Streit Talk

by Uzoma Ekenna

According to a recent news report from EurActiv, on April 18 The European Commission proposed instituting an EU-wide minimum wage, increasing the current salary in many nations and introducing a minimum wage for the first time in others.  “Setting minimum wages help prevent a destructive race to the bottom in the cost of labour, and are an important factor in ensuring decent job quality,” reads the draft communication which the College of Commissioners also adopted on April 18^th.  Although that statement may be true, one can also argue that over expenditures by governments lead to debt and a deepening of national financial issues, a problem that more nations within the eurozone cannot afford to endure.

One of the first articles in the Lisbon Treaty is dedicated to social issues, as it mentions creating a “competitive social market economy, aiming at full employment and social progress”.  But in recent years, this mission has become increasingly harder to achieve, as the EU unemployment rate has climbed to 10.2% (as of February 2012) and the disparity amongst the wealthier and poorer nations continues to increase, partly due to the financial and economic crisis in the eurozone.

Interestingly enough, the nations without a current minimum wage, including Germany, Austria, and the Scandinavian countries, have some of the highest GDP’s in all of Europe.  They also hold some of the lowest unemployment rates, with Austria at the lowest of the EU member-states, at 4.3% (in January 2012).  Establishing a minimum wage in these nations may end up increasing labor costs, which could cause the prices of goods and services to rise.  Also, if companies aren’t able to afford to pay their employees, this may lead to massive layoffs and a halt in companies’ expansion.  Depending on the existing wage structure in these countries, economic growth could actually be hindered.

If an EU-wide minimum wage should be established, it would need to be high enough for residents of wealthier member states to be able to survive, but low enough so governments of poorer member states will not fall into debt by overpaying its citizens.  That itself poses a problem, because the fiscal inequality of EU member states is so great.  Luxembourg, whose GDP (per capita) as of 2011 was over $84,000, has a minimum wage set at 1,800 euros per month.  On the other extreme, one of the poorest members of the EU, Bulgaria, has a minimum wage of merely 138 euros per month (GDP of Bulgaria: $13,500).  Bulgaria maintains a very poor welfare state and lacks social service programs; even schools and orphanages in the country rely heavily on private donations to operate.  Many citizens refuse to pay taxes, creating even less funds for government operations. A government of this caliber is highly unlikely to be able to create funds that would assist in raising the minimum wage for its citizens.  It would be unrealistic for these two nations to share the same minimum wage, due to dissimilarities in economy size and the standard of living.  Countries in the same economic position as Bulgaria could be driven to over-spending, putting them in a crisis potentially worse than their current situations.

What about countries tackling debt issues due to high government spending?  Part of the Greek’s government bailout plan included a 22% cut in the minimum wage, which is currently at 877 euros per month.  After a round of tax increases and a pay cuts in both the government and private sectors, the Greek economy continues to slide into a deeper recession, increasing the number of people living below the poverty line.  How would a potential enforced minimum wage affect Greece and similar nations?  It, along with Portugal and Ireland, have agreed to cut back on government spending, but it is difficult to determine if the EU-wide minimum wage will create more an issue for countries already facing austerity measures.

One feasible alternative to an EU-wide minimum wage could be to adjust the minimum wage to the countries’ purchasing power.  That way each country is assessed relative to each other instead of the EU as whole.  Or, the European Commission could just abandon the idea of creating a wide-spread minimum wage altogether and spend more time deliberating on ways to increase funds for job creation, especially in the private sector, which would be the real solution to disparity amongst member-states.

As the eurozone crisis carries on, members of the European Commission continue to scramble to generate solutions that will improve the current economic state of the EU as a whole.  But instead of finding a collective solution, each country should be assessed separately, based on their current financial status.  An increase in the minimum wage in certain countries may be a viable resolution, but an EU-wide minimum wage could possibly be a solution that deepens the existing crisis.

Uzoma Ekenna is an intern at the Streit Council; Photo credit Images_0f_Money (http://www.flickr.com/photos/59937401@N07/5930032284/lightbox/)

by Mitch Yoshida

In response to the Eurozone crisis, European policymakers have agreed to numerous measures aimed at addressing its underlying causes. In this context, Marco Fantini – a European Commission official who heads the Directorate-General of Taxation and Customs’ Quantitative Analysis Section – explains the Commission’s growing role in reforming EU Member States’ tax policies; how this could boost economic growth, improve public finances, and reduce trade imbalances in the common currency area; and the implications of such reforms for transatlantic foreign direct investment. 

Q: Since the start of the Eurozone crisis in 2009, a wide range of policy measures have been put into place in an attempt to resolve the crisis and prevent its recurrence. Could you explain your work in the context of these broader efforts?

A: There is, now, a much stronger focus on preparing country-specific recommendations that go into far greater detail than was the case in the past. There is also greater willingness, not only on the part of the Commission and other European institutions, but in Member States generally, to discuss these issues in a more thorough way. Tax policy is particularly sensitive for several countries, but we are seeing a willingness to really discuss what elements of tax systems in every country are slowing growth down.

What elements could be reformed? Going beyond taxes that are harmonized at the EU level – because some taxes are harmonized at EU level, at least in legal form – there is a willingness to really look at the entire spectrum of tax policies in each member state.

My role in this exercise is to analyze the strengths and weaknesses of each of the 27 Member States’ tax systems and to formulate recommendations. This is technical work, done by a team of people looking at this from different angles. My personal contribution is to help identify performance problems in tax systems and formulate reasonable suggestions for improvement.  This technical work is part of a larger process that eventually leads to a political decision.

Q: In terms of improving public finances and economic growth prospects, have you quantified the potential gains from reforming tax policy in Member States?  

A: Well, we haven’t really quantified this; this would be a very difficult exercise. It’s been done for specific reforms in specific Member States, but because our recommendations are often looking at tax systems in a very general way it becomes technically very difficult to really put a number next to the potential for impact. We know that it’s going to be significant in some Member States. It’s going to be less significant in others.

Even though we have not quantified the impact precisely at this stage, this should not lead anyone to think that this makes the exercise less significant. This is the case for three reasons. First, we do have some evidence for specific Member States. Italy, for example, has been running simulations of the impact of certain reforms. Second, we will be able to assess the impact later on when these recommendations are actually implemented. And third, even though we may not be able to quantify the exact impact, we have strong reason to believe that, especially in some Member States, the impact is going to be very large because the distortions that we have identified in the tax systems of certain Member States are pretty important.

So, this exercise can surely lead to a significant acceleration in growth. It is something that will have an impact in the medium-term, probably, more than immediately. But that’s linked to the specificity of the tax system. If you improve the tax system, that’s going to improve incentives for investment, and for employment creation, but these incentives are often created gradually. It takes time to improve the system, and then it takes time before entrepreneurs realize that the system is working better and offers better opportunities. So it’s inherently a process that generally produces results over a few years. But then we also have cases where the tax situation is such that there are large distortions – there is an immediate need for reform. And there, improving or implementing a reform that makes sense could lead to a big payoff even in the short-term. I think a prominent example of that is the Italian case.

In Italy, there was a very significant tax reform package presented in December of last year, and it was implemented very quickly. Largely, in my opinion, as a result of this package (although other accompanying measures certainly contributed), we have seen the so-called spread on Italian government bonds, fall by over 200 basis points, Germany. The spread is the yield difference compared to the best performer, a measure of the quality of the debtor; a drop of this size means that markets now consider Italian government debt to be much less risky. What is the impact of that? It essentially means bringing down interest rates by 2% on an annual basis, and that translates into very large savings in terms of government expenditure because Italy’s debt is approximately 120% of GDP. Plus, it means lower financing costs for enterprises.

In these cases, where we can introduce high-quality tax reform quickly, the payoff can also come very quickly. In other cases, it will be more medium-term. In the course of my work here, we have found that in the majority of cases there are problematic aspects in Member States. While some Member States appear to have tax systems that work more or less perfectly well, or reasonably well on all counts, we have found that tax systems in many Member States are weak on several counts. Whenever this is the case, obviously the impact is going to be bigger.

Q: Do you see the reform of Member States’ tax systems as another step toward deepening the Single Market?

A: This is an interesting question. Until now, traditionally, the focus of Commission recommendations on tax policy was exactly on deepening the internal market – on trying to eliminate the tax obstacles that create fragmentation in the internal market. This has been a focus until now, and it has led to initiatives over many years. The latest initiative in this respect is this idea of creating a system in which companies that operate across different Member States can utilize essentially the same rules for paying taxes across borders. This is the so-called Common Consolidated Corporate Tax Base. So there has been work done in that area. There have also been initiatives in other respects.

But these have been the focus of attention for a long time, and what we’re seeing now is going beyond the single market or internal market issues. While not diverting attention from these long-standing priorities, there is a new focus on policies that may refer to individual countries but that, collectively, are nevertheless slowing down growth and could be improved, irrespective of the fact that they may not have a direct impact on the functioning of the internal market. So, in a sense, we’re going one step further.

Q: Investors in Eurozone sovereign debt markets may view the Commission’s efforts to improve tax policy, and therefore fiscal sustainability, in Member States as a welcome development. But they would highlight the need for credible enforcement mechanisms. How would you respond to this concern?

A: I think we need to distinguish aspects. One is the enforcement mechanism to ensure budgetary sustainability. This is has obviously been a key topic for several years now. There is also tax policy – the enforcement of reforms in tax policy. The two issues are different because, in terms of the first, there has been a strengthening of the rules, for instance, in the so-called “six-pack.” The six-pack is a package of six directives addressing budgetary sustainability, the working of the euro, and so on. And this essentially looks at the general setup of economic and budgetary policy in Europe.

With tax policy reform, there has not been a major reform of the institutional setting. The institutional setting there remains based on unanimity, essentially, but it is also true that there is a greater willingness on the part of Member States to cooperate on tax policy matters. These types of problems are often structural problems that can be tackled in a longer time frame. So I think in cooperation on tax policy we are not seeing a radical change but an incremental improvement. But we will see in the coming months and years to what extent country-specific recommendations on tax policy are taken up and implemented credibly. We have seen some good examples, for example in the Italian case which I mentioned already. We’ll have to wait and see to what extent other Member States take up the country-specific recommendations.

Q: What scope is there for using tax policy reform to address broader macroeconomic imbalances within the Eurozone?

A: Broadly speaking, there are two types of macroeconomic imbalances within the Eurozone. One is the classic problem of having a budget deficit, or debt level that is too large. This was already at the center of the Stability and Growth Pact. And although this is not a new problem, it is of course an important problem that has been critical for the past couple of years, particularly in some countries. In this specific respect, tax policy clearly plays an important role because we have seen that in the majority of cases it has been difficult to reduce deficits by cutting spending. Most countries have relied largely on tax increases in order to consolidate their budgets. We are seeing some low tax countries that are increasing taxes, primarily.

Given a general increase in taxes in Europe, and given that Europe already has a comparatively high tax rate, it becomes more and more important to structure these tax increases in a way that is not too detrimental to economic growth. So tax policy here has to ensure that the tax increases that are unavoidable are technically solid so as to minimize the negative impact on unemployment, growth, and so on.

There is another macroeconomic imbalance which is linked to the functioning of the euro and has been coming to the forefront over time: the trade deficit. A number of euro Member States have been accumulating competitiveness deficits vis-à-vis other euro countries. The countries that have accumulated trade deficits, or have found it difficult to maintain competitiveness vis-à-vis other euro Member States, have been typically those that have been affected more strongly by the crisis. So the issue is: can tax policy somehow help, not only in consolidating budgets, but also in ensuring that a country’s economy is able to improve its international trade performance? If that is possible, then tax policy could help addressing both problems at the root of the euro crisis.

Our analysis shows that on the first problem of consolidating the budget, proper tax policy is one of the main solutions. But tax policy can also help in improving the foreign trade performance of a country…not on its own, but it can help. It can do so through reforms that improve competitiveness by shifting the tax burden toward those taxes that have a lesser negative effect on external competiveness, external trade.

This is among the recommendations we have been formulating to shift the burden of taxation from labor and corporations – these two taxes tend to have a negative effect on external competitiveness – towards taxes that are like VAT, for instance, or excise duties, which do not affect the international competitiveness of countries. This is a subject which has received a lot of interest, of course. There are limits to what can be done in this respect, but it is clear that reforms going in this direction can help and we are indeed including this reflection in our recommendations.

Q: Do you view broader cooperation, through the G20 for example, as key to implementing these reforms and producing the gains that you expect them to?

A: This is a question of strategy. The G20 can help in many areas. Personally, I think that in the G20 and at the global level, one area where more international cooperation would be helpful is in the fight against tax havens…in reducing the possibilities for tax evasion in particular. It’s a problem that generally requires a lot of cooperation across different jurisdictions, and it affects many countries. There has been progress in this respect. A lot of jurisdictions have become more open to cooperation in this area so there is a general shift in this respect. I think this is a welcome trend that should continue and surely we can reinforce that. I don’t think the G20 can play an equally important role in supporting reforms that have to be taken domestically and have to find political support domestically.

Q: Are these tax reforms expected to have an impact on transatlantic foreign direct investment flows?

A: Research shows that tax factors generally aren’t the first driver of investment flows, but they do contribute. One important issue in this respect is whether the shift from direct to indirect taxation that the Commission recommends will involve cuts not only in labour, but also in business taxation. So far the focus has been on cutting labour taxes, but cutting corporate taxes is easier to implement because it has a lesser impact on the budget and may contribute more immediately to investment.  Obviously, if business taxes are cut alongside labour taxes, this will directly support transatlantic investment, and then the impact could be sizeable and fairly rapid. But anything that supports growth will tend to boost investment, so even if the reforms just improved the tax system in general without reducing corporate taxes, they would still stimulate FDI.

*This interview was originally conducted on March 19, 2012

Mitch Yoshida is a Research Fellow at the Streit Council

by Mitch Yoshida

Now in its third year, the Eurozone crisis continues to weigh on the future of the common currency area and the global economy. Recently, I had the opportunity to discuss the prospects for its resolution and its broader implications with Streit Council Board Member Steve H. Hanke, a Professor of Applied Economics at Johns Hopkins University and a Senior Fellow at the Cato Institute in Washington, D.C. He holds and has held many other positions, including the post of Senior Economist on President Reagan’s Council of Economic Advisers.

Q: Since the start of the Eurozone crisis, member states in the so-called “periphery” of the common currency area have focused on fiscal austerity and structural reform as a means to restoring debt sustainability. Will these steps be enough to stabilize their sovereign debt markets?

A: No, I don’t think so. Member states haven’t delivered on much in terms of fiscal austerity and certainly not structural reform. Fiscal austerity should be about reducing the size of government…governments are bloated and spending way too much in Europe. Austerity should be almost entirely focused on reducing government expenditures and obviously not on increasing taxes. But there’s a lot of tax increase noise within the so-called austerity programs in Europe, so they just have it all wrong. And, in any case, they haven’t delivered much.

As far as structural reforms go, there have been almost none that have actually been implemented, even in Greece. They’ve talked a lot, and spent most of their time blaming markets or the outside world – the Germans, the Dutch, the Finns, and so on – for the problems that they’ve gotten into. So there’s a lot of finger pointing going on and talk about structural reforms, but they’re half-baked.

And when I say structural reforms, what do I mean? What they have to do is put in place growth-friendly policies and get government out of the way. And that means they have to have something like Presidents Reagan and Clinton did in the United States; they have to reduce government expenditures and reduce regulation and red tape. But they’re not in that business in Europe. Their assessment is: we have a crisis because markets failed and we have to regulate markets more now so that they don’t fail in the future. This is just upside down because the crisis was caused by government failure – mainly the European Central Bank and the Federal Reserve Bank of the United States. These were the great enablers and engines that allowed for the blow-up of the bubble that ultimately burst in the fall of 2008, although there were problems in Europe even in the summer of 2007.

So essentially in both the fiscal austerity and structural reform realms, the packages that they’ve been talking about are really almost fatally flawed. And they haven’t even delivered on what they said they would deliver on in the first place. They’ve been wasting their time moving from one meeting to the next and jumping from one fire to the next. They lack the “vision thing.” The long and the short of it is: will these steps toward fiscal austerity and structural reform stabilize the periphery’s sovereign debt markets? The answer is: of course not.

Q: How do you see the crisis evolving in the periphery and the Eurozone as a whole? 

A: Well, we have a problem here, and it’s the following. We just had a restructuring of Greek debt, and we’re getting the so-called second bailout coming into Greece. To some extent, the political elites are breathing a sigh of relief because there wasn’t an explosion that went off. And they’re moving on to electoral campaigning in both France and Greece – they’re now in full election mode. But if you look at Greece, the money supply there is contracting at a fantastic pace – over 16% per annum. So Greece’s economy is going to implode. All the calculations about debt sustainability and other things they’re talking about…you can just throw them into the garbage can. None of them are going to come true because the Greek economy is going to continue to shrink dramatically – you can just see it in growth and the broad money measure (M3). The point here is that money matters, money will dominate; forget the fiscal austerity packages and structural reforms. Money in the short-run will completely dominate the economy. So there are huge deflationary forces at work right now in Greece and as I’ve said since February 2010, the Greek economy is on an implosion course.

Now, where do we go from here? We are set up to have a real collision. It will ultimately occur and there will be a lot of tension along the way. That is, the political elites view the euro as a political project to unify Europe. On the other hand, we have the economic realities of the Eurozone in which the southern countries have become very uncompetitive for a variety of reasons. Mainly, there have been a lot of wage increases in the public sector and, on top of that, Italy has a somewhat unique situation because, since it adopted the euro, there have been essentially no productivity increases. So not only have they had wage increases, but no productivity increases. They’re very uncompetitive in all those southern tier economies.

In the coming decade, economic forces will congeal to get the system back to equilibrium – and this isn’t a policy thing, it’s just the nature of the monetary union. The Eurozone will move in the direction of equilibrating itself and will get the southern countries to be more competitive or on some kind of par with the northern countries; you will have relatively high inflation in the north and deflationary pressures in the south. That’s one scenario, and it’s the most likely economic reality that will evolve.

But of course this will mean that that economic reality will be on a collision course with the political elite. High inflation in the north and low inflation, or deflation, in the south is a formula for continued problems and anxieties in both the north and the south. So the elite will try to do bailing out, patching up, band aids, you name it…but of course it’s going to cost the taxpayers in the north a lot. So it won’t be very popular with the average working man who has to pay taxes, but that is what the political elite will try to do. In my view, they will continue to distribute bailouts even if there’s moral hazard and all the rest of these dangerous implications. The political agenda is set, and it’s to have a unified Europe. This is going to run into a buzz saw of economic realities that are largely driven by deflationary forces in the south and inflationary forces in the north.

Q: Is there still a heightened risk of contagion from Greece or other periphery countries to Eurozone financial institutions and “core” economies?

A: Yes, there’s no question about it. Greece in a few months could be the verge of blowing up again because the economy is imploding, which I think will happen and the markets do too. Markets have priced in this new debt that has been swapped for the old debt at very low rates. The market clearly doesn’t think they’re going to be paid. So market participants, with their own money at risk, think there’s a high probability that Greece will not pay and I completely concur with that. Only I think it’s probably going to be worse than the market thinks.

Q: European leaders have agreed to a wide range of measures aimed at promoting fiscal sustainability and addressing macroeconomic imbalances. Do you think these steps will accomplish their goal of preventing a repeat of the crisis?

A: No, I think the agreements aren’t worth the paper they’re written on. It’s like the Maastricht Treaty, which was broken almost immediately by France and Germany. When it comes to treaty infractions, I don’t know if the “police” would pick up the wayward parties. And I’m almost certain that there would be no prosecution, in any case.

I think the whole system…and I’m not talking about the euro itself because the euro itself isn’t really the problem, and never has been the problem. The whole system, and the whole grand structure integrating Europe has been turned into a set of rules and treaties and so forth that has essentially morphed into a kind of doomsday machine.

Q: Prior to the crisis, many perceived the euro as emerging alternative to the dollar as an international reserve currency. Could the euro reprise this role and even become more attractive than it was prior to the crisis?

A: There has always in world history been a dominant world currency. The U.S. dollar happens to be the dominant currency now, and it’s always very hard to challenge the top dog. The life of a dominant currency on average – and this is going back about 2,700 years – is about 300 years. So this would suggest that the U.S. dollar is probably, in statistical terms, going to be in the saddle for a while longer. That said, of course, today it’s always relative – one unattractive currency against even more unattractive currencies. So, if U.S. monetary policy stays as bad as it’s been since 2003, and the world retains the kind of international non-system that we have, I think the U.S. dollar is somewhat vulnerable.

But the problem is, who are the challengers? They talk about the euro, but the Eurozone is an economic basket case. And then you’ve got the Chinese yuan; some people are talking about that, but the Chinese yuan isn’t even a convertible currency yet. Even the Russian ruble is convertible. You can’t challenge a dominant currency with an inconvertible one. So, I think in the foreseeable future there’s a lot of conjecture and musing about the dollar’s international role, but I think we’re stuck with the dollar.

Q: Would the introduction of Eurobonds change this assessment?

A: Eurobonds for the euro area as a whole would probably enhance the euro and make it a more viable challenger. Now, whether it’s a wise idea or politically even feasible…those are another set of questions. But given the question you asked, my answer is that a Eurobond would enhance the international role of the euro.

Q: Do you think an intermediate step toward a Eurobond, such as closer fiscal coordination or limited fiscal integration would still have that effect?

A: I doubt it. The credibility of European economic policy, policymakers, and European elites is so low that any kind of intermediate step would be frowned on and not taken very seriously. I think they would really have to do the real deal. And that gets back to my first point about fiscal austerity and structural reforms in Europe. They’ve done almost nothing, especially with structural reforms. There have essentially been no structural reforms to liberalize the economies in Europe and take some of the red tape and intervention out of the system. I just don’t see that vision in Europe.

The only place that we saw that was in Germany under the Schroeder government. Schroeder pushed through reforms and liberalized the labor market. And that’s one reason the German engine is humming along, because of Schroeder’s Agenda 2010 program. It may be possible elsewhere – I don’t want to be completely negative here. But I don’t see that kind of talk and initiative on the horizon in Europe.

Q: Do you see the Eurozone crisis affecting the U.S. recovery over the next year?

A: There is one scenario that is very ominous for the United States, and that’s if Greece blows up and things are thrown out of kilter in Europe. Then, Europe’s growth would really go into negative territory and the U.S. dollar would soar. If the U.S. dollar soars like it did after the Lehman blow up…actually from July 2008 until February 2009 the dollar went up almost 30% against the euro. That huge strengthening dollar meant that commodity prices collapsed and things were very unstable as a result. If you’re getting into that kind of scenario, it would be good for people holding dollars, bad for commodity prices, and probably bad for the U.S. economy. So it’s conceivable that Europe could throw up a lot of dollar-euro instability and that’s bad.

*This interview was originally conducted on March 14, 2012

Mitch Yoshida is a Research Fellow at the Streit Council

By Galib Mammadov*

In February 2012 Ilham Aliyev met with NATO Secretary General, Anders Fogh Rasmussen and expressed Azerbaijan’s desire to expand the NATO partnership. NATO has a continued interest in cooperating with Azerbaijan, as 30% of NATO’s shipments to Afghanistan are being carried via Azerbaijan. In this the meeting President Aliyev said that Azerbaijan is willing to continue to be a reliable partner to NATO.

Azerbaijani President Ilham Aliyev (Left) and NATO Secretary General Anders Fogh Rasmussen (Right)

Although Azerbaijan is not a North Atlantic Treaty Organization (NATO) member state, Azerbaijan’s relations with the organization date back to March, 1992. The former President of the Republic of Azerbaijan, Heydar Aliyev signed the Partnership for Peace Framework Document in 1994. At that time Azerbaijan, together with 37 Central and Eastern European and former Soviet countries, joined a North Atlantic Cooperation Council (NACC) which in 1997 transformed into the Euro-Atlantic Partnership Council. Continued cooperation with NATO accelerates Azerbaijan’s integration into Euro-Atlantic structures, and gives Azerbaijan a chance to participate in NATO-led operations and accelerate reform in the defense and security sector.

Azerbaijan’s willingness to cooperate with NATO makes some of its neighbor countries like Armenia and Iran feel vulnerable.  The Armenian government considers the upgrading of the Azerbaijani army to NATO standards as a threat. As a result of the Nagorno-Karabakh conflict, Armenia now occupies around 17% of Azerbaijani territory. The two sides have engaged in peace talks for decades but no agreement has been achieved. The Azerbaijani President mentioned many times the possibility of using hard power to resolve the conflict if peaceful talks do not work. Azerbaijan’s pro-west policy helps the country to increase its influence in the region, and Armenian officials understand that it will be harder to negotiate with a NATO power.

Azerbaijan’s relations with its neighbor, Iran are also very tense. Iran is now home to more than 25 million Azerbaijanis. In the early nineteenth century Iran and Russia separated Azerbaijan to Northern (now the Republic of Azerbaijan) and Southern Azerbaijan (North of Iran) as a result of the Russo-Iranian war. The majority of Azerbaijanis living in Iran want independence from the Mullah Regime, and this desire for independence makes Iranian regime vulnerable. Iran fears that Azerbaijan can exploit ethnic Azerbaijanis to detach the territory from Iran. This explains why Iran supported Armenia in its aggression against Azerbaijani territorial integrity. We know that the Shia Iranian regime openly call themselves protectors of Shia Muslims all over the world. Though most of the people in Azerbaijan are Shia Muslim, Iran supports Armenia over their Shia brothers in the Nagorno-Karabakh conflict.

Azerbaijani officials have never openly supported Iranian Azerbaijanis in their battle against the regime. If Azerbaijan becomes a NATO member as a result of the close partnership with the organization, Azerbaijani officials will have more power to be able openly support the independence of Southern Azerbaijan.

Relations were also tense because of a dispute over the legal status of the Caspian Sea.  Iranian officials began to use this card against Azerbaijan when Iran was excluded from the Contract of the century in 1995 due to U.S. pressure. U.S. officials openly demanded that Azerbaijan exclude Iran from the Contract of the Century; otherwise American companies would withdraw from the contract. In protest, Iran brought forth the issue of legal status of Caspian Sea and claimed that it is illegal to exploit its resources without the accordance of all Caspian states. Despite Iranian warnings Azerbaijan continued its offshore exploitation. As a response, in July 2001 the Iranian Navy and Air Force violated Azerbaijani waters and as a result, British Petroleum temporarily stopped its exploitation. This violation was against NATO’s interest in Black Sea region. In August 2001, a Turkish Air Force division called the “Turkish stars” had a demonstration in Baku which was attended by Azerbaijani President, Ilham Aliyev.  Turkey is a historic NATO member. Many experts stated that with that jest Turkey protected NATO’s and Azerbaijan’s interest in the region against Iran. Azerbaijan’s NATO membership would increase Azerbaijan’s bargaining power on the issue of legal status of Caspian Sea.

The Azerbaijan-NATO partnership increases Azerbaijan’s security against its neighbors like Armenia and Iran. The Azerbaijani army and its regional importance are not the same as they were in 2001. Azerbaijan’s pro-west policies and its partnership with NATO include the country in the West’s sphere of interests. Projects like the Trans-Anatolia gas pipeline and the Nabucco pipeline also serve this purpose, as they are very important for Europe’s energy security and for Azerbaijan’s increasing importance in the region. Thus, any threat to Azerbaijan’s national security coming from Iran or Armenia is in conflict with the West’s/NATO’s regional interests.

Expanding the Azerbaijan-NATO partnership will make it harder for Iran to show its muscles against a smaller neighboring country (Azerbaijan). Iran’s recent regional policies show that it has ambitions to have control over the region. A possibility of three NATO members in the region—Turkey, Azerbaijan, and Georgia—would undermine Iran’s regional policy.

* The views expressed in this blog post are those of the author and do not necessarily reflect the official policy, position, or opinions of The Streit Council.

Galib Mammedov is an intern at the Streit Council; Photo credit NATO (http://www.nato.int/cps/en/SID-9515FA35-29C53507/natolive/photos_53493.htm)

By Thomas Aitchison

The involvement of German Chancellor Merkel in France’s 2012 Presidential Election potentially marks a new era of European cross border campaigning. However, if this election is anything to go by, it is not a successful strategy leaders should adopt anytime soon. French President Sarkozy continues to trail in the polls and Merkel’s support did nothing to help this. Sarkozy has failed to understand his electorate by presuming they possessed a European affiliation that he could tap into. Sarkozy has always polled well on foreign issues, but his attempt to remind domestic voters of his international notoriety has faltered, potentially worsening his candidacy.

The references to Germany began in earnest during a French TV interview on the 29^th January, when Sarkozy mentioned Germany no less than fifteen times. He held Germany up as the example of economic strength that France should emulate. Although, at this point, Sarkozy had yet to announce his candidacy it was clear Merkel was going to join in. There are three potential strategies for why Sarkozy might have thought thrusting Germany into his campaign might have helped; (1) He hoped that some of Germany’s economic strength and positivity would rub off. (2) Sarkozy hoped that some of Merkel’s, or other European leaders, popularity would transcend. (3) Finally, he hoped to tap into the French public’s heightened level European identity and appreciation. All three of the reasons require the French public to look beyond their borders, and see themselves as belonging to something bigger than France, which has been a big miscalculation. Though France is very continental, the public maintain a strong sense of national pride and perceive themselves to be French before European, something which Sarkozy is now realizing.

The first strategy is one of hope and potential. Sarkozy chose to highlight Germany to send the message that ‘if it worked for them […] why wouldn’t it work for us?’ France’s credit rating downgrade was not only embarrassing but psychologically damaging. This is supported by an IFOP poll that found that 64% of French people think France should take a leaf out of Germany’s book. However, the problem is that the French like to perceive their relationship with the Germans as on an equal footing, by Sarkozy looking up to Germany it gives the impression that France is the junior partner. This inferiority complex has riddled Paris throughout the economic crisis, and was exacerbated by the call for electoral help by Sarkozy. Moreover France and Germany are not that fiscally alike. Merkel has become the face of austerity because her nation can afford to be, whereas France lacks that luxury. Therefore through association Sarkozy has soured his economic appeal and exacerbated this by brandishing the relationship.

Nonetheless, in France Angela Merkel is well liked, more so than other foreign leaders. In a BVA poll 53% of French people see her as ‘Very Good’ or ‘Rather Good’, whereas Sarkozy himself only achieves 31%. Therefore, it would make sense for Sarkozy to align himself with the popular Merkel, hoping that some of her popularity might rub off. Sarkozy is the only leader from Spain, France, Germany, Italy and the UK to poll negatively on the good-bad balance scale in all five countries, whereas Merkel is the opposite, with her strongest result being in France. This suggests Sarkozy’s strategy could work. However, as François Hollande’s campaign was quick to point out, ‘The fact that Nicolas Sarkozy needs Ms. Merkel says a lot about his situation’.  As a result this association has been seen as a necessity rather than out of mutual admiration, and thus Sarkozy has come across desperate. If Sarkozy hopes for popularity through this association, he may be trying too hard. However, it has only been perceived as desperate because it is so rare in a domestic election. One has to wonder whether whether cross national electoral endorsements were to increase would it continue to be seen as desperate?

Finally, it can be argued that Sarkozy believed his electorate to have reached a point at which a transnational identity, or at least a care for a wider community, had been achieved. Merkel’s lack of hesitation supported this view too, the nations were so united that crossing boundaries and delving into domestic politics, seemed logical to both leaders. Merkel’s defense of her involvement had always been that they both belong to the same ideological end of the spectrum, even though ideology is usually overlooked at the international level. Yet the French electorate does not share the same nonchalance towards immersion into one community. This can clearly be seen by the rise of Marine Le Pen and the National Front, illustrating that nationalism is, indeed, on the rise.

Sarkozy’s realization of the fallibility of this strategy has been demonstrated by his recent rhetoric which is increasingly protectionist and nationalistic. Threats to withdraw from the Schengen agreement and France possessing too many foreigners are far from pro-European. He has consigned his appearances with Merkel to a minimum, appearing together but ‘not […] at a rally because an election campaign is the business of the French’. As a result, Sarkozy has started to gain traction in the polls, coming ahead of Hollande for the first time on March 11^th. Here it is being demonstrated, as it has been seen in other European Nations, how the EU is the first to go overboard in times of trouble. Like an act of self-defense the EU is the punching bag for nations when it gets difficult, and the only way the EU is likely to overcome this is by further integration and fostering a European identity. Sarkozy thought that this time had come in the wake of the economic crisis, but like everyone else, when he saw his electorate lacked that transnational awareness, appreciation and identity, he too sacrificed Europe for the sake of electoral security.  This is not to say that foreign campaigning will not and is not beneficial to candidates, but until it becomes a norm it is unlikely to be an effective strategy.

Thomas Aitchison is an intern at the Streit Council; photo credit Peter Schrank (http://www.economist.com/node/21547805)

by Uzoma Ekenna

Scale model of a nuclear power plant located in Lingen, Germany.

Iran’s nuclear program is without doubt one of the most controversial issues amongst many key global players.  While Iran claims that their nuclear program in Tehran is for peaceful purposes only, American and European officials believe Tehran is secretly developing weapons, much to the consternation of the West and Israel.  Although oil and financial embargoes have been imposed by the international community, Iran remains persistent in continuing its nuclear program.

Iran’s efforts to develop a nuclear facility began in 1957, stimulated by the U.S. President Dwight D. Eisenhower’s Atoms for Peace program. On March 5, 1957, the US and Iran announced a “proposed agreement for cooperation in research in the peaceful uses of atomic energy”, intending to allow the US to invest in civilian nuclear industries in Iran, such as health care and medicine.  Although Iran has the right to enrich Uranium under the Non Proliferation Treaty (NPT), skepticism about Iran’s true intentions has risen in the West.  Since 2006, the UNSC has imposed four rounds of sanctions against Iran, including a prohibition of certain items that would contribute to Iran’s uranium enrichment related activities.

As a means to force Tehran to suspend its uranium enrichment activities, the European Council banned imports of Iranian crude oil and petroleum products, a decision made on January 23. This prohibition is set to begin on July 1, 2012.  The delayed implementation will allow European markets enough time to arrange alternative resources, hopefully preventing a spike in oil prices.  The Council also outlawed imports of petrochemical products from Iran, and froze the assets of the Iranian Central Bank within the EU.

Sanctions have also been tightened in the US. On February 5, President Obama signed an executive order that allows US institutions to freeze all property and interests of the Iranian government.  The US Treasury Department also warned that companies continuing to do business with Iran “remain at risk” of US punishments.  After urges from Washington for the UN to inspect Iran’s facilities, the International Atomic Energy Agency (IAEA) held meetings in Tehran from January 29-31 to discuss matters pertaining to Iran’s nuclear program.  Although little information has been released, Fars News Agency in Tehran noted that “the atmosphere of the talks was constructive and positive,” and that both sides had “reached agreement on the continuation of these talks.”  When the IAEA revisited Tehran on February 20 and 21, they were refused entry to inspect certain facilities, including the Parchin military site- believed to be used for explosive testing.  The US State Department expressed its disappointment of the failure of the IAEA-Iran talks that has ended without progress.

Iran accuses the West of waging an “an economic war” through its sanctions, and threatens to retaliate.  “The enemies of the Islamic republic’s regime…have not been able to chain the nation and now they want to chain the economy,” claims Shamseddin Hosseini, Iran’s finance minister. “These sanctions are an economic war against us,” he said.  Iran claims not to be concerned with the EU ban on oil and the US’s financial sanctions, and would be able to endure them.  Moreover, only 18% of Iranian oil exports go to the EU, and more oil can be sold to other nations to make up for those exports.  India has recently increased oil purchases in Iran, and became the country’s largest customer within the last month. In January Iran threatened to shut the Strait of Hormuz, the passageway of 20% of the world crude oil supply.  As a reply to the EU’s “irrational decision”, the Iranian parliament is also currently debating a bill that would stop oil sales to European Union nations, an act that would be in effect almost immediately, before the EU’s oil ban that begins this summer. On February 19 Iran announced cut-offs to France and Britain, and threaten to extend the embargo to Italy, Spain, Greece, Portugal, and the Netherlands.

If the EU sanctions on Iranian oil come into effect this summer, many European nations will have to scramble to find new suppliers.  Greece, Italy and Spain, the nations hurting the most from the euro crisis, are also the nations that will largely be affected by these sanctions.  Greece receives a third of its oil imports from Iran, Spain receives about a fifth, Italy 13%.   “The European countries can use their fuel reserves to compensate for the halt on Iranian oil deliveries in the short term, but this will not resolve the issue,” reports Vitaly Kryukov, an analyst with the investment financial group Kapital.  Talks are underway with Saudi Arabia, which can supply short-term oil deliveries to the European countries in need.  The only other immediate alternative may be Libya, but they would be able to sell only small amounts of crude oil.   As of right now there are no other alternatives.

The IMF warns of the sudden increase of oil prices that may occur due to the embargo, which could range from 23 to 30%.  Due to fear of threats from Iran, Crude oil recently traded at the highest price in nine months, up $2.20 from the February 17 close.  Although the alleged cut-offs to France and Britain were slightly insignificant (France receives 3% of its oil from Iran, Britain <1%), it is certain that other EU nations will be affected drastically.  Greece may have to offer to pay more for oil bought elsewhere, which would cause greater spending cuts, leading to more riots and maybe another default on loans.  Stronger European nations would then have to decide either to assist Greece in its debts again or just allow it to country to leave the Eurozone. 

Even with all the sanctions that have been imposed on Iran in the last decade by UNSC, and the new embargoes drafted this year by the US and EU, Tehran remains relentless on continuing its nuclear program.  These sanctions have started to take a toll on the Iranian economy and finances, but Iran insists that their nuclear program is peaceful and has vowed to “never relinquish what it considers its legal nuclear autonomy”. In a region where many countries are facing harsh austerity measures and massive debt bailouts, the oil sanctions could end up hurting the members of the EU more than it does Iran.  At this rate, only crippling sanctions, affecting both parties, will deter Iran from continuing its efforts.

Uzoma “Zoey” Ekenna is an intern at the Streit Council; Photo credit Flokru (http://www.flickr.com/photos/flokru/391053464/).