29 November 2017

The End of the End of History

Will Hutton

This was a case in point. Chancellor Merkel’s attempts to build a coalition government fell apart. Eurosceptic liberals and green ultras could not agree a programme for government with her Christian Democrats. The British right gloated at the prospect: this was the moment to exact better terms in the Brexit negotiations from a mortally wounded Germany now suddenly brought to earth. It was thinking far removed from any reality. Germany is neither politically nor economically mortally wounded. Yes, there is a major political crisis following a hung election, but Germany will find a way through, rather more satisfactorily than stuffing a tiny minority party with a billion-pound bribe, as the Tories did with the Democratic Unionists. Its political system requires its principal parties to keep on talking to each other if none can command an overall parliamentary majority; they have their ideologies, but tempered by the necessity of dialogue to form a potential programme for government. A resolution will be found, or another election called, with the electorate more keenly aware of the choices they are making. It is democracy by grownups.

That is what is happening. German Social Democrats, after an impassioned plea by the president to put public before party interest, will poll their members about the terms for creating a possible coalition with Merkel’s Christian Democrats. There will be enormous wariness: junior partners in coalitions don’t fare well in either Germany or Britain, but Merkel will be going cap in hand to her left-of-centre rivals as her last option. For them, it could be the opportunity to put the social firmly back in Germany’s social market economy.

The economic backdrop to the negotiations could scarcely be more benign. Germany is beginning to grow strongly. Meanwhile, the eurozone, derided in Britain for its sclerosis, austerity, social cruelty, unsustainability and imminent collapse, is growing at the fastest rate for 10 years. German unemployment is lower than in Britain, and not achieved by many of those in work suffering stagnating real wages and insecurity. Germany has a strong budgetary surplus; there is huge scope to increase its already formidable economic competitiveness by stepping up its spending across new technology. It is not Britain that is going to be at the centre of the latest European industrial revolution, but Germany and France.

Yet none of this intrudes into our insular political debate. Germany is not about to capitulate to British demands to be cut a special deal on Brexit so that we can enjoy all the trade and market access benefits of EU membership without any of the responsibilities. Why would any German politician want that? Why would they need to? We are the supplicant country in desperate and growing trouble, if only we could see it.

That was the message of last week’s budget. The Office for Budget Responsibility projects that economic growth over the next five years will average 1.4%, an unprecedented, brutal downward revision of its forecasts. Productivity is projected to grow at a snail’s pace, so there is virtually no growth in earnings adjusted for inflation. It is the bleakest official forecast I can remember.

Nor does it capture all the risks. Sir Ivan Rogers, UK representative to the EU between 2013 and 2017 – in his lecture at the Hertford College series on prime ministers and Europe on Friday evening (full disclosure: I am Principal at Hertford, Oxford) – predicted the only feasible Brexit trade deal would be one based in principle on the Canadian free trade agreement, but which could take up to a decade to negotiate in legal detail. This, along with the absence of other trade agreements, which will take equally long to negotiate, would represent such a shock to British trade flows that he thought it would topple the UK into a full-blown recession. As shocking was his revelation that some leading Brexiters were fully aware of the economic risks, but wanted to organise the pain so it comes early rather than later in the run-up to a 2022 general election.

The chancellor, Philip Hammond, one of the few remaining substantial centrist British political figures, knows all this. But to acknowledge it openly would, given the current state of the Conservative party, cost him his political life. He would be confirmed as the pessimistic, unpatriotic Eeyore working against the will of the people. Instead, he has to talk of the opportunity ahead, and how the performance of the UK economy “continues to confound those who seek to talk it down”. It is rubbish, as well he knows. But the atmosphere does not permit the truth to be said. Britain remains the exceptional country that is going to get an exceptional deal congruent with its exceptional destiny.

British exceptionalism is a national delusion, and a shaft of light is that it is gradually being dispelled. Our economic performance is woeful, to be cruelly exposed when outside the EU. And there is an emerging consensus about the need for an industrial strategy both to support more fast-growing, knowledge-intensive firms and to try to close Britain’s huge geographical inequalities.

Milton Keynes, with half Liverpool’s population, produces the same volume of goods and services. For all its political weakness, the government is set to launch an industrial strategy white paper tomorrow – reinforced by Hammond earmarking another £2.3bn for research and development in 2021 and £7bn for the productivity fund in 2022. Jam tomorrow, maybe, and years behind what is happening in Europe and China, but a welcome signal of a new direction of travel.

It is the beginning of thinking straighter, but too many cling to Britain’s alleged exceptionalism, firing up so many Brexiters. The question in British politics is how soon the economic severity of what lies ahead will change minds – and whether exceptionalism can survive 20 years of wage stagnation, recession, stasis and the inevitable setback in house prices. It is not Germany that is the sick man of Europe, the cherished belief of the Brexiters, but Britain. Real change, even recommitting to Europe, will follow that growing realisation.

Share on Twitter (opens new window) Share on Facebook (opens new window) Share on LinkedIn (opens new window) Save Save to myFT 13 HOURS AGO James Kynge in London and Michael Peel in Brussels 101 comments In Hungary it is hailed as the “Eastward Opening”. Serbian authorities see it as the glue in a “reliable friendship”, while the Polish government describes it as a “tremendous opportunity”. Yet the 16+1, a grouping of 16 central and eastern European countries led by China, receives more caustic reviews in leading EU capitals, with diplomats fearing it could be exploited by Beijing to undermine union rules and take advantage of growing east-west tensions in the pact itself. The catalyst for the group is China’s ability to finance and build the roads, railways, power stations and other infrastructure that some poorer central and eastern European countries need. 

But the scope of its operations has spilled over into overtly political and strategic areas, breeding mistrust among some of the western European powers that dominate the EU’s agenda. “This sub-regional [16+1] approach is meeting a great deal of suspicion not only in Brussels but also in the capitals of many member states,” says a European diplomat who declined to be identified because of the sensitive nature of the topic. Essential stories related to this article The Big Read Inside China’s secret ‘magic weapon’ for worldwide influence beyondbrics Serbia torn between EU attraction and China ambitions EU trade EU plan to curb Chinese takeovers risks ‘trade war’ 

Another senior European diplomat, who also asked to remain anonymous, says: “The [16+1 is] dealing with many things. Some of them are touching on EU competences, or they are going into new areas where there are already initiatives between the EU and China. And we only see the tip of the iceberg.” Yet as the 16 countries — Hungary, Bulgaria, Romania, Poland, Bosnia and Herzegovina, Serbia, Croatia, Slovenia, Slovakia, Albania, Macedonia, Montenegro, Czech Republic, Lithuania, Latvia and Estonia — prepare for an annual summit in Budapest on Tuesday, it is clear that Beijing’s star is rising in central and eastern European nations. 

Share this graphic “The world economy’s centre of gravity is shifting from west to east; while there is still some denial of this in the western world, that denial does not seem to be reasonable,” Viktor Orban, the Hungarian prime minister, said in October. “We see the world economy’s centre of gravity shifting from the Atlantic region to the Pacific region. This is not my opinion — this is a fact.” The lure for central and eastern European nations is clear. Since 2012, Chinese companies, backed by state banks, have announced an estimated $15bn in investments in infrastructure and related industries, according to data collected by the Center for Strategic and International Studies, a Washington think-tank, in co-operation with the Financial Times. 

“To China, the 16 countries are important in their own right but also as a bridge into the EU,” says Jonathan Hillman, director of the CSIS Reconnecting Asia Project. While modest compared with the EU’s structural funds, which amount to about €80bn for Poland alone for the 2014-20 budget round, the promised investments have been welcomed by the beneficiaries. Serbia, with which China has a “comprehensive strategic partnership” and an “all-weather friendship”, is due an estimated $1.9bn in infrastructure investments, according to the CSIS data. Hungary, with which China officially has a “high level of mutual trust”, has been promised an estimated $1.5bn. Milos Zeman, the Czech president, last year described his country — with whom some $3bn worth of deals has been announced — as “a gateway for the People’s Republic of China to the EU”. 

Share this graphic For some in the EU there are two main concerns. The first is that China may intensify efforts to use the influence it is building in central and eastern Europe to frustrate aspects of the EU’s common China policy. The second is that some 16+1 countries may exploit strong ties with China to buttress negotiating positions against Brussels. European diplomats say such dynamics could undermine Brussels’ effectiveness in often fractious relations with its second-largest trade partner. One concern is that China’s push for guaranteed contracts for its companies will undermine the EU’s single market rules on public procurement. 

The issue is particularly relevant as Brussels pushes to implement a vetting process for inward investments against resolute opposition from Beijing, which has pumped record amounts of money into Europe in recent years. Big deals ALBANIA AND MONTENEGRO 2015: China Pacific Construction Group signs a €3bn deal to build an expressway between Montenegro and Albania but gives no detail on the companies involved. BOSNIA 2014: Sinohydro, the state-owned power company, and ExIm Bank of China sign a deal to build a €1.4bn highway from Banja Luka to Mlini┼íte. CZECH REPUBLIC 2016. China and the Czech Republic invest as much as €1bn to create a Y-shaped canal connecting the Danube, the Oder and Elbe rivers. Passions are already running high. 

In September, Sigmar Gabriel, the German vice-chancellor and foreign minister, called on Beijing to respect the concept of “one Europe” adding: “If we do not succeed for example in developing a single strategy towards China, then China will succeed in dividing Europe.” Beijing’s foreign ministry declared itself “shocked” by the Gabriel statement. Cui Hongjian, a director in the foreign ministry’s think-tank, the China Institute of International Studies, wrote in the Global Times, a state-owned newspaper, that Mr Gabriel’s concept of “one Europe” was misplaced and his concerns over 16+1 unfounded. “Gabriel asked China to develop a ‘one Europe’ stance,” Mr Cui wrote. “One Europe is feasible geographically, [but] not in terms of politics and the economy.” 

China's premier Wen Jiabao meets Donald Tusk in Warsaw in 2012 © Reuters At its launch, Beijing described the co-operation between China and central and eastern European countries, to give the project its official name, as an initiative to boost relations. But while it stressed commercial opportunities, its diplomatic intent was evident. The organisation is run by a secretariat in Beijing headed by the foreign ministry. And although it appears multilateral in structure, like the EU, the group is bilateral in practice with directives from Beijing relayed to the 16 European members. All ranking officials are Chinese. European participation is through “national co-ordinators”. 

For Beijing, the grouping embraces a mix of commercial and strategic aims. China wants to boost trade and investment ties with former socialist allies. It also sees the 16 countries as a gateway to western Europe and one that is critical to Beijing’s Belt and Road Initiative, which seeks to win markets and diplomatic allies in 64 countries between Asia and Europe — a priority for Xi Jinping, China’s powerful leader. In addition to its avowed commercial motivations, Beijing is using its ties for political ends. 

At last year’s 16+1 summit in Riga, for instance, Li Keqiang, the Chinese premier, called on the 16 governments to “properly resolve hot issues and maintain world peace and regional stability”, according to Xinhua, the official Chinese news agency. European diplomats are concerned that China may seek support for its position on the disputed South China Sea © AP That was interpreted by some European diplomats as a call for the 16 countries to support China’s position on the disputed South China Sea and other geopolitical issues close to Beijing’s heart, such as countering the Dalai Lama, the exiled Tibetan spiritual leader, and opposing any move by Taiwan toward independence from mainland China. 

The potential fruits of Beijing’s influence became clear last year when the EU debated how to respond to an international court ruling that China’s claims to maritime rights and resources in the South China Sea were incompatible with international law. According to European diplomats after three days of difficult talks among the EU’s 28 members, opposition — primarily from Hungary and Greece — succeeded in weakening the statement to the extent that it did not directly mention China. Big deals HUNGARY 2013. Hungary’s failure to hold an open tender for its section of a $2.9bn, 350km high-speed railway link with Serbia triggers a European Commission investigation into whether it breached EU law. SERBIA 2014: 

China Machinery Engineering Corporation agree a deal to build a 350MW unit at the Kostolac thermal power plant at a cost of $715m. The latest flashpoint is an investment screening process proposed by Jean-Claude Juncker, president of the European Commission, in September on the grounds that the EU needed to “protect its collective security”. He insisted that acquisitions of key infrastructure projects or military technology companies should only happen “in transparency, with scrutiny and debate”. The plan reflects a deep division among member states over how open the EU’s trade policy should be. Countries including Finland, the Netherlands and Portugal have expressed concerns about the EU intervening in an area seen as an exclusive national competence. European Commission president Jean-Claude Juncker has proposed an investment screening process © Reuters But, according to diplomats and policy experts, 

China’s lobbying has already proved effective in diluting the proposed review process, which Beijing views as a “little brother” to the Committee on Foreign Investment in the United States. The CFIUS has blocked several Chinese deals in recent years. The draft European proposal falls short of giving Brussels the power to force countries to block and revise the terms of corporate takeovers. Instead it provides a legal basis for requesting details on takeovers taking place and allows EU institutions to give guidance to member states, say diplomats. Jan Gaspers, head of the European China Policy Unit at Merics, a think-tank in Berlin, says some 16+1 nations in the talks sided with China. 

“Over the summer, several of the 16+1 EU member states already had a hand in watering down what was originally supposed to be a much more ambitious EU investment screening scheme that would have given genuine screening competencies to Brussels,” he says. Officials at a meeting of the 16+1 Some argue that China’s record in central and eastern Europe has made the need for a review process all the more necessary. Hungary’s failure to open its section of a $2.9bn, 350km high-speed rail line from Belgrade to Budapest to competitive tender has triggered an investigation by the commission into whether the project violated EU laws. 

Other projects in 16+1 countries are also mired in controversy. In Macedonia, the transport and communication ministry has blocked the completion of a China-financed 57km, €373m highway amid allegations of losses to the state budget of €155m. The project was financed mainly by a loan from the ExIm Bank of China and executed by Sinohydro, a state-owned Chinese construction company. Montenegro signed an €800m deal with ExIm Bank in 2014 to finance a road from Bar port to Serbia, even after the International Monetary Fund warned that the loan-based agreement threatened fiscal stability. Another concern in some capitals is the potential of 16+1 initiatives to shape future EU votes. 

The union requires unanimity on most matters of common foreign and security policy, including sanctions — effectively giving every member veto power. If the group took on two more EU members, the block of 13 would be enough to defeat EU measures decided under qualified majority voting, which is used in about 80 per cent of legislation. A diplomat from one of the 16+1 countries defends the group as an “economic tool” working with “full transparency”. “I know there are people who feel uneasy about this,” the diplomat says. “But we are saying among the 16+1, and also to the Chinese, that we are a member of the EU and we follow all the common EU positions on China.” 

Hungarian prime minister Viktor Orban © AFP In Serbia, which is a candidate to join the EU, the lure of China on one side and the tug of the EU on the other is creating a division of loyalties. The threat of an EU screening process could repel the Chinese investment that Serbia requires to develop sufficiently for EU accession, Vladimir Krulj, special economic adviser to Belgrade, wrote in the FT. Some sceptics acknowledge that the friction over the 16+1 reflects wider tensions in the EU, particularly between some eastern and western member states. Brussels has been in conflict with both Hungary and Poland over claimed breaches of EU rules and values. “We should expect China to leverage the 16+1 to pursue its own interests within the EU,” says Mr Hillman. 

“That’s strategic diplomacy: building relations where you have more leverage and applying those new relationships where you have less leverage. If China is winning friends, why wouldn’t it also influence people?” Additional reporting: Andrew Byrne in Budapest, James Shotter in Warsaw and Charles Clover in Beijing Global powers: Beijing draws parallel lines in battle for influence The theory of a “Thucydides trap” holds that when one rising power threatens to displace another, war is almost always the result. But one aspect of China’s rise thus far has been the extent to which it aims not so much to displace existing power structures but to move in parallel to them, rejecting the theory popularised by Harvard professor Graham Allison. 

“Right now I would describe the modus vivendi that the world has found as being parallel play,” said Lawrence Summers, the former US Treasury secretary, earlier this month. “The west does its thing; China does its thing. Countries get a bunch of money from China and they do it China’s way. Countries get a bunch of money from us and they do it our way.” The 16+1 grouping of 16 central and eastern European countries plus China is a case in point. It does not seek to displace the EU but to establish a structure that is in some senses — such as financing and nascent diplomatic cohesion — parallel to it. It is far from the only example. The Beijing-led Asian Infrastructure Investment Bank, for instance, replicates some of the work of the Asian Development Bank and the World Bank. 

The Shanghai Cooperation Organisation — which unites China with Russia, four Central Asian republics, India and Pakistan — overlaps the Russian-led Eurasian Economic Union. The Belt and Road initiative, through which China intends to boost commerce with more than 64 countries between Asia and Europe, offers a partial alternative both to the EEU and to Asean, the group of 10 Southeast Asian nations. 

 “These are parallel institutions with Beijing at the centre,” says Jonathan Hillman, director of the Reconnecting Asia Project at the Center for Strategic and International Studies. “Under both the 16+1 and the Belt and Road, China is the common denominator. To shift from balancing against existing institutions to effectively competing with them, [Beijing] will need to deepen these parallel structures.”

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