5 Questions

5 Questions for Boro Vucinic

Damon Wilson and Matthew Czekaj — Wed, 22 Dec 2010 13:01:19 -0600

Boro Vucinic has served as Montenegro's minister of defense since November 2006. We had the opportunity to get his thoughts on some key issues of interest to our community.

1. Recently, Montenegro contributed a small force to the NATO ISAF mission in Afghanistan. How has the Montenegrin public reacted to this distant troop deployment, and how, if at all, has it affected popular support for NATO membership?

The decision on deployment of the Montenegrin armed forces personnel to the ISAF peace-keeping mission was made in the Parliament of Montenegro, with the support of the majority of the parties in the parliament. At the moment, our country has its second contingent of 36 members in the ISAF mission in Afghanistan. Besides them, two members of our armed forces are deployed in the UNMIL mission in Liberia, as well as three Navy members in the EU peace-keeping mission “NAVFOR-ATALANTA” in the Somalia waters.

We are therefore trying to emphasize, through an intensive communication with the public, the significance of defending democratic values, together with our allies at the place where there are new global security challenges. The Ministry of Defense, in communication with the other governmental agencies of Montenegro, is investing significant efforts in raising public support for NATO. We are trying to explain to the citizens the new role of NATO, not being only a military but also a political and security institution. The intensive interaction and transparency of work of the Ministry has resulted in the fact that citizens have recognized the importance of participation of our armed forces personnel in building and strengthening peace in the world. We are rightfully satisfied with that recognition as well as with the fact that there is no major opposition from the public in regard to these missions.

We expect the support for NATO will increase in time. It is also expected that the citizens have recognized the need for NATO membership and the need for member support evidenced by the recent floods in our country. The efforts and the specific contribution from the Armed Forces of Montenegro, police and civilian sector, as well as NATO member and partner countries, in controlling floods are notable.

2. On October 28, Montenegro submitted its first individual annual program as part of its NATO membership action plan (MAP). At the Lisbon Summit, NATO allies recognized "the considerable progress that Montenegro has made on its road to Euro-Atlantic integration and its contribution to security in the region and beyond." However, as the EU noted in November, Montenegro still has work to do to more fully implement rule of law, increase government transparency and accountability, and strengthen its judicial system. What is Podgorica's plan to keep these issues from becoming an obstacle to its NATO accession bid?

The Government is committed to continue its close cooperation with NATO and is convinced that the to-date success in the defense area, the good assessment of MAP, and partnership goals implementation will be recognized in the upcoming period and individually evaluated on our strategic way to Euro-Atlantic integration. By using MAP mechanisms, we are determined to further improve the reforms in the defense system.

At the same time, we are paying special importance to the decision of Brussels on candidate status for the EU membership, which is certainly a new, big step forward for Montenegro in regard to integration. The Government is committed to implementing the adopted Action Plan with the aim of improving all the areas which the EU has marked as important criteria for furthering Montenegro’s progress.

It is true that at the Lisbon Summit, the success of the defense area reform has been positively emphasized. However, I consider the reforms on our way to EU and NATO are interconnected, although not mutually conditioned, and that the security and defense through civilian control is in the interest of the entire society, not only one Ministry.

3. NATO members are currently struggling with defense budget cut-backs and overall fiscal austerity. How is Montenegro coping with this problem of having to “do more with less,” and what is Montenegro doing to be seen as a contributor to NATO's security rather than just a net consumer?

The global financial crisis is a limitation but also an opportunity for a more efficient joint work, through integration, on military and military-civilian projects. That is also seen in the example of the United Kingdom and France, which are merging several significant military projects.

Montenegro has introduced savings measures through an anti-crisis economic package, even in the defense budget. However, the budget for 2011 will meet all the international commitments taken by the Ministry of Defense, including its commitment towards ISAF, UN and EU missions.

Montenegrin contribution to NATO operations is 2% of our armed forces. Our contribution is also reflected in a several joint NATO and Partnership for Peace exercises.

All this shows that we are not only the beneficiaries but also contributors to NATO. However, I would point out that our full contribution will take place with a full-fledged membership in the Alliance.

4. The North Atlantic Alliance just adopted its first new Strategic Concept since 1999. From its perspective of a post-conflict, Western Balkan nation, how does Montenegro view the continuing evolution of NATO after Lisbon? Has the question of NATO enlargement, especially in the Western Balkans, been adequately addressed?

The importance of an “open door” policy is reflected in the fact that the new Strategic concept of NATO will bring the Alliance much closer to the countries in the Western Balkans. I believe that this new concept will primarily help towards reaching the goal of “peaceful and united Europe” faster. While implementing the new Strategic Concept it is important to develop mechanisms which would ensure a more tangible contribution to NATO reforms and a better quality of life for the citizens. With regard to our region, looking from a historic perspective, those mechanisms would contribute to strengthening the collective security system which is necessary for the permanent security in the Balkans.

5. Prime Minister Milo Đukanović has been instrumental in carrying out important democratic reforms and reorienting Montenegro toward Euro-Atlantic structures like NATO and the EU. Will the absence of this hugely important personality in the government affect the speed or resoluteness of Montenegro's drive to NATO membership?

By making difficult political decisions during last two decades Prime Minister Đukanović has incontestably contributed the most to the democratization and international credibility of Montenegro. With his political vision he has defined our country’s way forward towards Europe and the world. Regarding the possible impact of his decision to resign as the Prime Minister on Montenegro’s pace towards NATO membership I would like to point out the firm commitment and undivided views of the Government and the ruling coalition on the issue of Euro-Atlantic membership and the European integration of Montenegro. I can freely say that the Government and the ruling coalition have never been more devoted to strengthening the Montenegro’s position within NATO Alliance and to bringing it the full membership in the nearest possible future. To that end the ongoing reforms in the Defense sector have a strong support across the Montenegrin society and will remain the priority of our new Government.

Damon Wilson is Executive Vice President and Director of the International Security Program and Matthew Czekaj is a research associate with the International Security program at the Atlantic Council.

5 Questions for Jan Lodal

Jorge Benitez — Wed, 10 Nov 2010 08:17:00 -0600

Jan M. Lodal is Chairman of Lodal and Company and a member of the Atlantic Council's Board. He is a former Principal Deputy Under Secretary of Defense for Policy and was President of the Atlantic Council from October 2005 until the end of 2006. I had the opportunity to discuss his thoughts on some key issues of interest to the Atlantic Council community.

With the current instability in the world and the difficulties in renewing even previous arms control agreements such as START, what is the rationale for Nuclear Zero? Why now?

The first answer is proliferation. The world is on the verge of entering an age of more nuclear weapons states, more nuclear materials, and more nuclear facilities that are poorly secured—making the job of the terrorists seeking the bomb easier and the odds that a nuclear weapon will be used greater.

In addition, creating a successful arms control regime takes a long time. It takes a considerable investment of time and diplomacy to convince governments that nuclear weapons serve no military purpose. This is a major part of the problem. You can not make progress as long as states believe nuclear weapons deter conventional attack or so long as states believe nuclear weapons can take out hard, high value targets.

The acquisition of nuclear weapons by states has been much slower than was expected after WWII. What has changed in the threat from proliferation?

The pace of scientific advancements in this field has accelerated. As a result, nuclear technology is now cheap and easy relative to what was available during the Cold War. For example, during World War II, it took 14% of all the electricity produced in the U.S. to run Oak Ridge. Furthermore, global demand for energy has produced more nuclear power plants and this has required a growing number of nuclear technicians.

Moving toward zero nuclear weapons would require dramatically improved verification. How would you describe an inspection regime that would support Nuclear Zero?

It can be based on the regime in place today and used effectively by the International Atomic Energy Agency (IAEA) to uncover covert nuclear weapons programs in Iraq, North Korea, and Iran. But it must cover all states – the five “acknowledged” nuclear powers are not subject to the IAEA – and it must be more rigorous. It will cost much more, but still a very small amount compared to what the worlds nuclear powers spend on their weapons today.

Only Russia retains a large inventory of operational non-strategic nuclear weapons – some estimates are as high as 10,000. These weapons are not covered by the New START treaty. How should they be dealt with?

It is imperative that future arms control negotiations start with the principle that “a nuclear weapon is a nuclear weapon,” regardless of its size, delivery system, or deployment status. The main risk mankind faces today from nuclear weapons is that one could find its way into the hands of a terrorist organization or terrorist-controlled state that could not be deterred from using it. The non-strategic weapons retained by Russia are among the most dangerous in this regard. Furthermore, they represent a very real threat to our NATO allies who are in range of these weapons even if we are not. Future arms control cannot be effective at reducing these threats and moving the world toward the only stable outcome – zero weapons worldwide – unless all weapons are on the table.

Is there a decisive next step the U.S. could take to put the world on a track to making Nuclear Zero a reality?

Yes. The U.S. could propose a new multilateral convention. This convention would require all states to declare that the only valid purpose of nuclear weapons is to prevent the use of nuclear weapons by others. It would also specify the development of a comprehensive control regime to account for all nuclear weapons and all nuclear material capable of being used to make nuclear weapons. The U.S. should unilaterally commit to living by the terms of the proposed convention. This would mean renouncing all use of nuclear weapons except for deterrence (which the current Nuclear Posture Review came close to doing) and opening all U.S. nuclear weapons and production facilities to international inspection.

Jorge Benitez is the Director of NATOSource and a Nonresident Senior Fellow at the Atlantic Council.

5 Questions for Kurt Volker

Jorge Benitez — Wed, 13 Oct 2010 07:40:13 -0500

Kurt Volker is a senior adviser at the Atlantic Council and member of the Council's Strategic Advisors Group. He is also a former US ambassador to NATO and current managing director of the Center for Transatlantic Relations at Johns Hopkins' School of Advanced International Studies. I had the opportunity to discuss his thoughts on some key issues of interest to the Atlantic Council community.

At a recent Atlantic Council conference, you discussed the future of NATO. How would you assess the state of the alliance?

I am concerned about the state of the alliance because it is facing three serious problems.

One is the global economic crisis which is starving NATO of resources just as the demands on NATO to address a wide range of security threats are growing.

Two is Afghanistan, which carries tremendous risk for the transatlantic relationship should NATO fail. Such a failure would reinforce a growing U.S. attitude that it is not worth working with reluctant Allies who do not do their share, as well as a growing European belief that NATO should not have gotten involved in Afghanistan in the first place, and should pull back from a global role.

Three is that NATO still has no common approach to dealing with Russia. While the tone of NATO-Russia relations appears calm, this is not because Russia has become a more constructive player, but because NATO has been willing to downplay problems, such as Russia’s lack of compliance with the CFE Treaty, it’s occupation of parts of Georgia, it’s pressure on many neighboring states, and its reversal of democratic freedoms at home.

You are very experienced with previous NATO Summits, how would you improve the plans for the upcoming NATO Summit at Lisbon?

I know it is flippant, but I would cancel the agenda at Lisbon and lock the Heads of State in a room for 3 hours so they can actually talk with each other. NATO Summits have become too scripted, too set-piece, too boring for leaders, and too focused on mini-deliverables rather than strategic dialogue and commitment. So much of the negotiations leading into summits is about defining the limits -- what allies will not do -- rather than defining our shared commitments and responsibilities. We are far from a genuine trans-atlantic consensus about the world we live in today – What is the nature of the “West,” and how do we tackle together a complex set of challenges in the wider world? It would be far more productive for leaders to discuss these questions among themselves, than to run through the usual trappings of Summitry.

What is the role of the public in the health and future of NATO?

There is a growing disconnect between NATO’s security experts, on the one hand, and NATO’s political leaders and the public, on the other. There has been a decline in public support for NATO. The public doesn’t see the value of NATO, NATO has not had a good message to communicate its value, and leaders of Allied countries are not engaged. Ultimately, NATO can only be effective if it enjoys the support and understanding of publics. The first step is for leaders to communicate the value of transatlantic cooperation, including on security issues through NATO, and then NATO itself needs to draw the connection between its day-to-day activity and the welfare of our publics.

How would you articulate the value and relevance of NATO to the public?

I always start with values. The United States and Europe are part of a single community, based on shared, democratic values: freedom, democracy, rule of law, human rights. These are universal values – embedded in the Universal Declaration on Human rights, and shared by people around the world – but they are deeply reflected in the societies of Europe and North America.

These values are challenged in the world – from authoritarians, extremists, terrorists, and so on. If our democratic community is divided, we will never confront these challenges effectively. So we must act together. For the past 60 years – and unless we create something else – NATO is the only device we have for concerting U.S. and European efforts to tackle the challenges we face in the world together.

What is your view of the debate within NATO over whether it should continue to have an expeditionary role or focus on its regional role?

As the Albright report says, it has to do both. A NATO that does not focus on Article 5 and the European theater is not doing its job. But at the same time, a NATO that does not tackle threats “from wherever they arise” – such as the sources of terrorist plots against Europe and American from the Afghanistan/Pakistan border area – is not dealing with the most serious challenges our nations face.

Jorge Benitez is the Director of NATOSource and a Nonresident Senior Fellow at the Atlantic Council.

5 Questions for Kori Schake

Jorge Benitez — Thu, 30 Sep 2010 12:27:29 -0500

Kori Schake is the former Director for Defense Strategy and Requirements at the National Security Council. She is currently a research fellow at the Hoover Institution and an associate professor of international security studies at the United States Military Academy. I had the opportunity to discuss her thoughts on some key issues of interest to the Atlantic Council community.

At a recent Atlantic Council conference, you discussed the future of NATO. How do you view the state of the alliance?

I am upbeat about the state of the alliance because of how NATO is responding to three key issues. The first of these is austerity, the significant cuts in defense spending being faced by all NATO members. I believe that this downward pressure on defense budgets will make governments appreciate the value of joint defense. The second issue is Afghanistan, where the difficulties of achieving our goals have increased appreciation for allied willingness to share the burdens. Third is Russia; less because of Russian behavior than the diminished friction among NATO allies about Russia policy.

How well is NATO responding to the large scale of cuts in defense spending?

NATO is facing a serious challenge. All of the allies made the easy cuts in defense spending five years ago. The choices being faced now are much harder to make. Hopefully, these hard choices will force the allies to improve transatlantic cooperation in defense. Otherwise, we could see the return of the burden-sharing debates of the past. But in the current political mood of the U.S. public, there may not be sufficient support to maintain a continued U.S. military presence in Europe. Even though it only costs about 8% more to base our troops in Europe than in Texas.

You identified Russia as one of the three most important issues facing NATO. What is the key to NATO’s relationship with Russia?

The problem of NATO-Russia relations is Russia and it has been for the last ten years. Russia wants to control the off switch on NATO policies such as missile defense. Only changes in Russia’s intransigent policies toward NATO will make decisive progress possible.

Which bilateral relationships are the weakest in NATO and have the greatest impact on the effectiveness of the Alliance?

This is a terrific question. I would say the relationship between Britain and Germany. Traditionally, the Franco-German relationship was the driver of European integration, but I have the sense the current economic challenges and the composition of the EU at 27 make the United Kingdom a more valuable partner for Germany. Closer German-British cooperation in defense could facilitate German military forces becoming more deployable and help tide the British through significant cuts to their capabilities. I see lots of possibility for mutually beneficial outcomes if the British and German governments strengthen their partnership.

Which policy change by NATO would have the most beneficial outcome?

Common funding for NATO operations. Our current system gives countries disincentives to participate in the NATO Response Force and in NATO missions like Afghanistan. I would love to see a pool of funds to support countries willing to deploy their forces.

Jorge Benitez is the Director of NATOSource and a Nonresident Senior Fellow at the Atlantic Council.

Global Economic Impact of Dodd-Frank Financial Reform Bill

Alexei Monsarrat — Thu, 08 Jul 2010 08:20:01 -0500

Alexei Monsarrat, director of the Atlantic Council's Global Business & Economics program, interviewed Tom Joyce, debt capital markets strategist for Deutsche Bank, on the impact of the Dodd-Frank bill on the finance industry and global markets. A transcript of their discussion follows.

ALEXEI MONSARRAT: Thanks very much, Tom, for taking part in our 5 Questions series to provide your thoughts on the Dodd-Frank bill. There has been a huge amount of dissecting of this legislation and the process to develop it. Now that we seem to have something tangible I’d like to get your sense of what we really have here, how it will affect the industry, and how this will affect the regulatory discussions in other G20 countries, especially in Europe.

The first question is: now that something has come out of the conference committee, what are we really looking at? How does the bill stack up to what the banking industry wanted to see? And how do you see this affecting your business model?

TOM JOYCE: I would say that it is on the aggressive side of our expectations. When I say “aggressive,” I mean it is a very tough piece of legislation on the big banks and on the banking system, in particular.

At the same time, I would say that we have had the opportunity to adjust our expectations in the last two months, in particular, to most of the provisions in there, such as the Volcker rule and the swap push-out provision. There are aspects of many of these provisions that are very good for financial stability and very good for the system, and that we actually did support in various forms. However, we ended up with what we would call the less-than-attractive outcome on most of these provisions as they relate to the impact it would have on the banking industry.

MONSARRAT: How do you see this changing the nature of the way that the banks are working? What are the pieces that you are okay with, and what are the pieces that you see changing how you are going to have to operate?

JOYCE: There are about 8100 banks in the U.S., and the legislation will impact big banks and small banks differently. But almost every major provision of the bill has the side effect of either creating downward pressure on industry profitability – that is likely to be significant – or upward pressure on the amount of capital that needs to be provided in various different businesses.

And once again, most of that is good, but not necessarily all of it. For example, we all believe that all of our businesses should be much better capitalized. As a matter of fact, we have already done that. So the industry is already by and large – U.S. banks, in particular, and Deutsche Bank included in that – is already overcapitalized vis-à-vis what the regulations demand. But what this law does is codify that into law, which is a good thing.

However, once again, almost every provision results in either profitability going down or capital requirements going up. As a result, many on Wall Street would estimate that industry returns on equity are going to go down from about 15 percent on average today to between 11 and 13 percent going forward. Some estimates have it even going even lower.

If you go issue by issue, Consumer Financial Protection Agency is going to have a lot of power. It is going to be inside the Fed, but will be an independent authority and will probably create significant downward pressure on a full-range of fee businesses, different types of mortgage lending and credit card products, etc. for all banks across the country. Aspects of that are probably good. But once again, it will have a significant impact on profitability in the banking system, which will therefore ripple on to the economy in different ways.

The derivatives provisions are certainly much more onerous than we would have liked. Ninety-five percent of all Fortune 500 companies use derivatives. About 350 of those are non-financial corporates -- energy companies, consumer retail, et cetera. About 150 are financial companies. For those 150 financial companies, where we ended up on the derivatives provision is reasonably onerous in that they did not receive the same end-user exemptions that corporates received. And so as a result of going through central clearing, there is going to be significantly higher demands on the liquidity of these institutions, in addition to the regulations that were already underway.

And then certainly the swap push-out provision, which was added by Sen. Lincoln a few weeks before her primary election on May 18th, will have an impact on the way the industry is able to interact with the 95 percent of Fortune 500 companies that do use derivatives. The Fed and the FDIC publicly came out in letters that said that they opposed it. Apparently the White House also opposed it. We had all assumed because of that public opposition that it would be removed from the bill. In fact, it was not removed from the bill. It was watered down, which was a positive thing. But it was not removed from the bill.

A big plus for the banking industry is that much of the disintermediation in the banking industry over the last 20 years -- meaning the full plethora of non-bank financial companies that were competing with banks -- were not regulated. So these entities were competing with banks in many different markets from lending to other products and they were not regulated, so they didn’t have to have the same capital requirements. They were able to do more off-balance-sheet transactions than even the banks were able to do.

So banks as a whole are relative winners from that perspective. But many of the individual businesses that banks across the country used to run are not relative winners. It is certainly positive that banks will not be able to be levered as highly as they had been previously, though many and most have delevered already on their own through the last few years to painful write downs. But with lower leverage, there will be less profitability.

Again, it is probably good for the system and it is the type of change that we all agree with and support. But some of the specific new capital provisions that were added very late in the game, such as the Collins amendment, which would no longer make trust preferreds and other types of securities eligible, is something that was somewhat unexpected prior to the last month. That will be a difficult transition for banks.

MONSARRAT: There has obviously been a lot of anxiety in the markets right now. Is there a little bit of a sigh of relief that at least it is over, and will markets respond positively to a higher degree of certainty? Or do we still have some bumps in the road ahead as the agencies write the rules on this?

JOYCE: I think both points are true simultaneously.

There is some significant degree of comfort that the market will have now that we at least have certainty on the direction that we are going, and on the main provisions of the bill; having said that, there is still quite a bit of uncertainty out there. I don’t want to understate the importance of this certainty. It is a very positive development. There are pros and cons to the United States having done this so much more quickly than most other advanced countries. We are well-ahead of most other advanced economies in Europe and in Asia and Latin America on this topic. The drawback in having moved so quickly will be the regulatory arbitrage opportunities created if other jurisdictions do not adopt the same rules.

On the down side I will just name two or three things quickly, but they are important and shouldn’t be underestimated.

Number one, as you suggest, is the very fact that a lot of the detailed rules still need to be written. It will take six to 12 months or more for the Fed, the SEC, the CFTC, the FDIC, and other regulatory bodies to write those detailed rules. And so there will be some uncertainty around that.

Secondly, there is still a tremendous amount of uncertainty around the economy both in the U.S. and globally.

Thirdly, the European sovereign debt crisis, which is certainly not unique to Europe, impacts the banking sector both in the U.S. and in Europe very directly; much more so than other industry sectors. There is still a tremendous amount of uncertainty on that topic. We are still not at peak default rates in certain products so there is still uncertainty out there.

Finally, the Basel Committee changes, which will largely impact the largest banks, seems to be on a slower timetable, but has certainly created tremendous amount of uncertainty. So a major piece of uncertainty behind us, but there is still plenty of things out there that will, I think, result in a tremendous amount of volatility in markets in the months and year ahead.

MONSARRAT: A lot of your concerns deal with the international side of the equation. How do you see international coordination going forward, and what is the industry hoping to see come out of the G20 meeting this weekend. Do you see any irreconcilable differences emerging here and if so, where?

JOYCE: It is a very daunting task to coordinate everything on a global basis, and so it is hard to imagine that we aren’t going to have a reasonably high margin of error in certain areas. The Basel committee is responsive to the global community, whether it be in a nation-state level or at a bank-industry level, to hear the feedback from institutions on what proposals and what proposal do not work. We do need more testing of proposals so that the full impact of different proposals is fully understood.

I think we all favor the general direction the Basel committee is going, but we want to make sure that things are properly discussed and adequately understood before we begin implementing things too soon. We need to fully understand the implications on economies, on the ability of banks to raise certain amounts of capital, the impact it will have on credit, credit flow in various different economies and so forth.

Our hopes for the G20 vary by topic. I wouldn’t say there are irreconcilable differences. But I would say that the early G-20 summits in2008 and 2009 were very effective in coming together with a cohesive set of meetings that were focused on coordinating the global response to the financial crisis. And that was very positive and very instrumental and some of the turnaround that we have seen in the last year.

The Toronto summit, by contrast – and perhaps understandably to some degree – is setting up to be a more divided meeting on a broad range of issues. We are certainly seeing a division in approach as it relates to global growth. Should we be pursuing more fiscal austerity measures or should we be pursuing policies closer to our fiscal stimulus? There is a clear divide between Europe and the U.S. on that point.

Foreign currency rate management is obviously a divisive issue, with a tremendous amount of focus on the euro and the Chinese yuan on that topic.

Financial regulatory reform will be a third topic where I think we will see a tremendous amount of division. The U.S. has obviously moved quickly and aggressively. Not all other jurisdictions will share the same view on all of the policies and on the timing. There is also clearly a divide on the topic of a bank tax with several nations favoring the tax, Germany, the U.S., U.K., in particular, and other countries such as Canada, Brazil, and Japan who oppose the tax.

And lastly, the whole approach to the sovereign debt issue, sovereign debt crisis. You know, obviously, there will be different opinions on the urgency and the timeframe around those challenges.

So there is a significant amount of divide, but this is all part of an ongoing dialogue and hopefully we can get to a constructive spot sooner than later.

Alexei Monsarrat is director of the Atlantic Council's Global Business and Economics Program. He previously spent six years with the U.S. State Department in the Bureau of Economics, Energy, and Business Affairs (EEB), where he worked on a range of issues with transatlantic partners, including economic development and poverty reduction, post-conflict reconstruction, strategic economic policy relations, and energy issues. Photo credit: AP.

5 Questions for André Sapir

Alexei Monsarrat — Wed, 22 Jul 2009 14:00:00 -0500

André Sapir, a member of the Atlantic Council's Business and Economics Advisors Group, is an Economics Professor at Université Libre de Bruxelles and a Senior Fellow at Bruegel, a Brussels-based think tank. I had the opportunity to gather his thoughts on some key issues of interest to the Atlantic Council community. We discussed new regulations emerging from the global financial crisis, particularly those developing in Europe.

Overall, does the new regulation plan seem to appropriately address the problem areas in European economies?

The European Council has defined a framework and asked the Commission to come up with specific proposals by early fall, which the Council will either accept or reject.

The framework laid out by the European Council closely follows the recommendations of the de Larosière report on financial regulation and supervision in the European Union presented to the Commission in March. On the whole it was an excellent report, which had received the endorsement of the Commission in April. Now the European Council has endorsed it as well, but without naming it specifically. This is definitely a step in the right direction. Frankly, one could not have realistically hoped for more at this stage given all the constraints.

Defining a broad framework based on de Larosière report was relatively uncontroversial. The real battle will only come later, after the Commission makes its legislative proposal. It’s only then that we shall see where the dividing lines are, if any, between the European countries and possibly between the United States and Europe.

What specifically would you cite in the de Larosière report that you feel positively about and that gets at some of the real fundamental issues?

There are essentially two issues they have endorsed: First, at the macro level, the creation of the European Systemic Risk Board, called the European Systemic Risk Council in the de Larosière Report. Although it’s not specified, as such, it was essentially proposed in the de Larosière that it would be chaired by the President of the European Central Bank (ECB). The principle issue is in the details: what is this board exactly, and what is the responsibility it will have? Now European leaders are only saying, ‘we support this, giving the Board a very general role.’

The second main idea of the de Larosière report regards the European System of Financial Supervisors. The Council recommended that a European System of Financial Supervisors be established to “maintain the quality and consistency of national supervision.” This would apply more at the micro level, with the creation of three authorities (the second main idea of the report). In effect the Council has endorsed both proposals.

The most contentious aspect of de Larosière is how binding those institutions should be in their recommendations, more precisely, binding to whom? The fact is that responsibility for fiscal policy lies with the Member States; that is the reality of the European Union. The aim is not creating a super, EU-wide oversight for fiscal policy. That would require changing the architecture of the Union, they are not considering that. The Council reaffirmed the reality that fiscal responsibility remains with the Member States.

Not to say that recommendations put forth by these new institutions can’t be binding in other areas, but the decision to bail out, by so much, certain institutions, should remain with the Member States, their governments and ultimately with national parliaments. In Europe, that was a demand of the British Prime Minister, who wanted this clarified, and therefore the Council underscored this in its conclusion.

Picking up on this central issue of EU authorities and whether EU regulators should have power over national spending decisions in areas such as bank bailouts: In your opinion, is this power necessary to ensure financial stability, and if so, has the right balance been struck between national and supranational authority?

In this case, I would differentiate between before, during, and after a crisis. The proposed regulations can put in place a number of bodies, like the European Systemic Risk Board and the European System of Financial Supervisors, creating a common European rule book for regulation and supervision, an important development, and hopefully will minimize the likelihood of future crises.

The question that remains however is how to deal with a new crisis if one does arise despite stringent new regulations. Increased regulatory cooperation and harmonization in Europe is important, but in the event of another crisis, how can the EU respond in the absence of this fiscal authority or without the ability to impose binding orders on countries?

Here, the Commission can be creative in its proposals. For example, it seems to me that there is still room between not impinging in any way on the fiscal responsibilities of Member States and doing nothing at all. One possibility might be to have some ex-ante burden sharing arrangement. This has been discussed in Europe, in fact before the crisis. One can look to, inter alia, the memorandum of understanding presented by the Council concerning burden sharing. Clearly, the existing memorandum was insufficient to deal with the crisis.

The EU would benefit greatly from a more precise, ex-ante burden sharing consensus delineating how resources can be pooled, how national treasuries ought to finance a clearly defined portion of a bailout (if necessary). The Commission and Council should tailor rules and guidelines to specific scenarios, with defined formulas for the allocation of burden sharing. This will probably be difficult for some to agree to, but in effect, it would not violate what they have defined as the proper course of action and it would bring us a step forward. Many have talked of a “Window of Opportunity” which currently exists, in Europe as well as the United States, to push for new regulation. This is, of course politics and it is hard to predict what the mood will be in three months, six months, etc. for ambitious regulatory reform. The Commission will need to closely monitor and consider this in putting forth proposals on what, realistically can be done.

Are there some issues that haven’t yet emerged as much that, when it comes time to get specific, are going to be contentious between Member States and which will potentially put up some road blocks to moving forward?

Thus far, the focus has been principally on crisis resolution – the ex-post piece of the puzzle, as opposed to defining the rules for preventative regulation and supervision. It is important, even during the crisis, to consider the link always between ex-post resolution and ex-ante planning. It is much easier to agree on the ex-ante by saying ‘these are the rules that we have and these are the rules we agree with,’ agreement on crisis management and its resolution has been more contentious.

One of the issues that we have not discussed is insolvency, and laws for insolvency in general, for all corporations. In Europe, insolvency is handled at the Member State level by national laws which differ between countries; there is no European regime to handle insolvency. In a single market, with many firms operating cross-border, this can create significant problems if one of these firms becomes insolvent; this requires dealing with the pieces of each country’s regulations on insolvency. This applies as much to banks as to corporations in general. Linkages between national regimes are essential to deal with cross-border companies in a single market. Without an EU-wide treasury, countries must decide where public money will come from in times of crisis management. Other matters for consideration include how to deal with shareholders, how to allow for greater cooperation between different regulatory regimes across countries, in general, and in particular for banks.

Many have noted the lack of cooperation between the US and EU in developing their regulation plans. Should international coordination be a priority for regulation at this point, and in which areas is this coordination most important?

There are two levels of international cooperation to consider, on the one hand we have the G20 framework, and on the other hand, we have bilateral coordination between the United States and EU. It’s clear that financial services and financial regulation is mostly, though not exclusively, a matter involving the EU and the United States. The G20 process is very, very important, but it’s also very important that within this G20 process there is a special attention to EU-US cooperation as the two current centers of global finance. If there is no progress between the EU and the US, then it is very difficult to make progress internationally and meaningful consensus will need US and EU agreement to be successful.

One thing we are seeing more clearly is that the processes in the US are always much more political than in Europe. In Europe the process is political in that it involves multiple Commissioners on the one hand, and the Member States on the other. But in the US, the process involves Congress, and Congress is a more formidable political body than the European Council in the sense that the constituencies represented in the US Congress are much more narrowly-focused than the member states represented in the European Council.

The European Council is also complicated (with 27 countries). But in the end, at the Council, for certain matters like this, there are really only a few countries that exert decisive power. For example, in financial markets, it is generally accepted within the Council that not every country has a leading role in financial affairs and even among leading countries different approaches can be hard to manage. However, I would say that, on the whole, because of the nature of the process of European integration, we are more naturally inclined toward cooperation than the US. Structurally, it’s somewhat easier for us to do. The key result for the US is difficulty for the administration to make binding agreements in the international process. Although President Obama, in principle, believes in multilateral cooperation in the G20 framework and bilateral cooperation in the EU-US framework, the political process in which he and his administration are engaged with Congress and the Senate limits room for maneuvering and true cooperation more, I believe, than it is the case in Europe, where the Commission is also engaged in a similar process with the Council.

Some regulatory decisions are being made in the US that may not really take into account what is happening elsewhere; the political structure makes it difficult even for the President and Congress to negotiate with each other and even more so if they are then simultaneously involving third parties. This is a risk for new and effective regulatory design.

Within the EU, do you see in the discussions any trend or emerging pressure toward less national sovereignty? Will one of the long-lasting effects of this crisis on Europe be to move the system closer to a supranational system, where the EU does take on more responsibilities?

There’s lately been much discussion on this issue in Europe, though it is not specific to the financial sector. This is especially relevant as people make predictions about the next Commission and what’s going to be the agenda. Many are promoting the bicycle theory: either you move forward or you fall off. That very same analogy is used in integration now: either you move forward or you will fall backward, that the status quo is not an option there is not a consensus on this, but the crisis has brought this message back. I used to work for Prodi when he was the President of the Commission, and he often repeated, that Europe only makes progress through crisis. That doesn’t mean that everyone is endorsing deeper integration – some people are disputing it. If you ask, ’What lessons do we draw from the crisis, and does it indeed mean that we need to move forward in order not to fall backward, because the status quo is not an option?’ This debate will likely continue and intensify.

What remains to be seen is whether deeper integration would be a broad brush over many areas, or if it will be limited to some very specific issues, like financial markets. Financial markets in particular are seen as the prime candidate for the idea that you need to move forward otherwise the risks are very, very big. You remember what Adair Turner, UK Financial Services Authority (FSA) Chairman, said about financial regulation and supervision in Europe: “sound arrangements require either increased national powers, implying a less open single-market, or a greater degree of European integration.” The point being that it’s one or the other.

So it’s either going back to national powers sacrificing part of the single-market or accepting a higher degree of European integration. The fact that this comes from the UK parliament is symptomatic of the attitude in that country. Mr. Barroso often says “if not now, when”?

Overall, I would expect deeper integration will indeed happen. Mario Monti, for example, has been making the point about deepening links between taxation regimes. Others have talked about social areas.

I would be very surprised if we have the status quo five years from now, at the end of the coming Commission. We would not have taken advantage of that window of opportunity, if we had not moved into greater integration, which means greater EU responsibility compared to national responsibility.

Alexei Monsarrat is director of the Global Business and Economics Program at the Atlantic Council. Photo credit: Review of International Economics.

5 Questions for Henrik Liljegren

James Joyner — Wed, 03 Jun 2009 16:43:47 -0500

Henrik Liljegren, an Atlantic Council board member, served 42 years in Sweden’s diplomatic corps, including stints at Ambassador to the United States, Turkey, East Germany, and Belgium. I had the opportunity to get his thoughts on some key issues of interest to our community.

1. During your time in Washington (1993-97) you were instrumental in negotiating the withdrawal of Russian forces from the Baltic States. What do you expect from this weekend’s meeting between President Obama and President Medvedev in Moscow?

I think the Russians will be pleased to have the publicity that inevitably surrounds meetings of this kind. It will project the image that Russia is a global player whose views count. In addition, bilateral arms control talks with the US creates the impression that Russia and the US are of equal superpower status just like when the Soviet Union and the US negotiated SALT during the Cold War.

For the Obama administration it might be the beginning of a long testing period where it will find out whether the Russians can be encouraged to see the advantages of behaving like a responsible stakeholder in the international system. Who knows, maybe people in the Kremlin will one day see the advantage of having free, peaceful and democratic countries on their borders. And perhaps one day they will see the advantages of genuine cooperation based on mutual trust.

2. What are the chances that this will happen?

I am not optimistic. Russia suffers from post-imperial withdrawal syndrome.

Many people have forgotten how powerful this empire seemed to be only some twenty years ago. I was ambassador to East Berlin when West Berlin was an island in the middle of East Germany and a potential hostage of the Soviet Union. At Embassy receptions all the ambassadors of the Warsaw Pact countries flocked around the Soviet ambassador to East Germany to pay their respects in a rather servile way. It was a spectacle somewhat painful to observe but heady days for the Soviet officials.

Those were the days when Putin was a young KGB officer in East Germany and Dmitri Trenin, nowadays director of the Carnegie Moscow Center and of the most influential commentators on relations between the West and Russia, was an officer in the Soviet Army at Potsdam outside East Berlin. I am sure that their experiences are deeply ingrained in their respective mindsets. It must have been a terrible shock when the wall came down and the Soviet empire rapidly dissolved.

What we are observing today is how Russia under Putin and Medvedev try to use all means at Russia’s disposal to gradually regain some influence over territories it acquired during the last three hundred years. Right now it seems that Russia also tries to block the United States wherever it can globally. It has been said many times before, but it is worth repeating; the Russian leadership perceives it its relations with the US as a zero sum game. So if it is able to block the US anywhere on the global chessboard it probably will.

3. What would you like to see happen in US-Russian relations?

I hope of course that the new and very constructive approach by the Obama administration towards all its partners will have a positive impact on the leadership in Moscow. Since the people in the Kremlin have a tendency to mistake a polite posture for weakness I think it is important that the Obama administration reaffirms what Vice President Biden already said, i.e. that it will not accept the concept of a sphere around Russia where Moscow has legitimate or privileged interests. The administration should also provide the countries in what Russian calls its “near abroad” with support in appropriate forms whenever they come under pressure.

4. To what extent does the West bear a responsibility for ignoring Russian concerns, such as in recognizing Kosovo’s independence and expanding NATO up to its borders?

I don’t think that the West is to blame. During the first year of the Russian Republic the Yeltsin government adopted the positions of the West on practically every important international issue and in response Washington had adopted the “Russia First” policy and paid a lot of attention to Russian views. However, when I asked a member of the NSC in the middle of April 1993 about Russia the answer was that a change had occurred in Russian foreign policy and that they had started to spring some nasty surprises on the West in the Middle East, North Korea, Georgia and the former Yugoslavia. The American honeymoon with Russia was over already in 1994 and it was not the fault of the American partner.

5. You spent the last years of your diplomatic career in Turkey and still have a home there. What context should we view recent disputes with the West over energy, the Armenian genocide, NATO leadership, and EU membership? How do we reconcile Turkey’s critical role in NATO and geopolitics generally with its political behavior?

Turkey, like Russia, constitutes what remains of a great empire. An important difference is that Turkey has been more successful than Russia in overcoming its huge loss of territory. In fact Turkey has turned it into an advantage.

The current Turkish Foreign Minister, Prof. Ahmet Davutoglu, writes that Turkey’s geography gives it "a specific central country status" and “an optimal place in the sense that it is both an Asian and European country." Davutoglu adds that "in terms of its area of influence "Turkey is a Middle Eastern, Balkan, Caucasian, Central Asian, Caspian, Mediterranean, Gulf and Black Sea country."

If you look at Turkey with this perspective in mind you understand that the Turkey of today might be tempted to act according to what it perceives are its own basic interests in relation to the EU and NATO. In the view of leading Turks probably the advantages that Turkey can offer NATO and the EU outweigh what these institutions can offer Turkey in return.

Turkey is rapidly changing, sometimes at a faster pace than foreign observers can keep up with. The Turkish leadership of today does not feel closer to the member countries of these institutions than to, let us say, Iraq. Opinion polls show that most Turks nowadays feel that being a Muslim counts for more than being a Turk. If Muslims are killed in distant countries Turks feel as if their close family has been attacked regardless of the circumstances.

Add to that the strong emotional element of Turkish foreign policy. Turkey is a proud nation and reacts strongly to what it often sees as unfair and prejudiced treatment on the part of the West. During my two tours of duty in Ankara I witnessed how Turkish views were ignored or vilified while the not quite so objective historic accounts and arguments by groups that murdered Turkish civilians and waged war on the Turkish state were readily accepted as the ultimate truth by the media and public in Europe and the US.

Turkish foreign policy, which used to be reactive and cautious, has lately become proactive and creative. Instead of trying to achieve a dominant position in the territories of the former Ottoman Empire, Turkey nowadays conducts a policy which tries to achieve maximum advantage and" zero problems" in the relations with its partners at the same time as it tries to assist ongoing negotiations between adversaries like Syria and Israel.

However, Turkey has not yet come to terms with its own identity. Turkey is torn between a desire to rid itself of the secular system imposed by Atatürk and a wish on the part of what looks like a more and more beleaguered minority to stick to secularism. My own hope is that Turkey will one day find its own model for combining the population’s predominantly Muslim faith with the secular structure needed both for the efficient organization of the affairs of state and a successful relationship with the West.

You can read about Ambassador Liljegren's fascinating life story in his memoir, From Tallinn to Turkey - as a Swede and Diplomat

James Joyner is managing editor of the Atlantic Council.

5 Questions for Robert Oakley

James Joyner — Wed, 15 Apr 2009 08:05:26 -0500

Robert Oakley served as U.S. ambassador to Zaire (1979-82), Somalia (1982-84), and Pakistan (1988-92) and as Special Envoy to Somali (1992-1994) and directed State's Office of Combatting Terrorism (1984-86). I had the opportunity to get his thoughts on some key issues of interest to the Atlantic Council community.

1. What lessons can we draw from the American experience in Somalia in the 1990s in dealing with the recent piracy problem?

It's worth remembering that the [George H.W.] Bush administration considered force the last resort in Somalia, ultimately sending in a humanitarian mission when the situation deteriorated. President Clinton changed that, trying to turn Somalia into a democracy. This angered the local population, turning them against us, and ultimately led to the Blackhawk Down tragedy. This in turn caused problems for Clinton for years to come, notably in Rwanda, Haiti, and elsewhere.

We have a superbly trained and capable military. Taking out pirates isn't a problem. But the question becomes "Then what?" Who do we arrest? How do we deal with the backlash?

2. Most observers argue that the piracy is part of a deeper problem: Somalia as a failed state. Do you agree? What, if anything, can the United States and its allies do to promote stable governance there?

It's a very interesting question. We spent a number of years going down the wrong track. We were paying warlords to keep order but this made the Islamic courts much stronger. The Ethiopians solved that problem for a while but they're gone now and the Islamists are back in control.

Somalis are going to fight each other if left on their own but will quickly unite against foreigners who come in. The Al-Shabaab splinter group, which has strong al Qaeda links, is largely a product of our mistakes. And they're helping to fund the pirates we're now trying to fight.

There's a really good editorial in Tuesday's Washington Post, outlining what needs to be done. We've got to gradually cultivate the current president and build up a sustainable government, relying on allies like the Saudis and the relevant NGOs as much as possible. The goal should be economic development and security but we must do that with very little American presence on the ground. Somalis aren't hard to rent.

We've just got to peel off the layers until we get to the hard core extremists. Only then do we consider military options within Somalia.

All of this is going to require a lot of patience, something Americans haven't exactly been known for in recent years. It's going to be very expensive but worth it in the long run. We can't be impatient. We have to accept making progress slowly, always with the promise of doing more later.

We have to enlist allies with long term interests in the region. Back when I was ambassador there in 1983, President Barre was doing a huge amount of business with Saudi Arabia, for example. They love to buy Saudi sheep and camels. So, we need to help them get legitimate commerce going to make piracy and other criminal activity less attractive.

3. Moving to Africa generally, the United States has made a concerted effort in recent years to step up our engagement, including the creation of AFRICOM and a much larger financial commitment to public health. Why is that continent so important to our interests? What more should we do there?

We got off on the wrong foot with AFRICOM, which Africans perceived as a takeover under the guise of development. That's largely been sorted out now, though.

Africa is just so important to the United States in so many ways. The mineral resources -- oil from Angola, Nigeria, and Algeria -- plus cobalt, copper, and so forth are critical to our economy. Terrorism is also a major issue, especially in Algeria and Nigeria. We've set up a naval task force to deal with the issue along the West African coast.

And humanitarian issues are obviously of major moral concern to the United States. Yes, many Americans worry about corruption and aid money not going to the people we're trying to help. But we've learned a lot over the years. The Millennium Challenge Fund, for example, rewards leaders for good behavior and has strong accountability measures. Money for AIDS and other programs are now being very well targeted.

4. The Obama administration has made an effort to improve our relations with the Muslim world. At the same time, however, he seems to be receiving substantial pushback from Pakistan in his efforts to pressure them to address security issues there. What advice would you offer in balancing these objectives?

I recently met with a Pakistani expert and asked her whether things were as bad as it looked from here and she replied that "It's even worse." We've forgotten Rumsfeld's question: "Are we creating more terrorists than we're killing?" And we probably are. The drones may be killing a lot of Taliban and al Qaeda but they're alienating the tribesmen we need to win the war.

We've pushed the Pakistani army to fight our war and created a huge backlash. They're not trained or equipped for counterterrorism and they're getting killed and killing the wrong people, essentially fighting their own.

Worse, what we're calling "benchmarks" remind them very much of the "sanctions" they had hanging over their heads for so many years. [Editor's note: Pakistan's ambassador, Husain Huqqani, made this point in his Atlantic Council appearance last week.] By demanding that they divert troops from the Indian border to fight the Taliban, we've alienated them tremendously. Whether we agree or not, the Pakistanis consider India to be the biggest threat to their security.

Right now, the Pakistani military has control over their nukes. But, if the Islamists gain ground, who knows what's going to happen?

Beyond that, the Pakistani president is both incompetent and corrupt. He's got no clue on the economic side of things.

5. Finally, the war in Afghanistan has been underway for more than seven years with no end in sight. What prognosis do you have for the NATO mission there?

The problem is that we can't do one without the other. If we can't contain the problem in Pakistan, we don't have any chance in Afghanistan.

It's going to take a long time. The progress on the civil side has been encouraging. We're finally making a real effort there. Still, the Karzai government is not providing sufficient protection. We've had great success training the army but the police is in shambles. Right now, the people dislike the police more than the Taliban.

Ultimately, we've got to ease Karzai out. The problem is that we've made it known that we want to get rid of him, which has created its own backlash. We've got to be more subtle.

We're not very good at subtle.

No, we're not.

James Joyner is managing editor of the Atlantic Council.