%) dependent on energy supplies from Russia (just like the Baltic States, Bulgaria and Italy inside the EU), which may and most of the times is used as a political tool to put pressure on Moldova and its relations with the EU or Russia.
Transparency – should consist of predictable regulatory environment for economic operations, based on legal certainty and proportion is envisaged in Chapter 12.63 To this end, the EU and Moldova should work together in order to establish a proper field for well working governance, facilitating decision-making procedure, enhance better connection between different institutions and ministries in Moldova and bring transparency in actions and decision available to the citizens through the civil society organizations. Trade and sustainable development provisions are reflected in Chapter 13 where the parties agreed to encourage a high level of environmental and labour protection. Following this idea they should seek to enhance the contribution of trade, by promoting trade in forest products and fish products. The cooperation inter alia should take place in the following: the positive or negative impacts of Title V (trade and trade-related matters), promoting private and public certification, traceability and labelling schemes, trade related issues of the current and future international climate change and others. In the same context, in order to perform the purposed objectives, Moldova should establish an institutional and overseeing mechanism, as well a joint civil society dialogue forum.64
Chapter 14 provides for all possible ways for dispute settlement in case of any inconsistencies between Moldova and the EU arising from the AA. Therefore, resolving any existing disputes may be possible through consultations, mediation and arbitrations procedure.65 Finally, Chapter 15 sets general provisions on approximation, which should
60 Ibid., pp. 109-112. 61 Competition Law of Moldova no. 183 dated 11 June 2012. Available at: http://www.competition.md/uploads/files/legi/concurenta/Lege%20Nr183%20din%2011.07.2012.pdf. 62 European External Action Service, Association Agreement between the European Union (...) and the Republic of Moldova, Op. cit., pp. 112-115. 63 Ibid., pp. 115-117. 64 Ibid., pp. 117-123. 65 Ibid., pp. 123-131.
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take place by withdrawing provisions of domestic law that is inconsistent with the EU’s law. In this case, the Association Committee should be the institution involved in the approximation and the assessment of its correct implementation by adopting necessary procedures and ensuring exchange of information.66
To summarise, one can emphasise that the content of the Title V of the AA covers many areas and aspects of the new level of cooperation between Moldova and the EU, with a special emphasis of the trade and trade-related matters (DCFTA). Each of the above mentioned Chapters touches upon diverse sectors of mutual cooperation (e.g. trade, intellectual property rights, SPS, trade in energy, competition, transparency), and some of them may be new for Moldova, while others may be very challenging to implement and adjust to domestic legislation and operating practices to the Union’s requirements.
Benefits for the agriculture sector of Moldova
The main operating sector of the Moldova’s economy is agriculture. Therefore, the DCFTA has as its main priority to enhance reforms and modernize the agriculture sector and make agriculture products more attractive on the EU market. Through the removal of the EU’s import duties, accounting for approximately 43 million Euros, the agriculture sector will benefit from higher production standards, modern technologies, European funds and investments and improved labour conditions.67 The transitional period of 10 years is granted for opening Moldova’s market for European products, implementing necessary reforms and adapting national standards to the EU’s.68
The Regional Centre of Moldova presented a report in which it has offered a precise analysis of the impact (positive/negative) of the DCFTA on the agriculture sector of Moldova. According to this report, the agriculture sector of Moldova is currently stagnating because of lack of innovative recourses, technologies, support from the government and lack of qualified labour capacity.69 Therefore, the DCFTA has a great emphasis on agriculture and food sectors. Yet, many changes, costly and lengthy in time, are required in order for Moldovan products to integrate on EU’s market (i.e. certification of origin of the goods, control of compliance with sanitary and phytosanitary standards, compliance with competition rules etc.). Furthermore, the report stresses that, according to statistics, starting from 2006 the EU has been the main trade partner of Moldova. However, since 2010 the exports diminished considerably, due to such factors as: incompatibility of the exported products with the EU’s standards of quality, difficulties to meet sanitary and phytosanitary criteria and low competitiveness of the Moldovan producers.70 Among the EU’s Member
66 European External Action Service, Association Agreement between the European Union (...) and the Republic of Moldova, Op. cit., pp. 131-134. 67 European Commission, The EU’s Association Agreements with Georgia, the Republic of Moldova and Ukraine, Op. cit., p. 4. 68 Centrul Regional de Mediu Moldova, Impactul Acordului de Liber Schimb Aprofundat şi Cuprinzator între Republica Moldova şi Uniunea Europeană asupra sectorului agroalimentar moldovenesc, Chişinău 2013. Available at: http://www.rec.md/sites/all/themes/daycare/images/Publicatii/studiu_impactul%20zlsac_agricultura.pdf. 69 Centrul Regional de Mediu Moldova, Op. cit., p. 8. 70 Ibid., p. 19.
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States, the main trading partners in agriculture goods in the past year were Romania, Poland, Italy, Germany, France, Spain, Bulgaria and the Netherlands.71
Figure 3. EU Trade with the Eastern Partners (2012-October 2013)
Source: Eurostat (COMEXT database)
In order to “fit” the EU’s market standards and easily expand its capacity within it, one of the main challenges for the agriculture sector of Moldova is the poorly developed sanitary and phytosanitary systems. The norms related to sanitary and phytosanitary measures are part of the DCFTA and are very important to ensure the safety of the agriculture products of vegetal and animal origin. Currently, the Republic of Moldova is implementing the relevant measures and is in a process of harmonizing the national legislation in this regard. But the main downfall derives from the absence of specialised laboratories with advanced technologies to run the sanitary and phytosanitary tests and the only responsible authority is the State Inspectorate for Market Surveillance, Metrology and Consumer Protection which has not enough means and specialists.72
Having said that, in the past couple of years Moldova took the following steps to redress this situation, although the changes are not significant: 1) the Law on sanitary-veterinary activities was adopted back in 2008, envisaging the creation of a specialised Agency responsible for sanitary-veterinary issues and safety of animal products; 2) the Law on establishment of general principles and requirements of food safety legislation was adopted in 2011; 3) the Regulation on the organization and functioning of the National Agency for Food Safety was adopted in 2013 in order to regulate and control the safety of food products, along with the implementation of the Food Safety Strategy 2011-2015; 4) the Regulation on procedures and documentation related to the Identification and Traceability system of animals was adopted in 2007, and harmonized in accordance with the EU’s norms and directives in 2012; 5) Moldova ratified the Agreement on Sanitary
71 Ibid. 72 Ibid., p. 29.
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and Phytosanitary measures which seeks to reduce any risks as such for the consumers, animals and plants.73
The trade barriers in the EU-Moldova trade relations are different in nature, namely tariff and non-tariff barriers and technical barriers. After the implementation of the DCFTA, tariff barriers costs for the agriculture sector are expected to decline to 2%, which represents a clear advantage for the further development of trade flows.74 The non-tariff barriers include restrictions and measures applied on products and producers, such as: sanitary and phytosanitary measures, rule of origin, requirements and high standards of quality and quantity, high competitiveness, diversification of products, etc. On the other hand, technical barriers continue to be the most challenging for the local producers/exporters (e.g. only for the purpose of standardization it requires implementation of approximately 20 000 new standards).75 In this sense, Moldova ratified the Agreement on Technical Barriers in Trade which aims at “ensuring proper technical regulations and standards, including requirements for packaging, marking and labelling, and procedures used to assess compliance with these regulations, requirements and standards are not formulated and applied so as to create unnecessary obstacles to the Trade”.76
The agriculture sector needs constantly direct implication and innovative solutions from the government, by launching agriculture related projects, funds, etc. The Common Agriculture Policy77 launched by the EU in the 60’s serves as an example for Moldova on how to support agriculture’s development, its modernization and to encourage the farmers to produce, be competitive and observe the needs of the market. Thus, in June 2013 Moldova adopted the Strategy for Agriculture and Rural Development in Moldova 2014-202078 which has the following priorities: “enhancing investments in agricultural holdings, improving the processing and marketing of agricultural products, creating assistance and management services for farmers, organizing courses and instructions seminars on new technologies, improving control and verification structures for quality, veterinary and plant health aiming at higher food quality and consumer protection”.79 Once the DCFTA implemented Moldovan agriculture sector is also integrated into the EU’s agriculture sector and will have to comply with the CAP provisions. Among the main benefits of the implementation of the DCFTA for the agriculture sector of Moldova, one can underline the following: 1) unlimited access without any tariff barriers to the EU’s market; 2) enhanced competition which will bring positive effects as lower prices, better quality and diversification of the products; 3) implementation of the best practices of European partners; 4) increase in imports/exports of agricultural products between Moldova and EU’s Member States; 5) financial and technical support from the EU through different projects and funds directed to modernization and sustainable development of agriculture sector; 6) potential business development and increase in investments in Moldova.80
73 Centrul Regional de Mediu Moldova, Op. cit., pp. 29-30. 74 Ibid., p. 33. 75 Ibid., pp. 33-35. 76 Ibid., p. 34. 77 More details at: http://ec.europa.eu/agriculture/cap-history/index_en.htm 78 More details at: http://www.maia.gov.md/public/files/Proiecte/ProiectStrategiaAgriculturaDezvRur.pdf 79 Centrul Regional de Mediu Moldova, Op. cit., pp. 42-43. 80 Ibid., p. 44.
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The DCFTA - A risk assessment for the Republic of Moldova
The gradual implementation of the DCFTA, intended to take place within 10 consecutive years, will obviously have a positive impact on the country’s economy, its business, trade flows, market development and general increase of living standards for Moldovan citizens (i.e. higher incomes, lower prices, increased trade and more prosperity). However, the positive effects of the DCFTA will require different structural and institutional reforms and may have certain risks for several areas of the Moldovan economy. The risk assessment of the DCFTA is presented as a way to face the upcoming challenges and manage to “soften” the impact for businesses that are most vulnerable. Therefore, below is presented an analysis of different views on risk assessment of the German Economic Team Moldova, Visegrad group and the World Bank.
In the light of the German Economic Team Moldova report, the main challenges for Moldova’s economy may be the fall in demand, possible unemployment and shift in tax revenues for government.81 Therefore, it is crucial for the government to know clearly the sectors that are the most vulnerable and most likely to fall under the risk of immediate implementation of the DCFTA. The report estimates the impact of removing tariffs of EU imports (impact on demand for imports and impact on government finances), as well as making recommendations on how to redress the situation. According to its estimations, “manufacturers of leather products, textiles, wearing apparel as well as producers of tiles and bricks may see significant increases in competition”, as well as an increase in imports of some agricultural products.82 Moreover, it also finds that the DCFTA will bring between 5.4% and 6.4% to Moldova’s GDP, while exports are most likely to increase by 11-16% and imports by 6-8%.83 Higher competition also coming from the imported products from the EU will impose stricter “rules of the game” on the domestic companies, also by discouraging monopolies and creating proper conditions for open market competition.
Based on the experiences of the Visegrad Group (V4), consisting of cases and examples of economic integration and policy implementation in Hungary, the Czech Republic, Slovakia and Poland at their time, a report was issued to present an analysis and give recommendations for Moldova economic integration with the EU. In each of the presented cases it is clear that because some of the countries were not ready to absorb all the necessary changes and implement structural reforms, they were confronted with several difficulties. In this context, economic integration with the EU through DCFTA is quite challenging, demanding and risk assessment is a “must” in order to minimize possible negative side effects. This report, among others, presents the following conclusions and recommendations for implementing the DCFTA:1. “enhance firm political leadership of Moldovan authorities and set up a clear policy
objectives, not implementing the DCFTA “blindly”;
81 Jörg Radeke, The DCFTA between Moldova and the EU – A Risk Assessment, German Economic Team Moldova, Policy Paper Series [PP/03/2012], Berlin/Chisinau, September 2012. Available at: http://www.berlin-economics.com/download/policypapers/GET_Moldova_PP_03_2012_en.pdf. 82 Ibid., p. 17. 83 Ibid., p. 7.
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2. take necessary actions to measure the potential impact of the new legislation and structural reforms on businesses;
3. set up an online portal to improve communication and interaction between government and business;
4. engage in more SME corporate actors in the DCFTA implementation;5. open regional information centres to provide consultations in areas of the DCFTA
implementation and EU integration in general“84.
According to the World Bank Economic update for Moldova dated 02 October 2014, projections for the following years are relatively encouraging. In 2014, the economy of Moldova experienced a great growth in the first half, but by the end it slowed down, also because of the Russian embargos on Moldovan exports. Moreover, World Bank growth forecast reduces 3% of GDP for 2015 and 3.5% for 2016, due to many factors, including weak economic activity which is expected with Russia reducing trade relations with Moldova, and quite reduced trade activities with Ukraine.85 At the same time “soundness and transparency of the financial sector remain the main domestic policy challenges.”86 However, World Bank considers that for improving Moldova’s trade competitiveness it requires implementation of relevant structural reforms in all sectors of its economy. To this end, the DCFTA gives the right opportunity for a greater economic integration of Moldova into global economy and the possibility to enhance openness, transparency and proper structural reforms. So far, Moldova’s main trading partners remain the EU and the CIS countries, but in order to improve its economy growth indicators and the living standards of its citizens, it needs to find new markets and producers.87
Can the EU actually through the DCFTA substitute the CIS (i.e. Russian) market area of activity, or compensate its trade share? By signing the DCFTA Moldova encountered serious trade destructions with Russia (which still remains an important trade partner in the region), especially in fruits exports (e.g. apples, grapes, plums and others).88 In response to Russia’s restrictive trade policy, the EU increased imports on Moldovan wine, fruits and other products. However, it is more difficult to increase exports to the EU because of the high and restrictive standards that need to be respected (i.e. maximum level of containments in food, of pesticides, health and hygiene standards, labelling requirements, proof traceability, compliance and responsibility of food and feed89) and poor technical conditions of the producers.
84 Georgian Institute for Strategic Studies, Report of the Task Force under the Project “V4 supporting Economic Integration of Georgia and Moldova with the EU”, July 2014. Available at: http://www.ceid.hu/wp-content/uploads/2014/11/Report-Moldova_ENG.pdf. 85 World Bank, Economic Update Moldova, 02 October 2014. Available at: http://www.worldbank.org/content/dam/Worldbank/document/eca/moldova/Moldova%20Economic%20Update%20October2014_Final_ENG.pdf. 86 Ibid. 87 Ibid. 88 Jörg Radeke, Moldova’s fruit exports: Can the EU substitute the Russian market?, German Economic Team Moldova, Policy Paper Series [PB/05/2014], Berlin/Chişinău, June 2014. Available at: http://www.get-moldova.de/download/policybriefings/2014/PB_05_2014_en.pdf?PHPSESSID=f3820de4165392bd0c10205bb09b11d7. 89 Jörg Radeke, Op. cit., p. 14.
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Conclusion
All these achievements were possible due to the enormous support of the EU and distinct pro-European orientation of the Republic of Moldova. And the strong dependency on the external factors played its role as “booster”. The Association Agreement, including DCFTA, has a wide area of application, covering domains such as political dialogue and cooperation in the field of foreign security policy, justice and freedom, economic sector, trade and trade-related matters, financial assistance and anti-fraud and control provisions. Among top priorities are issues related to combating organized crime, corruption, increasing transparency and efficiency of good Governance, establishing better consumer protection and boosting employment. As a result, Moldova will benefit from increased imports and exports, increased GDP and salaries, enhancement of business environment, as well involvement of the EU companies in investment projects in Moldova. The DCFTA carries a distinguished added value, that has to be gradually implemented in a transitional period of 10 years and which includes trade remedies, technical barriers to trade, standardization, metrology, sanitary and phytosanitary measures, customs, trade in services and electronic commerce, intellectual property rights, competition and other aspects. The best achievement of the DCFTA is the elimination of customs duties, fees and other charges on imports and exports; as well as boosting trade in services and electronic commerce, by mutual recognition of qualifications for natural persons and the launch of e-customs. The new element which challenges nowadays Moldova’s business environment is the enhanced competition and competition related issues as antitrust and merger control, which need to be monitored and controlled by relevant authorities. Trade barriers in the EU-Moldova trading relation are of different nature, namely tariff (which are expected to reduce) and non-tariff barriers (include restrictions and measures applied on products and producers, such as: sanitary and phytosanitary measures, rule of origin, requirements and high standards of quality and quantity, high competitiveness, diversification of products, etc.) and technical barriers (the most challenging one – standardization). The DCFTA also has a separate focus for the agriculture sector, which represents the core of Moldovan economy, and is foreseen to benefit from higher production standards, modern technologies, European funds and investments and improved labour conditions. Importance of the DCFTA for agriculture sector is crucial, since it represents more than 50% of total employment in the country, having most of the population established in the rural areas. The expected effect of liberalizing trade is to create more business activities between the EU and Moldova’s business milieu. However, the Foreign Direct Investment is very small, through implementation of the DCFTA it is foreseen to gradually increase. But, is the DCFTA sufficient in order to enhance closer cooperation and economic integration with the EU? Is the EU successful in shaping Moldova in an EU-model society?
The EU acts in its role of normative power, exporting its values towards neighbouring countries, offering development, innovation and political and trade cooperation, in exchange for them to implement the EU’s acquis. How far can the EU go in order to continue to invest and maintain its cooperation with its neighbouring partners, acting as normative power, however not being able to offer the most desired outcome – EU membership? Is the EU ready for further enlargement? What else could it offer to the EaP countries?
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Bibliography
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• Centrul Regional De Mediu Moldova, Impactul Acordului de Liber Schimb Aprofundat şi Cuprinzător între Republica Moldova şi Uniunea Europeană asupra sectorului agroalimentar moldovenesc, Chişinău 2013. Available at: http://www.rec.md/sites/all/themes/daycare/images/Publicatii/studiu_impactul%20zlsac_agricultura.pdf
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ROMANIAN JOURNAL OF EUROPEAN AFFAIRS Vol. 15, No. 4, December 2015
Management of Regional and International Crises by the European Union
Antonio Manrique de Luna Barrios1
Abstract: One of the European Union’s main goals is to be an important actor in the field of international peace and security and, with this in mind, it has developed a number of military and civil capacities. With these capacities the EU has launched and contributed to a great number of peace missions on different continents. And, by capitalizing on the experience gained during these peace missions, a general improvement of the standards of the EU peacekeeping missions can be achieved. And with the lessons learned and the actions that have been taken by the EU in its military, civil and mixed operations it could also make use of its normative power in order to consolidate the respect and protection of the fundamental rights of different populations around the world.
Keywords: European Union, crisis management, Petersberg tasks, peacekeeping, civil and military crisis management.
Introduction
Internal and international armed conflicts have not always been managed in an adequate way on the international arena and for this reason constant violations of the fundamental human rights have taken place and have endangered the regional and international security and stability.
Considering this problem that the international society is facing, it has to be asked: Has the participation of the EU been appropriate in terms of strengthening regional and international security? Has the European Union contributed to the creation of a climate of regional, national and international stability with its Petersberg tasks given the globalized and interconnected world in which we live?
In order to answer these questions we have structured this investigation in two parts. In the first section we will study the role of the EU in the area of regional peace and security. In the second section we will discuss the role of the EU in the area of international peace and security.
This research wants to: 1) foster the debate about the role that the EU has assumed in order to contribute to regional and international peace and security; 2) reaffirm the importance of strictly observing European and international laws; 3) establish that the
1 Antonio Manrique de Luna Barrios is Doctor in International Law, Master in International Relations, Master in International Trade and Master in Intercultural Communication. At the moment he is Professor for Public International Law & International Organizations at the Deusto University (Spain). E-mail: [email protected].
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actions of the European Union should be in line with the rules and principles that have been embedded in the Charter of the United Nations; 4) disseminate the lessons learned by the European Union with regards to regional and international peace and security.
Finally, we should note that this research uses a multidisciplinary approach, where theory and practice are combined, in highlighting the various experiences of the European Union in the promotion of regional and international security. The sources that were used are official national documents and other documents with supranational character.
1. The EU’s Crisis Management Efforts in Regional Peace and Security
With the Treaty of Amsterdam the European Union had at its disposal a number of mechanisms that allowed it to develop a more important role in the area of regional peace and security. The EU wanted to become a more important player in the international society.2
The Treaty of Amsterdam helped it in certain ways to reach this objective by transferring the Western European competences to it that had been linked to the tasks of Petersberg.3 However, for a long period of time the Member States debated on the need to approach the development of the Petersberg tasks with low or high intensity. With the adoption of the Global Objective of Helsinki, it was decided that the EU would obtain a major capacity to develop the whole range of missions mentioned before. The reference made in Article 17.2 TEU also caused some controversy between the Member States because of the possibility that the EU could use combat forces to manage certain crises. This led to the refusal of some Member States because it could lead to peace enforcement operations4.
In this regard it has to be said that the initial rejection of the Petersberg tasks by some EU members has been overcome by missions of low intensity (humanitarian missions, maintaining traditional peace). However it still remains with respect to peace enforcement missions5. At the same time, the EU has continued to develop its “Common European Defence Policy” and with the management of military crises, the management of civil crises and the prevention of conflicts it continues to try to uphold regional stability with
2 Koops, Joachim & Macaj, Gjovalin. The European Union as a Diplomatic Actor, Basingstoke: Palgrave Macmillan, 2014. 3 The Petersberg tasks are a set of humanitarian and rescue operations, as well as activities for peacekeeping and peace restoration, which were established in the framework of the Western European Union, after the adoption of the Declaration of Petersberg on June 19, 1992. Vid. Hill, C., “The EU´s Capacity for Conflict Prevention”, European Foreign Affairs Review, Vol. 6, 2001, pp.315-333; Consejo de Ministros de la UEO, Declaración de Petersberg, Bonn, 19 de junio de 1992; Oreja, M., El Tratado de Ámsterdam de la Unión Europea. Análisis y comentarios, Mc Graw-Hill, Madrid, 1998, pp. 366-374. 4 Vid. Oust-Heiberg, E., Security implications of EU expansion to the North and East, in K.A. Eliassen (Ed.). Foreign and Security Policy in the European Union, London, Sage, 1998, p.185. Citado por Natividad Fernández Sola, “La Política de Seguridad y Defensa como elemento constitucional de la Unión Europea”, Revista General de Derecho Europeo, No.2, octubre 2003, pp.1-36. 5 Vid. Bono, G. “The role of the EU in external crisis management”, International Peacekeeping, Vol. 11, No.3, 2004, pp. 395-403; Acosta, M., “La evolución de las operaciones Petersberg de la UE - Operación Althea en Bosnia-Herzegovina”, Revista de Derecho Comunitario Europeo, Vol. 10, No.23, 2006, pp.47-86.
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the coordination and systematic utilisation of the instruments that it has been given. It makes efforts towards identifying the causes of the conflict and trying to help resolve them in a peaceful manner. It is also improving the capacity to intervene in the early stages of a conflict and to promote international cooperation in this field. To date, the EU has deployed several operations which enabled it to contribute to the maintenance of international peace and security. Thus, the European Union has helped neutralise certain ideological extremes that exist in society and endanger certain nations and regions.
In this regard, it should be noted that through the concept of crisis management, the European Union covers a rather wide range of situations and activities, but the concept is usually identified with a series of interventions that are aimed at putting an end to armed conflicts in order to protect civilian populations and to rebuild the devastated areas through a combination of military and civilian means.
With new threats emerging for the regional and international security, the European Union has continued to develop a number of mechanisms to help it deal with such situations. The European Union and other regional organizations took over the challenge to manage crisis, given the fact that with this it tried to keep international peace and security6.
In this context the European Union has decided to participate in the area of crisis management of military and civil nature with the objective to assume a more preponderant role and in accordance with its position as an important actor in the international society7. It makes sense to observe that the European Union has to overcome several problems in the area of crisis management: firstly, it is necessary to create a general policy that is applicable for all cases in which a crisis management is carried out, independently of the organisations that do that; secondly, if this general policy will prove unsuccessful, it has to be determined if the European Union has strayed too far from the United Nations’ framework in regards to the development of its instruments for crisis management, and, thirdly, to single out contradictions that can exist between the instruments that have been adopted for crisis management and the dispositions present in the Charter of the United Nations.
It has to be noted that within the framework of the United Nations there are several instruments for crisis management and this universal organisation does not have or claim the monopoly for neither one of them, thus the European Union is free to use them. Among these instruments we can mention the preventive diplomacy, the establishing of peace, peacekeeping, consolidation of peace, the disarmament, the sanctions and the peace
6 Vid. Manrique de Luna, A., Las operaciones de mantenimiento de la paz de las organizaciones regionales de carácter internacional. Editorial Dykinson, Madrid, 2013; Manrique de Luna, A. “Las operaciones de mantenimiento de la paz de la Unión Europea”. In: Tremolada, E. (Ed.), Los procesos de integración como factor de paz. Ed. Publicaciones de la Universidad del Externado de Colombia, 2014. 7 Tuomas, Iso – Markku, “Europe’s changing security landscape: What role will the EU play in security and defence?”, FIIA Briefing Paper 165, December 2014, pp. 1-8.
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enforcement8. In this sense, the European Union has developed instruments of political-diplomatic, economic, military and civil character to contribute to crisis management.
Now after having presented a few key elements of the EU’s approach and efforts in the field of crisis management, it has to be noted that until now it was not possible to design a general policy applicable to crisis management, given the sheer number and complexity of the different instruments that have been adopted with the objective to solve such crises. A number of disagreements have risen and have been generated with regard to the opportunity to carry them out and to the powers that can implement them. The role assumed by the European Union in crisis management continues to be a very interesting one since through its experience it contributes to the discussion and development of possible tools for the future control of such crises, And, as a consequence,, it makes for an important contribution in designing of an international system firmly established and experienced in crisis management and where peace and regional and international security are promoted.9 Furthermore, the EU has developed certain instruments for crisis management that are wider than those envisioned by the United Nations, but they are at all times in accordance with the provisions of the United Nations Charter.
Thus, we can conclude that the European Union seeks to implement an effective operational capacity that allows solving the various problems that may arise and affect international peace and security and the full respect of human rights. The success for this mainly depends on the ability of the institutions involved in peacekeeping – political structures, regional and international organizations – to identify and designate an efficient functioning10.
So, regional organizations that were created for economic purposes (like the EU) had to adapt to the new requirements that the international society presented to them, and thus, had to understand that peace, security and the promotion and the respect for the fundamental rights and freedoms are essential to maintain national, regional and international stability given the global context in which we live. The European Union has developed a series of military and civil capacities to preserve peace and security. Now we are going to develop on each one of them.
8 The first three instruments of crisis management can only be used with the consent of the parties of the conflict in question. Sanctions and peace enforcement are coercive measures, so, by definition, they do not require the consent of the parties concerned, but the authorisation of the United Nations Security Council. Meanwhile, disarmament can be carried out by agreement or in the context of coercive measures as regulated in Chapter VII of the Charter of the United Nations. Vid. United Nations, Supplement to an Agenda for Peace, Document A/50/60-S/1995/1, 25 January 1995, paragraphs 23-24. 9 Brodersen, D, “Konfliktvorbeugung und Krisenbewältigung”, Europäische Sicherheit, (45. Jg., Nr. 6, Juni 1996), s. 50-52. 10 Vid. Ekengren, M. and Rhinard, M., European Union Crisis Management (EUCM): the interface between Union institutions and EU member states, ECMA Conference ”Future challenges for crisis management in Europe” 3-5 May 2006, Stockholm, Sweden.
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1.1 The European Union and its military capacities to manage the crisis
In order to ensure that the European Union could play a complete role on the regional and international level and thus overcome its apparent inability to manage crises of a military nature, just as it happened during the conflicts in Bosnia-Herzegovina and Kosovo11, it was decided to equip it with a number of instruments and resources to enable it to assume its responsibilities with regard to European security policy and common defence with autonomous action, backed up by credible military capabilities and with appropriate decision making bodies12.
Also, to this end, it was established that there is a need to develop a cooperation framework between the European Union and the Organization of the North Atlantic Treaty13, under which the European Union could choose according to the circumstances between the missions that it would lead, using the means and resources of NATO and the missions that it would use without the support of NATO14. Such a horizontal cooperation between the EU and NATO should avoid any double use of forces in crisis management and it was claimed that a special attention should be given to what has been established with respect to this by NATO15.
Later it was given deeper consideration to the idea that the capacity was created to take an autonomous decision (headline goal), which would allow the European Union to carry out its missions in order to respond to international crises taking place16. It was also established that there is a need for new organs and structures of political and military nature to allow the European Union to ensure the political guidance and strategic direction to such operations while respecting the institutional framework that had been set up.17
11 Treacher, A.,“From civilian power to military actor: the EU’s resistible transformation”, European Foreign Affairs Review, No. 9, 2004, pp. 49-66. 12 European Union, European Council of Cologne , 3 - 4 of June 1999 13 Van Willigen, Niels and Koops, Joachim, “The European Union’s Relationship with NATO and the OSCE”, in K. Jorgensen, A. Aarstad, E. Drieskens, K. Laatikainen, B. Tonra (eds.) The SAGE Handbook of European Foreign Policy, SAGE: 2015. 14 In the framework of the Berlin Plus agreements it was a commitment adopted for a strategic partnership in crisis management, under which the EU could conduct operations of peacekeeping, using the assets and capabilities of NATO. The EU could also have access to planning capabilities of this regional organization and its military assets and capabilities. Vid. Al Tal, Baider, EU-NATO Relations: Military Missions in the Western Balkans and the Berlin Plus Agreement, Lambert Academic Publishing, 2013.Thus, two modalities were established with respect to peacekeeping missions led by the EU. So, first the missions were established where the EU used assets and capabilities of NATO and second peacekeeping missions were addressed where the European Union did not use the means and capabilities of NATO. 15 After the coming into vigour of the Lisbon Treaty, it was sought to define a stronger cooperation with NATO. In this context, it was established that a Common Security and Defence Policy effectively helps to increase the security of European citizens and contributes to peace and stability of the environment and for the world. Vid. Conclusions of the Presidency of the European Council of Brussels, 19-20 December 2013 16 Vid. Conclusions of the Presidency of the European Council of Helsinki, 10-11 December 1999. 17 Tamminen, Tanja, “Towards efficient early action: The EU needs a regional focus and proactive tools to prevent and manage conflicts”, FIIA Briefing Paper 113, September 2012, pp.1-9.
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1.2 The European Union and its civil capacities to manage crisis
Since some fears were expressed by some of the Member States (especially the Scandinavian countries) pointing to the fact that the European Union would suffer as a result of its potential militarization, it was suggested during the European Council of Cologne the need that the EU should also assume a role in civil crisis management18. Later, this approach was formalised by the European Council in Helsinki, where it was stated that “a mechanism for handling non-military crisis to coordinate and to make more effective the various civilian means and resources would be established in parallel with the military means, that were available to the European Union and its Member States.” Finally, through the European Council in Santa Maria de Feira, which was held from 19 to 20 June 2000, a number of tasks were established with regard to police activities, restoring the rule of law, civil administration and civil protection in full respect of the principles of the United Nations Charter19 and with the aim of contributing to building a European Security and Defence Policy, which could strengthen the external action of the European Union with the development of a military crisis management capability as well as the development of a civil capacity. Of the tasks mentioned before, which started to be conducted, in order to contribute to the management of civil crises, we should note the tasks which are linked to police activity. Later, an action plan for the development of a European police force20 was initiated through the Göteborg European Council.
Regarding the fulfilment of the objectives in the field of civilian crises management, it should be noted that under a voluntarily assumed commitment of the Member States, these goals have been achieved and the deepening of these capabilities is being taken into consideration.
On a practical level, the EU experience in the autonomous management of peacekeeping in the region dates back to 2003, when it launched the Operation Concordia in the former Yugoslav Republic of Macedonia (first operation of military peacekeeping nature, which was established by the Council Joint Action 2003/92 / CFSP of 27 January 2003), and the police mission of the EU in Bosnia and Herzegovina (first peacekeeping of civil nature, which was established by the Council of Joint Action 2002/211 / CFSP of 11 March 2002). Later, the Operation Althea in Bosnia and Herzegovina (which was established by the Joint Action Council of 2004/570 / CFSP of 12 July 2004), the EU NAVFOR – Operation ATALANTA in Somalia (which was established by the Join Action Council of 2008/749/CFSP of 29 September 2008)21, among others.
18 Vid. Conclusions of the Presidency of the European Council of Cologne, 3-4 June 1999. 19 According to the Council in Santa Maria de Feira, the civil capacity of the EU should be developed in four areas: police, strengthening the rule of law, strengthening civil administration and civil protection. Vid. Conclusions of the Presidency of the European Council of Santa Maria de Feira, 19-20 June 2000. 20 Vid. Conclusions of the Presidency of the European Council of Goteborg, 15-16 June 2001. 21 On 21 November 2014 the Council of the EU extended the Mandate of Operation ATALANTA until December 2016.
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2. The EU’s Crisis Management Efforts in Peace and Security at International Level
The development of the EU activities abroad has raised the need to address issues related to: the geographical scope of the European Security and Defence Policy; the comparable advantages of the deployment of a peacekeeping mission of this organisation to solve a crisis; determining if it is required to have a prior green light from the United Nations; the limits in terms of the intensity of the operation and the way that an intervention is done22. As concerns the first aspect mentioned before, it can be said that through its actions, the EU has proven its will to develop and to interact as a global actor in the area of peacekeeping and international security, and for this reason it has deployed its peacekeeping missions not only in Europe, but also in Africa (the Artemis Operation, the Police Mission of the European Union in Kinshasa and the Help Mission of the EU for the African Union in Darfur), in Asia (with the Observation Mission of Aceh in Indonesia) and in the Middle East (with the EUPOL COPPS Mission and the EU Border Assistance Mission Rafah in the Palestinian Territories), among others.
Then, regarding the advantages of deploying an out-of-the-area mission of the EU, it is worth mentioning the fact that there exists an important level of acceptance for this kind of operations, which do not present any difficulties in regards to obtaining the agreement of the states in the territory of which the deployment of a peacekeeping mission takes place. Which is being carried out by the EU either in an autonomous way or in application of the Berlin Plus Agreements. But we have to indicate that the EU still depends on the cooperation of NATO in order to realise missions of higher risk intensity or more complex operations. However, with respect to the missions of low intensity and complexity, the European Union can deploy in an autonomous way.
As to whether the EU considers it necessary to have a mandate of the United Nations, before the deployment of its missions, it must be said that every time the EU has acted in accordance with the dispositions of the Charter of the United Nations, given the fact that it waited for the authorisation coming from the Security Council of the United Nations before it carried out missions with a military component; however, in the case of missions of civil character it has acted in a direct way and without any authorisation of the Security Council. It can be noted that this practice does not violate the dispositions of the Charter of the United Nations if it obtains the prior consent of the state on the territory of which the deployment will take place.
Regarding the intensity of the operation that the EU carries out, as previously noted, there is no consensus among the Member States with regards to the type of operations in which the EU would be willing to participate or not. And the same applies to the type of missions in which, considering their distance from the Union, the EU should decide whether to engage or not23. Finally, with regard to the way in which the interventions of the European Union happen, they were carried out for short periods of time and they
22 Vid. Bayles, A., “The Institutional Reform of ESDP and Post-Prague NATO”, The International Spectator, Vol. XXXVIII, No.3, 2003, pp. 31-46. 23 Vid. Miralles, D., “La Capacidad de Acción de la Unión Europea: Análisis de las Recientes Misiones de Gestión Civil y Militar de Crisis en el Marco de la PESD”, Revista General de Derecho Europeo, No.3, enero 2004, pp. 1-14.
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avoided participating in peace enforcement operations, with the exception of the Artemis Operation in the Democratic Republic of Congo.
Considering this special case, the European Council has repeatedly made references about the role of the EU in the DRC and to the new tasks that it had assumed in the Police Mission of the European Union in Kinshasa, which was deployed on June 8, 2005. Similarly, under the new requirements for international participation of the EU in civilian and military crisis management, it was decided to continue developing the military capabilities of the European Union in the area of battle groups and regarding the rapid reaction forces. Considering the civilian capabilities of the EU, it was decided to continue working on aspects related to strategic planning, stabilisation, reconstruction, conflict prevention, institutional development and support for humanitarian operations.24
Meanwhile, regarding the peace process in the Middle East, the European Union has reiterated the importance of supporting, through the deployment of the EU Border Assistance Mission Rafah, the monitorization process of the Rafah crossing between Gaza and Egypt. Also, efforts were made to strengthen the capacity of Palestinian border management. Finally, the EU has sought to strengthen its relations with Africa in the field of peacekeeping and international security. On this note, it has reaffirmed its commitment to continue supporting the missions of the African Union and other African organizations, taking into account the new tasks and the need to ensure a transition to peace and security in the region.
Conclusions
On the international scene the European Union has established itself as an important actor in the area of regional and international peace and security. These efforts have been the product of a number of communitarian efforts, which, at least for the moment, provide an adequate protection, assistance and security to the peoples that live in our region or other regions in the world.
The incorporation of the Petersberg tasks in the regulatory framework of the European Union was a fundamental aspect from which both military and civilian missions have been carried out. Regardless of its military and financial capacity, it can be argued that the European Union has achieved a greater degree of acceptance by the different actors of the international society, to the extent that its actions generate less doubt about their objectives and legality. The fact that the actions of the European Union showcase an important degree of perceived fairness allows the EU to carry out the Petersberg tasks not only in our region, but also on a global scale.
With the lessons learned, the EU can provide to needing populations an adequate protection and humanitarian assistance through a range of activities. This outcome is possible because of its autonomous military missions or by using the military capabilities of NATO. Meanwhile, operations that are more linked to civilian activities have mainly been developed through the deployment of its police missions. However, the EU
24 Vid. Conclusions of the Presidency of the European Council of Brussels, 16-17 June 2005, paragraph 78-81.
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continued to improve its military capabilities and, in that sense, it has created a European Defence Agency, through which it hopes to further develop and consolidate its defensive capabilities and the cooperation in armaments. It also wants to improve its technological development and do research in the field of defence, among others.
Regarding the civilian capabilities of the European Union for crisis management, it should be noted that this is the area in which it has developed its capacities in a very effective and autonomous way. It has carried out a number of troop deployments of police which allowed contributing to international peace and security. However, the European Union continues to forge partnerships with third party countries and (regional or global) organisations that share its values and principles; this way a high degree of cooperation in all fields of international relations that are linked to the maintenance of peace and security can be achieved. And the European Union is strengthening its relations with the United Nations in order to strengthen its role as an international player in peacekeeping operations and in world politics.
References
Books
• Baider, A., EU-NATO Relations: Military Missions in the Western Balkans and the Berlin Plus Agreement, Lambert Academic Publishing, 2013.
• Gonzáles, A., “La política de defensa de la Unión Europea”, en Esther Barbé (dir.), Política Exterior Europea, Ariel, Barcelona, 2000, pp.152-153.
• Koops, Joachim & Macaj, Gjovalin. The European Union as a Diplomatic Actor, Basingstoke: Palgrave Macmillan, 2014.
• Manrique de Luna, A., Las operaciones de mantenimiento de la paz de las organizaciones regionales de carácter internacional, 1ª. ed., Editorial Dykinson, Madrid, 2013, pp.1-172.
• Manrique de Luna, A. “Las operaciones de mantenimiento de la paz de la Unión Europea”, in Tremolada, E. (Ed.), Los procesos de integración como factor de paz. Ed. Publicaciones de la Universidad del Externado de Colombia, 2014.
• Oreja, M., El Tratado de Ámsterdam de la Unión Europea. Análisis y comentarios, Mc Graw-Hill, Madrid, 1998.
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• Ortega, M., “Petersberg tasks, and missions of the European force”, Institute for Security Studies, Paris, 2004.
• Van Willigen, Niels and Koops, Joachim, “The European Union’s Relationship with NATO and the OSCE”, in K. Jorgensen, A. Aarstad, E. Drieskens, K. Laatikainen, B. Tonra (eds.) The SAGE Handbook of European Foreign Policy, SAGE: 2015.
Articles
• Acosta, M., “La evolución de las operaciones Petersberg de la UE- Operación Althea en Bosnia-Herzegovina”, Revista de Derecho Comunitario Europeo, Vol. 10, No.23, 2006, pp.47-86.
• Bayles, A., “The Institutional Reform of ESDP and Post-Prague NATO”, The International Spectator, Vol. XXXVIII, No.3, 2003, pp. 31-46.
• Bono, G. “The role of the EU in external crisis management”, International Peacekeeping, Vol. 11, No.3, 2004, pp. 395-403.
• Brodersen, D., “Konfliktvorbeugung und Krisenbewältigung”, Europäische Sicherheit, 45. Jg., Nr. 6, June 1996, s. 50-52.
• Fondation Robert Schuman, “L’Union Européenne et la gestion des crises”, Question d’ Europe, No.22, 13 Mars 2006, pp.1-13.
• Gourlay, C., “European Union procedures and resources for crisis management”, International Peacekeeping, Vol. 11, No.3, 2004, pp. 404-421.
• Hill, C.,“The EU´s Capacity for Conflict Prevention”, European Foreign Affairs Review, Vol. 6, 2001, pp.315-333.
• Iglesias, A., “La Agencia Europea de Defensa ya es una realidad”, Revista Española de Derecho Internacional, Vol. LVI (2004), 2, pp.1056-1060.
• Messervy-Whiting, G. “The Growing EU-NATO Relationship: Beyond Berlin”, The International Spectator, Vol. XL, No.2, April-June 2005, pp.63-73.
• Miralles, D., “La Capacidad de Acción de la Unión Europea: Análisis de las Recientes Misiones de Gestión Civil y Militar de Crisis en el Marco de la PESD”, Revista General de Derecho Europeo, No.3, enero 2004, pp. 1-14.
• Tamminen, Tanja, “Towards efficient early action: The EU needs a regional focus and proactive tools to prevent and manage conflicts”, FIIA Briefing Paper 113, September 2012, pp.1-9.
• Tuomas, Iso – Markku, “Europe’s changing security landscape: What role will the EU play in security and defence?”, FIIA Briefing Paper 165, December 2014, pp. 1-8.
• Treacher, A., “From civilian power to military actor: the EU’s resistible transformation”, European Foreign Affairs Review, No. 9, 2004, pp. 49-66.
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Documents
Conclusions of the Presidency of the European Council
• European Council of Cologne, 3-4 June 1999.
• European Council of Helsinki, 10-11 December 1999.
• European Council of Santa María de Feira, 19-20 June 2000.
• European Council of Laeken, 14-15 December 2001.
• European Council of Sevilla, 21-22 June 2002.
• European Council of Brussels, 24-25 October 2002.
• European Council of Brussels, 27 January 2003.
• European Council of Brussels, 16-17 June 2005.
• European Council of Brussels, 15-16 December 2005.
• European Council of Brussels, 19-20 December 2013.
Statements by the Council of Ministers of the Western European Union
• Consejo de Ministros de la UEO, Declaración de Petersberg, Bonn, 19 de junio de 1992.
• Consejo de Ministros de la UEO, Declaración de Marsella, 13 de noviembre de 2000.
Other documents
• Council of the European Union, “Lessons learned from the first EU Military Operation (Concordia)”. Document 11154/1/03 REV 1, 15 September 2003.
• Council of the European Union, “A Review of the first 100 days of the EU Police Mission in Bosnia and Herzegovina (EUPM)”. Document 11760/03, 23 of July 2003.
• Ekengren, M. and Rhinard, M. European Union Crisis Management (EUCM): the interface between Union institutions and EU member states, ECMA Conference ”Future challenges for crisis management in Europe” 3-5 May 2006, Stockholm, Sweden.
• Informe del Secretario General al Consejo de Seguridad de las Naciones Unidas sobre la Misión de las Naciones Unidas en Bosnia Herzegovina (UNMIBIH), Documento S/2002/1314, 2 of December 2002.
• Naciones Unidas, Suplemento de un Programa de Paz, Documento A/50/60-S/1995/1, de 25 de enero de 1995, párrafos 23-24.
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ROMANIAN JOURNAL OF EUROPEAN AFFAIRS Vol. 15, No. 4, December 2015
The Future of Private Equity in Europe – The Determinants Across Countries
Mihai Precup1
Abstract: This paper examines two aspects related to private equity investments in Europe. First, we will present the evolution of private equity investments across European countries during the last crisis. Second, the paper will analyse and identify the main determinants of the European private equity market, using an empirical panel analysis. The empirical model includes many of the determinants already tested in previous studies (GDP growth, Market Capitalization, Research and Development Expenditures, Interest rates, etc.) and also new variables such as productivity and corruption index which we consider important factors in explaining the evolution of private equity investments in Europe. The present research paper follows the equilibrium model of private equity investments (Gompers and Lerner 1998, Jeng and Wells 2000, Romain and de La Potteria 2004, Félix 2007). We will use aggregated data from European private equity market during 2000–2013, as well as macroeconomic data, in order to estimate a panel data model with fixed and random effects. This paper will also run the Hausman specification test in order to compare the consistency of fixed effects models and random effects models. Our results confirm existent hypotheses regarding the importance of some determinants on the evolution of private equity investments in Europe. However, in the context of the last crisis new factors emerged as important for the private equity market in Europe such as productivity or corruption.
Keywords: private equity, economic growth, market capitalization, unemployment rate, corruption, private equity determinants, Europe.
JEL Codes: C23, G24, G32, G34.
1. Introduction
This article tries to answer to the following questions: How the recent crisis impacted the evolution of Private Equity in Europe? and What are the factors affecting the evolution of private equity investments in Europe?
Europe is the second largest private equity market worldwide after United States. In 2013, total private equity investments amounted to 35.7 billion euros which represents a drop of 49% compared to pre-crisis levels. This drop was mainly in relation to the austerity measures taken by European governments in order to respond to the sovereign
1 Mihai Precup is a PhD student at University of Paris 1: Panthéon-Sorbonne in France and advisor to the Vice-President of the European Investment Bank in Luxembourg. Email: [email protected].
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debt crisis. However, in the last years we have seen that private equity investments began to slightly revive in Europe but modest and well below pre-crisis levels.
The objective of this research is to identify and analyse the main factors affecting the evolution of private equity in Europe. It should be noted that the literature is not exhaustive in terms of identifying the determinants of private equity market. However, some studies managed to identify and validate macroeconomic variables such as the GDP growth, the market capitalization, the R&D expenditure, the interest rates, etc. as drivers for the private equity market. In general, the literature studies the phenomenon of venture capital which targets the investments in start-ups and is a subcomponent of the private equity investments.
The papers which are more relevant for this study, both in terms of model and methodology, are the following: Gompers and Lerner 1998, Jeng and Wells 2000, Romain and de La Potteria 2004, Félix 2007.
Gompers and Lerner (1998) study the development of venture capital activity in U.S. taking into account the period 1969 - 1994. The main variables studied were: the number of IPOs, the economic growth (expressed as GDP growth in real terms) and the short-term interest rate (expressed as the yield of U.S. Treasury securities). Gompers and Lerner (1998) confirm the positive effect of the economic growth on the evolution of venture capital in U.S. Both authors also confirm statistically the negative relationship between the venture capital and the short-term interest rate. However, Gompers and Lerner (1998) failed to statistically validate a relationship between the number of IPOs and the funds raised for the venture capital investments.
In another similar study, Gompers and Lerner (1998) tested and validated a correlation between the US Government expenditure in R&D and the evolution of venture capital investments. This variable was validated by the econometric model as significant with a positive impact on the venture capital investments.
Jeng and Wells (2000) studied the evolution of venture capital investments in 21 countries during 1986 and 1995. Both authors analysed the determinants of venture capital such as market capitalization, number of IPOs, economic growth (expressed as GDP growth in real terms), labour market rigidity, value of pension funds and the level of taxation on capital gains.
The possibility of having access to IPO divestments is considered by both authors as the most important factor for an private equity investment fund when deciding to raise money for the venture capital investments. However, Jeng and Wells (2000) failed in their analysis to validate a significant correlation between the evolution of venture capital investments and the following variables: economic growth, market capitalization and tax on capital gains.
Romain and de La Potteria (2004) continues to study the determinants of venture capital for a sample of 16 OECD countries during the period 1990 - 2000. The main variables used in their econometric model are: economic growth rate (expressed as GDP growth in real terms), long-term interest rate, short-term interest rate, economic
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growth rate, level of R&D spending, number of patents filed, labour market rigidity and entrepreneurial activity.
Unlike Jeng and Wells (2000), the authors Romain and de La Potteria (2004) showed that the economic growth affect positively and significantly the level of venture capital investments. Moreover, both authors confirmed that long-term interest rate, short-term interest rate, technological developments, level of entrepreneurial activity, R&D expenditure and labour market rigidities are key factors in the evolution of venture capital.
Latest research work led by Félix et al. (2007) was focused on the European continent and analysed a group of 23 European countries for the period 1992 - 2003. These authors are among the few authors who exclusively focus on the European private equity market. Félix et al. (2007) developed an econometric model based on the following variables: economic growth (expressed as GDP growth in real terms), long-term interest rate, market capitalization in absolute terms, R&D expenditure in absolute terms, unemployment rate, number of IPOs, number of mergers and acquisitions (M&A) and write-offs.
Félix et al. (2007) confirmed the findings of the authors mentioned above, namely the economic growth and the market capitalization were validated as drivers of venture capital market in Europe. The number of IPOs and the number of mergers and acquisitions (M&A) were also validated as determinant factors affecting significantly the level of venture capital. Additionally, long-term interest rate was statistically validated as having a positive impact on the evolution of venture capital. However, the R&D expenditure and the write-offs were not statistically validated by the econometric model of both authors.
The reminder of this paper will be organized as follows: Section 2 will present the factors which we consider important in explaining the evolution of private equity investments in Europe. Section 3 will describe the data and it will reflect the dynamics of private equity during the last crisis. Section 4 will present the methodology and will describe the equilibrium model of private equity investments and the Hausman specification test which will allow us to compare the consistency of fixed effects models and random effects models. Section 5 explains the results of our econometrical models and Section 6 concludes the research paper and points out several strategic directions that are meant to support the future development of private equity in Europe.
2. Existent Theories on the Determinants of Private Equity
In the last two decades, numerous studies have identified various factors that significantly impact the evolution of private equity investments. Therefore, this research paper reviewed the determinants of private equity which were validated by the literature such as: the real GDP growth (Gompers and Lerner (1998); Romain De La Potterie (2004) and Félix et al. (2007)), the market capitalization (Black and Gilson (1998) and Félix et al. (2007)), the interest rate (Gompers and Lerner (1998); Romain De La Potterie (2004) and Félix et al. (2007)), the unemployment rate (Félix et al. (2007)), the R&D expenditure (Gompers and Lerner (1998) and Romain and de La Potteria (2004)).
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This research paper also introduced new variables such us productivity and corruption index which were not tested previously in the literature but we consider important factors in explaining the evolution of private equity investments in Europe.
Table 1. Factors analysed for the reference authors in the area in analysis
Determinants Gompers and Lerner (1998
Jeng and Wells (2000)
Romain and de La Potterie
(2004)
Félix et al. (2007)
Economic growth + Ø + +
Market capitalization Ø +
Number of IPOs Ø + +
Number of M&A +
Number of write-offs Ø
Short term interest rate – +
Long term interest rate + +
Unemployment rate –Tax rate – Ø
R&D expenditure + + Ø
Number of patents filed +
Entrepreneurial activity + Ø
Labour market rigidity – –Value of pension funds +
Source: the author based on the findings from the literature.(+) a variable which has an effect significantly and positively validated.(-) a variable which has an effect significantly and negatively validated.
(Ø) a variable which was not validated.
Our research paper distinguishes from the studies presented in Table 1 by the fact that it analysis the determinants of the private equity market as a whole. The research led by Black and Gilson (1998), Gompers and Lerner (1998), Jeng and Wells (2000), Romain and de La Potteria (2004), respectively Félix et al. (2007) is focusing on the venture capital investments which are a subcomponent of private equity.
Let us now study each determinant of the private equity and explain for each determinant the expected theoretical impact on the evolution of private equity market in Europe. This will be useful in interpreting our empirical results and comparing them with previous studies.
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2.1. Economic growth
According to the literature, the economic growth is expressed as Gross Domestic Product growth in real terms.
Hypothesis 1: In this study we would like to test the hypothesis that economic growth significantly and positively affects the private equity investments in Europe. This hypothesis could be seen as a logical consequence of the fact that during a period of economic growth the investment opportunities for the private equity funds increase.
In the literature several studies have shown a positive correlation between private equity investments and economic growth. Gompers and Lerner (1998), Romain and de La Potterie (2004), respectively Félix et al. (2007) showed a positive correlation between GDP growth in real terms and the level of venture capital.
Based on literature findings, we expect that private equity activity in Europe to be pro-cyclical in the sense that its evolution might follow periods of economic expansion.
2.2. Market capitalization
Hypothesis 2: We assume a positive relationship between the evolution of private equity and the size of the stock market which is represented by the indicator of market capitalization in absolute terms.
Based on the research work led by Félix et al. (2007), in our paper we consider for all European countries as a variable the market capitalization in absolute terms. For the period 1992-2003, Félix et al. (2007) had statistically validated a positive relationship between the venture capital in 23 European countries and the market capitalization of these countries.
Jeng and Wells (2000) considered the number of IPO as a driver for the private equity market and argued that an increase of this variable will reflect a dynamic stock market which can provide interesting opportunities to disinvest for the private equity funds.
The authors mentioned above are claiming that the number of IPOs is the most important driver for the venture capital funds to allocate additional resources for this sector, in conclusion Jeng and Wells (2000) consider the number of IPOs the main factor in explaining the evolution of venture capital.
2.3. Interest rate
Hypothesis 3: In this research paper we expect that an interest rate increase will generate an increase of private equity investments across European countries.
Romain and de La Potterie (2004) claim that the interest rate is a key factor in the evolution of private equity. The authors argue that a long term interest rate increase for the 16 OECD countries could lead to an increase in private equity investments.
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However, Gompers and Lerner (1998) used as variable for the empirical model the short term interest rate which was expressed as the return on U.S. treasury bills and then both authors showed a negative relationship between the interest rate and the venture capital. As U.S. treasury bills investments are considered alternative investments to venture capital, Gompers and Lerner (1998) concluded that an increase in the short-term interest rate will determine a decrease in venture capital investments.
2.4. Unemployment rate
Hypothesis 4: This article assumes a negative relationship between the dynamics of private equity and the unemployment rate.
The research paper published by Felix et al. (2007) shows that unemployment is a macroeconomic indicator which negatively affects the private equity investments in Europe.
In our econometric model we will test if there is a negative relationship between the unemployment rate and the offer of private equity investments and in the same time we will test a positive relationship between the unemployment rate and the demand of private equity investments in Europe. However, the sign of the relationship between these variables in the equilibrium (demand/supply) model of private equity investments depend on which of the two effects is stronger.
2.5. R&D expenditure
Hypothesis 5: This article assumes a positive relationship between the R&D expenditure and the development of private equity in Europe.
This hypothesis was confirmed in literature by Gompers and Lerner (1998). Both authors showed that an increase in R&D expenditure was followed by an increase in technological opportunities and in the ‘90s, these technological opportunities had a positive impact on the demand and supply of venture capital funds in U.S.
Later, Roman and De La Potterie (2004) confirmed the positive role of the new technological opportunities and the increased number of patents filed on the venture capital transactions.
2.6. Corruption
Hypothesis 6: This article assumes a negative relationship between the corruption index and the evolution of private equity in Europe.
It should be noted that compared to the variables presented above, the corruption was studied previously only by Cherif and Gasdar (2009) in the context of understanding venture capital dynamics in U.S.
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The corruption index presents the level of institutional transparency and business conditions in a country. The values of this variable were collected from the cpi.transparency.org database. In our empirical model the corruption is ranking from 1 to 100. Hence one could notice that corruption index for the emerging countries in Eastern Europe is below the European average.
2.7. Productivity
Hypothesis 7: A positive change in productivity per employee will determine an increase in private equity activity.
This research wants to introduce a new variable such as productivity in our empirical model. As far as we know, there is no other research that has tried to show a correlation between the productivity and the private equity investments.
The need to study the relationship between productivity and the evolution of private equity appears important in the context of a profound crisis of competitiveness for the European continent. During the period 2000 - 2007, the growth of economic competitiveness was +1.8% in Europe, +1.7% in Japan and +2.3% in the US, then during the period 2008-2012 the competitiveness has increased only by +0.25% for the European continent compared to +0.9% in Japan and +2.0% in the US. These figures clearly show that Europe is lagging behind its main competitors in terms of competitiveness: the United States and Japan.
3. Data
For the empirical analysis we use data on 27 countries which were grouped as follows: Austria, Belgium, Bulgaria, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Netherlands, Poland, Portugal, Romania, Spain, Sweden, the Baltic States, ex-Yugoslav states, United Kingdom.2 We grouped the central-eastern European countries for reasons of data availability during the period studied. It should be also noted that for the same reasons of data availability the reports published by EVCA (“European Venture Capital Association”) use the same type of grouping for the Eastern European countries.
Taking into account the geographical area that we want to cover it was necessary to use various sources of data for establishing our own complete database. In order to have a complete picture on private equity investments across European countries we have used Thomson Reuters’ database and EVCA’s Yearbooks. It should be noted that by combining the information provided from both databases we managed to put together our own database with the most complete information on private equity activity, particularly for Eastern European countries.
2 Baltic States include Estonia, Lithuania and Latvia. Ex-Yugoslav States include: Serbia, Bosnia-Herzegovina, Slovenia, Croatia, Macedonia and Montenegro. For reasons of data availability we followed the methodology used by EVCA and we added to this group of countries Slovakia.
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We work with a panel data for these 27 countries, from 2000 – 2013, which leads to a database of 378 observations for each variable.
An overall view on the private equity market at European level shows an important drop compared to pre-crisis levels. However, as shown in Table 2, during the last years the European private equity market started to recover slowly and below pre-crisis levels.
Table 2. The dynamics of private equity in Europe
Source: the author based on the information provided by the report „European Private Equity Activity 2013”. Available: www.evca.eu. Consulted in September 2014.
In 2013, United Kingdom was the leader in the private equity market in Europe with 27% of market share. This was possible despite the fact that according to the European Commission (2014) the small and medium size companies (SME) located in UK generated only 14.5% from the total value added generated in 2013 at European level. In terms of private equity market shares United Kingdom was followed by France (18%) and Germany (14%), countries which generated 21.6% respectively 14.6% from the total value added generated by all the European SMEs.
Britain’s dominant position was made possible because of a favourable legal and fiscal framework for private equity activities. It should be noted that in UK exists a more flexible legislation regarding the regulation of pension funds activities and less heavy procedures for a company to go public than the European average. It could also be added the mentality of the managers and the owners of British companies which are more opened to the private equity investors than the European average.
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Table 3. The number of companies financed by private equity in Europe
Source: the author based on the information provided by the report „European Private Equity Activity 2013”. Available: www.evca.eu. Consulted in September 2014.
Table 3 shows a sharp decline in the number of companies that were financed by private equity investments in Europe in 2013 (4977) compared to pre-crisis levels (5421). This reflects the lack of investor confidence in the macroeconomic conditions of the European continent, and the difference between the price at which the buyer values a transaction and the seller prices the same transaction.
The following variables: annual real GDP growth rate, market capitalization, interest rate, unemployment rate, R&D expenditure, corruption and productivity per employee were collected from the annual reports provided by Eurostat. Additionally, the information regarding the corruption index was collected from the database “cpi.transparency.org”.
4. Methodology
In this research paper we want to analyse the evolution of private equity investments from a temporal perspective over a period of 14 years and from a sectoral perspective by studying the private equity in 27 European countries. Hence, we use a panel data analysis that includes both a horizontal dimension (i) and a temporal dimension (t).
The basic structure for analysis of a panel data regression is the following:
= + β + (1)
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Where i= 1…N relates to the number of countries and t = 1 …T relates to the number of years for which we conduct the empirical simulations.
The objective of this research paper is to build a panel data regression using the following variables: private equity investments, economic growth, market capitalization, interest rate, unemployment rate, R&D expenditure, corruption and productivity.
Then, we introduce a cross-section fixed effects and a cross-section random-effects models. The fixed effects model assumes that all members of the panel have the same variance and that there is no correlation over time neither across, nor within the members of the panel. The random effects model assumes that the unobserved effect is uncorrelated with each explanatory variable and both could randomly vary over time and from one country to another. Jeng and Wells (2000) argue that the fixed effect estimation provides the best understanding of the evolution of private equity from one country to another, respectively random effects estimation gives a better understanding of the evolution of private equity over time.
As a quality check we will run the Hausman specification test in order to compare the consistency of fixed effects models and random effects models in explaining the evolution of the European private equity activity.
This research paper follows the equilibrium model of private equity investments used by the following authors: Gompers and Lerner 1998, Jeng and Wells 2000, Romain and de La Potteria 2004, Félix 2007. In order to identify the key determinants of private equity in Europe, we study the degree of statistical significance of the coefficients in the equilibrium model of supply and demand of private equity investments.
The offer of private equity in Europe represents the total amount of funds raised for private equity investments. The offer of private equity is described by the following equation:
= + b + + + + + +
(2)
t=1,…13 and t=1,…14
The demand of private equity is the total amount of shares which were put for sale by the managers of the European private companies. The demand of private equity is described by the following equation:
= + b + + + + + +
(3)
i = 1…..8 and t=1,…14
In order to formulate the equilibrium model we consider the equality between the amount of funds supplied by the private equity investors and the demand for such funds. Hence, following the methodology used by the above mentioned authors we have obtained the following equilibrium model of private equity investments:
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= + b + + + + + +
(4)
i = 1…..8 and t=1,…14
VarGDP – gross domestic product growth in real terms.
InterestR – long term interest rate.
Unemployment – unemployment rate for each country.
R&D – public expenditure with R&D.
MarketCap – market capitalization for each country.
Corruption – corruption index as provided by cpi.transparency.org.
Productivity – total value added generated per employee in one year.
5. Final Results
5.1. Descriptive Statistics3
The mean annual value of the dependent private equity investments varies from 0.6 million euros in Ex-Yugoslavian States to 40.9 billion euros in the U.K., as shown in the second row in Table 4. On average, over all periods, the private equity investments across European countries are about 194 million euros. Hence, in the U.K., annual private equity investments are about 6.5 times as high as annual private equity investments on average in Europe. U.K., France and Germany represent on average, over all periods, 57% from the European private equity market.
The countries also differ substantially with respect to the total value of market capitalization. This variable fluctuates from low levels for the Eastern European emerging countries such as Bulgaria and Romania, to significant values for developed countries such as the U.K. or France.
In terms of R&D expenditure, the annual record for our sample is own by Sweden with 3.9% of its GDP invested in one year. The Nordic countries like Finland or Denmark tend to invest more on research and development than the European mean. Over all periods, the R&D expenditure for our sample of countries is on average about 1.2% from the European GDP.
5.2. Correlations
The correlations presented in Table 5 offer a first clue at the relationship between private equity investments in Europe and macro determinants. Most of the correlation coefficients between private equity investments and the independent variables of the
3 Descriptive statistics for all macro and political variables are presented in Table 4.
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empirical model are below 0.5. However, a strong correlation between the evolution of private equity and the market capitalisation (about 0.8) can be easily noticed.
By contrast, correlation coefficients between unemployment and interest rate, respectively productivity and R&D expenditure are relatively high, above 0.8. This correlation can induce serious problems of multicollinearity and might limit the extent to which the relevance of each dependent variable can be identified.
Many economic variables have the property of being correlated. This is not surprising, given the natural links between some variables such as R&D expenditure and productivity. The standard solution is to group those variables that capture similar dimensions (Daude and Stein, 2007). This paper will group unemployment and interest rate on one hand, and productivity and R&D expenditure on the other hand. Furthermore, we will try to avoid analysing all these variables by using the same model.
5.3. Panel Regression Results
This section provides the empirical results from our panel estimations. Tables 6 and 7 show the most significant drivers for the private equity evolution in Europe under the fixed-effects models, respectively under the cross-section random models. Then, this section compares the results highlighted in tables 6 and 7 with the existing results in literature, in terms of the signals of the coefficients.
Following our results presented in tables 6 and 7 it can be easily noticed that two variables have a higher significance and influence on the private equity evolution than others. One can conclude that during the 2000 - 2013 period, the main drivers for private equity in Europe were the unemployment rate and the market capitalisation of each country. The unemployment rate and the market capitalisation were statistically validated as significant with the highest probabilities for the fixed-effects models as well as for the cross-section random models.
In the first column of Table 6 and 7 (see the Appendix), we present the results of the same model which is including all seven variables together. Given the high correlation among the variables and the important multicollinearity problems, it is still interesting to point out that the variables unemployment rate and market capitalisation seem to be the most relevant factors in the European private equity evolution.
In this analysis, GDP growth rate presents a statistically significant and negative impact which comes in contrast to what authors such as Gompers and Lerner (1998), Romain and de La Potterie (2004), respectively Félix et al. (2007) had concluded in their research. However, one should notice that the GDP growth rate is validated significant with a probability of 90% according to the Student-t test. Moreover, authors such as Jeng and Wells (2000) concluded that for a sample of 21 countries, the GDP growth was not a determinant for venture capital investments evolution.
The market capitalisation shows a positive effect on the European private equity market. This relation was statically validated with a probability of 99% which makes the variable market capitalisation one of the main drivers for the evolution of private equity
84
Mihai Precup
investments in Europe during the last years. One could add that the existence of an active stock market in European countries lead to the accomplishment of more private equity investments in those countries.
Table 6 and 7 illustrate that in all the estimated models, the relationship between the private equity investments in Europe and the market capitalization is statistically significant and positive. This relationship confirms the work lead by Félix et al. (2007) which showed that in 23 European countries that were analysed, an increase in the market capitalisation of one county lead to an increase in investors’ positive expectations about that economy.
With respect to the interest rate, the results of the estimations show that this variable is not statistically significant which, again, is in contrast to what authors such as Gompers and Lerner (1998), Romain and de La Potterie (2004) and Félix et al. (2007) had determined. This means that according to our research in the past years, the interest rate levels had a limited influence on the private equity funds’ decision to invest in the European economies. However, one should notice that the interest rate coefficient is positive and from this perspective our work is in line with the existing literature: Romain and de La Potterie (2004) and Félix et al. (2007).
The unemployment rate had a strong negative impact on the evolution of private equity investments in Europe, in both fixed and random effects models. The relationship between both variables was validated with a probability of 99% for all estimated models. This confirmed the conclusions of Félix et al. (2007) who had shown a negative relationship between the labour market of 23 European countries and the development of their venture capital markets.
Additionally, our empirical estimation showed that the private equity funds were very vulnerable and wary about the high level of unemployment in some European countries. The negative relationship between both variables could reflect the fact that an increase in the number of unemployed persons will not translate into an increase in self-employment which, in turn, would have led to an increase in the demand of private equity investments.
With respect to the R&D expenditure, the results of the fixed and random models show that this variable is not a driving factor for private equity evolution in Europe. The coefficient was not statistically validated as significant and the signal of the coefficient varies across models. This is not in line with the existing results of the literature.
In tables 6 and 7, only one model which was tested with both fixed and random effects illustrated a statistically significant and negative relationship between the R&D expenditure and the European private equity market. However, one should underline that t-statistics values were statistically validated at the significance level of 10%. The negative relationship between both variables is contrary to the results obtained by Gompers and Lerner (1998) or Romain and de La Potterie (2004). A possible explanation would be that our variable does not measure the innovation correctly. An argument to the previous statement would be that authors such as Romain and de La Potterie (2004) used two additional variables to present the role of R&D expenditure and those two variables were actually statistically validated in their regressions.
85
The Future of Private Equity in Europe – The Determinants Across Countries
In this paper, we have introduced one institutional variable which is the corruption. In tables 6 and 7, the corruption was statistically validated as significant with a probability of 99% and this variable generally had a negative impact on the evolution of private equity investments in Europe. Following our analysis, a certain increase in corruption in some European countries will lead to an outflow of private equity investments from that country. This relationship between corruption and private equity investments is in line with the hypothesis of our model.
Finally, with respect to the effect of the productivity on the private equity activity in Europe, the results of our estimations showed that the signal of the coefficient is positive. This paper is the first to establish a relationship between the productivity and the evolution of private equity in Europe and in our models with fixed and random effects, the coefficients of the productivity were statistically validated as significant with a probability of 99%.
5.4. Robustness – Hausman test
In this paper we had run the Hausman specification test in order to compare the consistency of fixed effects models and random effects models. The null hypothesis of the Hausman test suggests that the coefficients of both estimations with fixed, and respectively with random effects are consistent but only the coefficients of the estimation with random effects are more efficient for our model. Hence, the acceptance of the Hausman null hypothesis will lead us to conclude that the estimation with random effects is more suggestive to explain the impact of the independent variables on the evolution of private equity in Europe.
Table 8 (see the Appendix) reports the results of the Hausman test. One could observe that for all estimated columns and models the null hypothesis of the Hausman test is accepted, so we can choose the random effects estimation as optimal for our regression. Hausman test shows that the estimated value for χ2 is less than its critical table value which makes us accept the null hypothesis of random effects estimation as being optimal.
6. Conclusions
This paper studies the determinants of the European private equity activity during the last crisis using fixed and random effects models. The panel regressions are based on 378 observations collected over 14 years from 27 European countries. The empirical model includes many of the determinants already tested in previous studies (GDP growth, market capitalization, research and development expenditures, interest rates, etc.) and also new variables such us productivity and corruption index which we consider important factors in explaining the evolution of private equity investments in Europe.
This paper estimated both fixed effects models and random effects models in order to understand the impact of macroeconomic variables on the private equity activity in Europe. In most cases, Hausman’s test showed that the random effects models seemed
86
Mihai Precup
to be more efficient than the fixed effects models to explain the evolution of the private equity investments in Europe.
Of the seven key factors that have been analysed, we obtained the results which confirmed the assumptions and the conclusions of the existing literature for the following variables: market capitalization and unemployment. These two variables were also the main drivers of the private equity activity in Europe because were statistically validated as significant with the highest probabilities.
Furthermore, our study showed that the new determinants we introduced in our model - corruption index and the productivity - were clearly relevant in explaining the development of the private equity activity in Europe.
The variable of economic growth rate presents quite significant negative coefficients across countries where this variable was validated as significant and this contradicts the results of the existing literature.
Finally, the independent variables represented by the interest rate and by the research and development expenditure did not have a significant effect on the private equity investments in Europe during the last years.
This paper identified the main drivers of private equity investments evolution in the European countries during 2000 – 2013. Furthermore, the dynamics of these determinants could provide us information about the possible future evolution of private equity in Europe.
Based on our empirical results, one important recommendation is that the European unemployment crisis should become a priority on every policymaker`s agenda. This research shows that the private equity investors are very susceptible to the level of unemployment in the European countries, and increases in unemployment and long-term unemployment could harm the private equity investments in Europe over a large period of time.
The last recommendation for the policy makers in Europe is that the further development of immature capital markets in Europe would increase the opportunities for private equity funds to find better deals to divest. Better developed capital markets in European countries would show stronger real economies and would be an incentive for the private equity investors to raise additional funds for those economies.
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The Future of Private Equity in Europe – The Determinants Across Countries
References
• Baltagi, B.H. (2005). „Economic Analysis of Panel Data”. 3rd Edition, John Willey & Sons, Ltd, Anglia, p. 12-19.
• Black, B. and Gilson, R. (1998). „Venture Capital and the Structure of Capital Markets: Bank versus Capital Markets”, Journal of Financial Economics, p. 243-277.
• Bourbonnais, R. (2000) „Econométrie”, DUNOD, p. 201 – 222.
• Cherif, M. (2009) „Public institutions and venture capital in Europe: a cross-country panel data analysis”, Reims University Working Paper.
• Cherif M. and Gasdar K. (2009), „What drives venture capital in Europe? A cross-country panel data analysis”, International Journal of Public Management Performance, p.112-130
• Daude, C. and Stein, E. (2007) „The quality of institutions and foreign direct investments”, Vol. 19, No. 3, pp.317-343.
• Elisabete G. et al. (2007) „The Determinants of Venture Capital in Europe – Evidence Across Countries”, publicat de CEFAGE, p3-32.
• European Venture Capital Association, „European Private Equity Activity 2013”, available: www.evca.eu, consulted in September 2014.
• Felix E., Gulamhussen M. A. and Pires C.P., (2007), „The determinants of venture capital in Europe evidence across countries”, Published by CEFAGE UE p. 11 -25.
• Gompers P. & Lerner J., (1990), „The Determinants of Corporate Venture Capital Success: Organizational Structure, Incentives, and Complementarities”, NBER Working Paper, no 6725.
• Gompers, Paul A. (1996) „Grandstanding in the Venture Capital Industry.” Journal of Financial Economics, p. 133-156.
• Gompers P. & Lerner J., (1998), „What Drives Venture Capital Fundraising?”, Brooking Papers on Economic Activity, Macroeconomics, p. 149-192.
• Gompers P. şi Lerner J. (2001), „The Venture Capital Revolution”, Journal of Economic Perspectives, p. 145-168.
• Gompers P., Lerner J., Kovner A. si Scharfstein D. (2005) „The Venture Capital Revolution”, Journal of Economic Perspectives, p.145-168
• Guilhon B. & Montchaud S., (2006), „The dynamics of venture capital industry in Europe”, International Journal of Technology Management, p. 146-160.
• Hege, Palomino & Schwienbacher, (2006), “Venture capital performance: the Disparity between Europe and the United States”.
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• Hurlin C. „L’Econométrie des Données de Panel – Modéles Linéares Simples”, Ėcole Doctorale Edocif, 2012.
• Jagwani S., (2000), „Supply and demand of venture capital in the US”, The Park Place Economist, p. 90-98.
• Jeng L. & Wells P., (2000), „The Determinants of Venture Capital Funding: Evidence Across Countries”, Journal of Corporate Finance, p. 241-289.
• Kortum S. & Lerner J., (2000), „Assessing the Contribution of Venture Capital to Innovation”, Rand Journal of Economics, p. 674-692
• Romain A. & de la Potterie B.V.P., (2004), „The determinants of venture capital: a panel data analysis of 16 OECD countries”, Published by Research Institute in Management Science, p 10 - 35.
Annexes
Table 4. Descriptive statistics
Mean Maximum Minimum Std. Dev. ObservationsPrivate equity investments 1941637 40897427 0.000000 4683575 294
Economic growth 0.888002 9.500000 -8.900000 2.370771 294Interest rate 3.046742 22.50000 0.021100 2.639068 294Unemployment 5.482813 27.50000 0.044000 4.979249 294R&D expenditure 1.298189 3.910000 0.003500 1.148342 294Market capitalisation 4.55 3.86 5.05 7.25 294Corruption 0.326531 1.000000 0.000000 0.469743 294Productivity 48.42786 93.96500 3.773930 25.92686 294
Source: the author
89
The Future of Private Equity in Europe – The Determinants Across Countries
Tabl
e 5.
Cor
rela
tions
Mat
rix
Priv
ate
equi
tyEc
onom
ic
grow
thIn
tere
st
rate
Une
mpl
oym
ent
R&D
ex
pend
iture
Mar
ket
capi
talis
atio
nC
orru
ptio
nPr
oduc
tivity
Priv
ate
equi
ty1
Econ
omic
gro
wth
0.1
471
Inte
rest
rat
e 0
.155
0.0
271
Une
mpl
oym
ent
0.1
40-0
.010
0.8
021
R&D
exp
endi
ture
0.2
06 0
.205
0.4
81 0
.523
1M
arke
t ca
pita
lisat
ion
0.8
80 0
.170
0.2
21 0
.318
0.3
091
Cor
rupt
ion
-0.2
42-0
.255
-0.3
73-0
.407
-0.6
53-0
.342
1Pr
oduc
tivity
0.2
49 0
.367
0.6
01 0
.526
0.8
11 0
.338
-0.6
611
Sour
ce: t
he a
utho
r
Tabl
e 6.
Em
piri
cal r
esul
ts w
ith fi
xed
effec
ts m
odel
s fo
r th
e Pr
ivat
e Eq
uity
var
iabl
e
Pote
ntia
l D
eter
min
ants
Priv
ate
equi
ty (F
ixed
Effe
cts)
M
odel
1
Mod
el 2
M
odel
3
Mod
el 4
M
odel
5
Mod
el 6
Econ
omic
gro
wth
-207
4,65
-182
03.8
384
09,9
4-4
69.6
1-2
9421
22
(-0,0
33)c
(-0,3
14)
(0,1
47)c
(-0.0
07)
(-0.3
80)
Inte
rest
rat
e18
4634
.0(1
,982
)e
Une
mpl
oym
ent
-105
382.
4-2
6157
.72
-603
47.1
8-6
4547
.89
-549
53.7
3-2
5864
(-1
,348
)a(-0
,408
)a(-0
,962
)a(-1
.158
)a(-0
.853
)a(-0
.403
)a
R&D
exp
endi
ture
5890
382.
4-3
5965
9.5
(0.6
53)e
(-0.4
34)
90
Mihai Precup
Mar
ket c
apita
lisat
ion
6,40
E-06
6.27
E-06
6,07
E-06
6,08
E-06
6,10
E-06
6.21
E-06
(11,
642)
a(1
1,77
)a(1
1,47
7)a
(11.
601)
a(1
1,35
8)a
(11.
790)
a
Cor
rupt
ion
-178
16.2
4-2
4539
.06
-331
2.00
-264
2.05
-517
5.32
(-0,5
5)e
(-0.8
09)
(-0.1
14)
(-0.0
92)
(0.1
74)a
Prod
uctiv
ity46
320.
2851
724.
4945
724.
32
(1,6
63)e
(2.2
09)
(2.0
61)a
Adj
uste
d R-
squa
red
0,85
30,
854
0,85
10,
852
0,85
10.
854
Sour
ce:
the
auth
or.
The
tabl
e pr
esen
ts t
he r
esul
ts o
f fix
ed e
ffect
s pa
nel
data
mod
els.
The
val
ues
of t
he t
-sta
tistic
s fo
r ea
ch v
aria
ble
are
pres
ente
d in
par
enth
eses
. The
t-st
atis
tics
valu
es a
re s
igni
fican
t at t
he fo
llow
ing
leve
ls: a s
igni
fican
ce a
t 1%
; b si
gnifi
canc
e at
10%
; c si
gnifi
canc
e at
15%
; and
, e sig
nific
ance
at 2
0%.
Tabl
e 7.
Em
piri
cal r
esul
ts w
ith r
ando
m e
ffect
s m
odel
s fo
r th
e Pr
ivat
e Eq
uity
var
iabl
e
Pote
ntia
l D
eter
min
ants
Priv
ate
equi
ty (
Rand
om E
ffect
s)
M
odel
1
Mod
el 2
M
odel
3
Mod
el 4
M
odel
5
Mod
el 6
Econ
omic
gro
wth
-260
75,8
0-2
7260
.86
-128
58.3
1-4
6008
3.5
-531
232.
1
(-0,4
46)c
(-0.4
90)
(-0,2
37)c
(-0.4
26)
(-0,8
88)
Inte
rest
rat
e24
8059
,3
(2,6
70)e
Une
mpl
oym
ent
-215
713,
5-1
1461
7.1
-108
431.
3-1
0524
5.6
-970
40,4
-118
309.
9
(-3,4
34)a
(-2,3
12)a
(-2.2
29)a
(-2.3
63)a
(-1.8
38)a
(-2,4
13a
91
The Future of Private Equity in Europe – The Determinants Across Countries
R&D
exp
endi
ture
-183
230,
3-2
3323
3.2
(-0.4
57)e
(-0.5
67)
Mar
ket
capi
talis
atio
n6,
17E-
066.
05E-
066,
04E-
066,
03E-
066,
06E-
066.
01E-
06
(18,
756)
a(1
6.82
2)a
(17,
031)
a(1
7,38
1)a
(16.
723)
a(1
7.24
1)a
Cor
rupt
ion
2883
,24
-157
99.2
8-5
06.4
11-1
247.
5976
40.4
82
(0,1
26)e
(-0.7
84)
(-0.0
35)
(-0.0
90)
(0,3
61)a
Prod
uctiv
ity90
7,12
1701
0.84
8397
.82
(0,0
56)e
(1.0
95)
(0,7
53)a
Adj
uste
d R-
squa
red
0,58
90,
524
0,53
40,
541
0,52
90.
605
Sour
ce: t
he a
utho
r. Th
e ta
ble
pres
ents
the
resu
lts o
f ran
dom
effe
cts
pane
l dat
a m
odel
s. T
he v
alue
s of
the
t-sta
tistic
s fo
r ea
ch v
aria
ble
are
pres
ente
d in
par
enth
eses
. The
t-st
atis
tics
valu
es a
re s
igni
fican
t at t
he fo
llow
ing
leve
ls: a s
igni
fican
ce a
t 1%
; b si
gnifi
canc
e at
10%
; c si
gnifi
canc
e at
15%
; and
, e sig
nific
ance
at 2
0%.
92
Mihai PrecupTa
ble
8. H
ausm
an te
st e
stim
atio
ns
M
odel
V
aria
bles
χ2
estim
ated
va
lue
Hau
sman
χ2 c
ritic
al
valu
e Pr
obab
ility
Ho
or H
a*
valid
ated
Estim
atio
nEffi
cien
t
1
Econ
omic
gro
wth
In
tere
st ra
te
Une
mpl
oym
ent r
ate
R&D
exp
endi
ture
M
arke
t cap
italis
atio
n
Cor
rupt
ion
Prod
uctiv
ity
12.0
214
.70.
11H
oRa
ndom
eff
ects
2
Econ
omic
gro
wth
U
nem
ploy
men
t rat
e M
arke
t cap
italis
atio
n
Cor
rupt
ion
Prod
uctiv
ity
5.61
11.0
70.
34H
oRa
ndom
eff
ects
3
Econ
omic
gro
wth
U
nem
ploy
men
t rat
e M
arke
t cap
italis
atio
n
Cor
rupt
ion
2.01
9.49
0.73
Ho
Rand
om
effec
ts
4U
nem
ploy
men
t rat
e M
arke
t cap
italis
atio
n
Cor
rupt
ion
2.01
7.81
0.58
Ho
Rand
om
effec
ts
5
Econ
omic
gro
wth
U
nem
ploy
men
t rat
e R&
D e
xpen
ditu
re
Mar
ket c
apita
lisat
ion
C
orru
ptio
n
1.85
11.0
70.
87H
oRa
ndom
eff
ects
6
Econ
omic
gro
wth
U
nem
ploy
men
t rat
e M
arke
t cap
italis
atio
n
Prod
uctiv
ity
5.68
9.49
0.23
Ho
Rand
om
effec
ts
Sour
ce: t
he a
utho
r bas
ed o
n th
e in
form
atio
n pr
ovid
ed b
y H
ausm
an te
st. *
) Ho
is n
ull h
ypot
hesi
s, H
a is
alte
rnat
ive
hypo
thes
is
Rien ne se crée sans les hommes. Rien ne dure sans les institutions.
Jean Monnet
ISSN 1582-8271
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