Field Manual to Europe (19 Feb 2013)

Field Manual to Europe

Trans-Atlantic Economy

Eurozone Crisis

Post-Afghanistan NATO

Arab Uprising

Counterterrorism & Homeland Security

Cyber Security

Energy & Climate Change

Turkey

Russia

China

Ten Memos for the New US Administration 1

2

Field Manual to Europe Introduction ........................................................... 4 2013 Major Events ................................................. 8 Trans-Atlantic Economy ........................................... 10 Eurozone Crisis . ...................................................... 17 Post-Afghanistan NATO ........................................... 26 Arab Uprising ......................................................... 32 Counterterrorism & Homeland Security . .................... 38 Cyber Security ........................................................ 44 Energy & Climate Change . ....................................... 51 Turkey . ................................................................... 56 Russia . ................................................................... 64 China . .................................................................... 7 0 Acknowledgements . ................................................ 77 Citations . ............................................................... 78

Ten Memos for the New US Administration

3

INTRODUCTION If the past four years have taught Washington policymakers anything, it is that Europe is not “solved”. Europe has seen its role in US foreign policy grow more complex; it is at once a partner and challenge. The eurozone crisis, which exploded in fall 2009 after a decade of Greek profligacy was revealed, has transformed the region from a political success story to a source of geopolitical concern. The continent’s debt woes have plagued the international system ever since. With growth prospects failing to meet expectations, core Europe— including France and Germany—will enter recession in 2013.

Nevertheless, the US continues to rely on Europe as a steadfast ally and partner in confronting rising economic and security challenges. Since summer 2012, Europe has imposed on Iran its toughest sanctions yet, which cut the country off from its largest market for energy.

European leadership in NATO and the UN Security Council was instrumental passage and enforcement of Resolution 1973, which established a mandate to protect Libyan civilians and ultimately led to Muammar Gaddafi’s overthrow.

Looking ahead, European support will be a decisive factor in achieving stability

If the past four years have taught Washington policymakers anything, it is that Europe is not “solved”. in Afghanistan and the post-uprising Arab world. The Europeans have also been instrumental players in the G20.

Beyond the Atlantic, Europe will be a key partner in the ongoing integration of pivotal powers, such as China and Russia, into the international system.

damaged the relationship and both were subsumed by subsequent events, they still contributed to the sense that the Obama administration is unsure what kind of Europe it wants and how the relationship should fit into the US’s pursuit of its broader interests.

And yet political elites in Berlin, Brussels, and Paris perceive an asymmetry of interest in US European cooperation. While President Obama made 10 trips to Europe in his first term, they were seen mainly as tactical, lacking the strategic impetus of his more high-profile visits elsewhere. European diplomacy attaches great symbolic value to summits. For this reason, two of the biggest perceived slights involved summit decisions. The first was the exclusion of European leaders from the informal decision-making process that led to the underwhelming conclusion of the UN Conference on Climate Change in Copenhagen in December 2009. The second was the suspension of the spring 2010 US-EU summit, the first of the postLisbon Treaty era. While neither event

Four years ago, the general cast of the Obama team’s foreign policy was a full-scale recalibration from some of the strategic priorities of the previous decade, a shift to recognizing previously underappreciated changes in the international system. The next four years will be about continuing that rebalance and wrapping Europe more comprehensively into a wider vision.

Four conditions will frame the Obama administration’s relationship with Europe in its second term. All relate to the administration’s grand strategy and broader trends transforming how the US and Europe function in the international system.

US Secretary Travel to EU Member States Secretary of State

Secretary of Treasury

Secretary of Homeland Security

Secretary of Defense

US Trade Representative

2009

11

8

6

4

1

2010

7

2

2

5

1

2011

18

9

10

5

1

2012

13

1

4

3

2

Source: Departments of State, Treasury, Homeland Security, Defense and the Office of the US Trade Representative

4

Introduction

2. The prism of crisis will color relations between the US and Europe.

The eurozone crisis has revealed the tenuousness of Europe’s integration and put at risk the most important geopolitical achievement of the past 60 years: a politically stable and economically prosperous Europe. As the veneer of unity cracks, Europe—in particular, core Europe—is returning to history. The geostrategic end state aimed at through accession to NATO and the EU revealed itself to be illusory. If the past three years have taught us anything, it is that Europe’s political future will not be linear. It will be dotted with external shocks, internal unrest at various levels, and veto points. The debt crisis has seeped into the policy calculus on issues ranging from traditional foreign and security policy to newer topics such as climate change, immigration and relations with Turkey.

The lens of crisis is not limited to Europe.

The 2008-09 US financial downturn left Washington with an oscillating fiscal policy that started with stimulus but since 2010 has been dominated by discussions of fiscal consolidation.

Since then, Washington has been locked in debates over a potential government shutdown (April 2011), the debt ceiling

European Approval of the US and US Leadership 90 80 70 Approval Rating %

1. The US is engaging in the most profound diplomatic rebalancing in a generation. The Obama administration recast two foreign-policy elements in its first term, both of which will have a lasting impact on the trans-Atlantic relationship. The first, in recognition of the interaction between diplomacy and economics, was a greater emphasis on economic statecraft. The second was the so-called “pivot to Asia”, a wide-scale reprioritization towards the world’s most dynamic region. The pivot is anchored by the Transpacific Partnership (TPP) and a recalibrated defense posture in the Pacific. These two acts of strategic rebalancing will alter US cooperation with Europe in 2013 and beyond. The US is and will remain a European power.

But the US must expand the concept of US-European relations to include its economic dimension and wider geostrategic vision in a Pacific century.

60 50 40 30 20 10 0

2008

2009

2010

2011

2012

US president personal approval rating (Pew)

US president personal approval rating (GMF)

US favorability rating (Pew)

US favorability rating (GMF)

Source: Pew Global Attitudes Project; GMF Transatlantic Trends

(summer 2011), deficit reduction (December 2011) and the effect of sequestration and expiration of the Bush-era tax cuts (early 2013).

In the US and Europe, there is the sense that the economic crises are a symptom of or an interacting variable with suboptimal political arrangements, rather than their cause. Labored decision-making in Congress and the EU summits reflect an intractability endemic to both political systems.

US policymakers in 2013 must think of relations with Europe in terms of these constraints while leveraging the US’s substantial influence to encourage a more resolute EU. 3. On foreign policy, the state is facing an identity crisis in the US and Europe. The traditional silos of foreign policy have broken open. International negotiations were once more clear-cut. Today, topics such as cyber security, climate change, homeland security, and banking regulation are eroding traditional boundaries between ministries and agencies. In addition, new actors— multinational corporations, NGOs, international organizations, organized crime or loose networks as diverse as

money markets and Wikipedia—now compete with states for the reins of governance. Nowhere is this complex policy ecosystem felt more than in the US and Europe. At the same time, the interdependency between the US and Europe raises the stakes for coordination in many of these areas. Governments must bring these new actors into the process of developing foreign policy. This ought to begin with involving legislators from committees traditionally thought to deal with domestic issues.

4. The US has successfully rehabilitated its reputation in Europe. Perhaps the most evident transformation of the USEuropean relationship has been the reputational rebound of the US in the eyes of European elites and publics.

George W. Bush left office with an approval rating in Europe of around 13 percent. In 2009, Obama’s rating jumped to 86 percent, and today it stands at 79 percent.1 The Obama administration amassed a great deal of political capital among Europeans during its first term. This is largely due to a new tone set in its engagement with foreign governments and an earnest effort to work within

Introduction

5

multilateral channels.

Europeans have welcomed the more conciliatory approach and the commitment to finding policy solutions that are cognizant of the interests and values of the international community.

US prestige in Europe will give the Obama second administration a freer hand in its second term to articulate US and global interests to European leaders and the public. This change has already played a key, often-unrecognized role in improving the trans-Atlantic relationship. For example, it contributed to the successful negotiation of several information-sharing agreements and to ambitious coordination on Iran sanctions. Even on issues on which Europe and the US differ, such as the extrajudicial detention facilities or the US’s use of drone aircraft in military strikes, Europeans have shown a greater understanding of the domestic political constraints affecting US policy, an empathy seen at both the popular and elite levels. This political capital can be tapped into more deeply, particularly in continental Europe.

Field Manual to Europe The US-European relationship warrants a rebalancing of its own. For most of the post-World War II era, the relationship has been largely defense-based, with economic strategy playing an important but supporting role. Today, this has shifted. The interactive relationship between economic and security policy continues, but the economic role of Europe—whose faltering has dramatic geopolitical implications— has superseded its role as a US defense partner. At the same time, security concerns continue to be key, expanding to issues ranging from Middle East and North African stability to cybersecurity to climate change. Finally, the US’s European policy must account for shifts in the geopolitical center of gravity.

This document contends that a steady hand policy toward Europe will allow the US to preserve its influential role there while recalibrating attention toward the Pacific. A steady hand policy requires strategic thinking that: 1) continues to

6

Introduction

This manual presents a series of issues that are the building blocks of a long-term rethink of the US relationship with Europe in the face of dynamic European and global transformations. recognize the US as an active European economic and political power; and 2) imbues the relationship with a sense of purpose that has been lacking in recent years, despite occasional half-hearted contentions to the contrary.

This manual presents a series of issues that are the building blocks of a longterm rethink of the US relationship with Europe in the face of dynamic European and global transformations. It aims to reimagine the relationship based on the top strategic issues that will define a positive agenda for the next decade. The authors recognize that foreign-policy challenges that arise during that period will not necessarily fall neatly into the categories laid out here. The memos that make up this manual present broad strategic strokes and complement them with assessments of European political attitudes, operational recommendations for the new US administration, potential “red lines”, and events that should be on the radar of US policymakers. They identify 10 crucial areas of cooperation for US relations with Europe and, in doing so, aim to outline a forwardlooking US strategy that fits into the context of the wider rebalance.2 This document is intended to serve as a mirror for Europe’s strategic thinking as well.

The first two memos deal with policy areas that are primarily, but not solely, economic: the joint US-European domestic struggle to reignite economic growth and establish a sound basis for future stability and the eurozone crisis.

The first memo provides an ambitious yet realistic economic agenda that takes into account domestic political constraints on both sides of the ocean.

A trans-Atlantic economic compact would be the most concrete expression of an updated relationship between the two powers. The second memo delves into the broader governance challenges

in Brussels and in EU member states that are not only symptomatic of, but inexorably linked to, the eurozone’s debt woes. As the US’s largest economic partner, Europe represents a significant exposure given the fragile scaffolding of its economic governance. In 2013, leaders will have to move from custodial to transformative leadership. This memo outlines a role for the US in supporting this process.

The third and fourth memos explore areas classically defined as foreign and security policy. The memo on NATO addresses steps for the alliance postAfghanistan. The memo on the Arab uprising outlines US leverage with Europe vis-à-vis emergent governments, particularly in North Africa.

The next four memos explore areas that sit at two policy nexuses: 1) national security and economic policy; and 2) domestic and foreign policy. Having risen to prominence in the US-European relationship over the last decade, each of these areas confounds traditional bureaucratic silos and most likely involves a heavy influence of legislative action. The memo on counterterrorism addresses the major achievements in this area since 2010 and explores rising challenges in keeping the world’s largest commercial artery open and protected from potential terrorist threats. The cyber security memo examines the contours of the rising international debate on critical infrastructure, with its security, commercial, law enforcement and political implications. A memo on energy and climate change addresses the ability of the US to facilitate a more efficient and secure European market given the German nuclear phaseout and the positive supply shock of shale gas from the US and, eventually, Europe. It also offers prospects for constructive initiatives to build confidence on climate change, Europe’s

top international priority, without congressional legislation. The memo on Turkey addresses a quasi-domestic European partner as a member of NATO and an EU candidate country, and looks at strategies for greater US-European alignment of interests in a country that is the fulcrum between Europe and the Muslim world.

The final two memos address USEuropean cooperation with the two most consequential powers beyond the Atlantic: Russia and China. One memo highlights the distinct yet converging interests of European states vis-àvis Russia and identifies the areas of greatest joint US-European leverage.

The final memo looks at potential transAtlantic cooperation on China in an era in which it, the US and Europe are all in deep transition. Both of these memos highlight economic acculturation as the area in which the US and Europe can most effectively work together.

EU and NATO, as the key actors in determining the tenor of the USEuropean relationship. It does, however, consider other players in Europe that bring a unique perspective or resources to a particular issue, such as Poland and the US visa-waiver program or the Netherlands on Internet freedom. The objective is not to delineate the totality of the US-European relationship. Many pressing foreign policy and national security issues are not addressed, notably the confrontation over Iran’s nuclear program. Many analysts assert that trans-Atlantic cooperation on Iran is already optimal, and the EU’s ability to implement sanctions in a targeted, timely manner is one foreign policy success of the post-Lisbon Treaty EU. This, along with the approach to Syria, demonstrates a significant shift in the EU’s ability to implement, in concert, economic policy intended to compel changes in state behavior.

This manual concentrates primarily on the three largest European powers (Germany, France and the UK), the

This exercise also avoids discussion of US-European cooperation on the Middle East peace process, integrating the western Balkans into Europe,

Annette Heuser Executive Director

Tyson Barker Director, trans-Atlantic Relations

development assistance policy, global governance reform, piracy, mitigating the threat of pandemics and nonproliferation. Each of these issues is salient to US foreign policy and the trans-Atlantic relationship and together contributes to the depth of linkages across the ocean. But this is a great paradox of the US-European relationship: The multitude of issues can obfuscate any strategic narrative.

As a result, the partnership can seem unfocused and at times adrift. When everything is a top priority, nothing is.

The authors interviewed many highlevel government officials, academics, business leaders and legislators in the US and Europe for this manual. They also gained key insight from a series of Bertelsmann Foundation working dinners with experts in US-European relations. Each dinner featured a senior practitioner and dealt in detail with one of the topics of the 10 memos for the new US administration. These conversations served as the basis for much of the analysis found here.

Introduction

7

2013 MAJOR EVENTS January January 1 – July 1 January 1 – Decembert 31 January 1 – December 31 January 11 – January 12

Irish EU presidency (takes over from Cyprus) UK assumes G8 presidency Russia assumes G20 presidency Czech presidential elections

January 21

US presidential inauguration

January 22

50th anniversary of Élysée Treaty

January 23 – January 27

World Economic Forum Annual Meeting

February Italian parliamentary elections February 1 – February 3 February 17

Munich Security Conference Cypriot presidential elections

March March 9

Maltese parliamentary elections

April April 19 – April 21

8

2013 Major Events

World Bank and IMF Spring Meetings

June British presidency of UNSC June 17 – June 18

G8 Summit in the United Kingdom

July American presidency of UNSC July 1 July 1 – December 31

Croatia joins EU Lithuanian EU presidency (takes over from Ireland)

September German parliamentary elections Austrian parliamentary elections September 5 – September 6 September 17

G20 Leaders’ Summit in Russia UNGA Meeting

October Elections for five non-permanent UNSC seats October 5 – October 7 October 11 – October 13

APEC Summit World Bank and IMF Annual Meetings

December French presidency of UNSC

2013 Major Events

9

MEMO ON

THE TRANS-ATLANTIC ECONOMY The State of Play Three medium-term trends will alter the US and EU’s positions in international economic policymaking in 2013. First, the eurozone crisis and difficulties in resolving it, which “knocked the wind out of the trans-Atlantic economy”,1 have caused American and European companies alike to rebalance their investment in foreign affiliates on the opposite side of the Atlantic. The result has been a marked reduction in trade and investment, particularly as export demand dried up in Europe and the European financial sector sought to repatriate capital from the US. This occurred despite the remarkable buoyancy of the trans-Atlantic economic relationship during the early phase of the crisis (2008-11). The eurozone’s woes have the potential to derail the US goal of doubling exports by 2015 and could undercut US real sector growth, an engine of the recovery, which accounted for about one-third of US GDP growth in 2011.

The second trend is the divide between the slow growth of the advanced industrial economies in the US and Europe and the expanding emerging markets led by China. By 2030, the trans-Atlantic share of global GDP is projected to shrink to 31.6 percent.

While this remains a formidable volume, it would nevertheless mark a diminished ability by the US and Europe to set global economic norms. According to International Monetary Fund estimates, in 2030 the combined economic weight of China (23.8 percent of global GDP) and India (10.4 percent) would surpass that of the US (17.3 percent) and the EU (14.3 percent).2 This will be a game-changing situation for global economic policy.

10

The Trans-Atlantic Economy

The need to enshrine the principles of the liberal economic order has not been greater since the first half of the 20th century, and the continued primacy of the US and EU in the face of these global trends will depend on the ability of political leaders to retrofit their economies for an age in which their power is no longer preeminent.

The third trend, occurring in tandem with the rebalancing of global economic weight, is the challenge posed by the emergence of state capitalism and the role of state-owned enterprises (SOEs) in countries such as China. This model, which eases access to “finance, preferential procurement, market protection, regulatory treatment [and] technology transfer”, and offers other domestic and international advantages, could undermine elements of the liberal economic system.3 The need to enshrine the principles of the liberal economic order has not been greater since the first half of the 20th century, and the continued primacy of the US and EU in the face of these global trends will depend on the ability of political leaders to retrofit their economies for an age in which their power is no longer preeminent. For this to happen, agility and tight cooperation between the US and Europe is essential.

A comprehensive economic package would provide an adrenaline shot of bilateral economic growth that could help counter the negative headwinds from the eurozone crisis. The window of time for action on this front, however, is extremely limited. In fact, President Obama’s next four years in office might be the final opportunity for a comprehensive initiative.

The events of 2012 have already generated momentum for a new

trans-Atlantic economic partnership.

Recent breakthroughs include the USEU Organic Equivalence Agreement and eased EU restrictions on US beef imports. Other successes include joint WTO dispute-settlement cases on raw materials and rare earths against China, and a memorandum of understanding on secure trade. These serve as confidence-building measures for a larger strategic arrangement. The trans-Atlantic business community has promoted a major economic initiative since the establishment of the HighLevel Working Group for Jobs and Growth (HLWG) in November 2011. The HLWG’s interim report, released on the sidelines of the Mexico G20 summit in June 2012, outlined a framework for a liberalized trade and investment agreement and listed areas ripe for cooperation.4 But the report’s language was cautious about the feasibility of a comprehensive agreement.

European Perspectives The major EU powers are aligned in their support of an ambitious recasting of the trans-Atlantic economic relationship.

British and German leaders have explicitly called for a timetable to establish a trans-Atlantic free trade agreement (TAFTA), and they have pushed negotiators in the US and EU to think broadly about potential outcomes.

French leadership under President Nicolas Sarkozy backed movement on a major economic deal with the US,

a significant departure from Paris’s previous position. Since entering into office, the current Socialist French government has not indicated a change from the support of its predecessor and has largely been silent on the prospects of a larger US-EU economic agreement.

The German chancellery in particular has indicated its interest at the highest levels in a sweeping strategic recalibration of the US-EU economic relationship.

Chancellor Angela Merkel has taken a personal interest in a deeper partnership and sees the trans-Atlantic economic project as perhaps her greatest legacy in US-European relations.

With this alignment of the largest EU member states, the European Commission has been given a broad informal negotiating mandate with the US. It has been eager to negotiate a comprehensive deal that will satisfy the preferences of EU members. But the Commission has also become more aware of the democratically legitimate role of national parliaments and, in particular in the post-Lisbon world, the European Parliament in approving trade agreements. This was a slow development that led to some unconstructive policy U-turns on the EU’s previously concluded agreements with the US in recent years. The European Parliament has formally endorsed the opening of broad-based talks between the two sides but will continue to have reservations as negotiations develop, and will require active involvement.5

Recommendations for 2013 The trans-Atlantic economic space represents the most promising area for a positive agenda for the US and Europe in 2013. The potential success of a broadbased trans-Atlantic economic compact including a TAFTA as well as agreements on investment, services and regulation will depend as much on the sequencing and scope as on inherent political will.

1. Negotiate a roadmap of cumulative wins for the trans-Atlantic economic compact: The

future

trans-Atlantic

economic

compact should go beyond trade and aim to liberalize the four drivers of economic performance: goods, services, capital and labor. In time, it could form a GATT 2.0, a deep economic liberalization accord with a US-EU nucleus but an open-door policy for other states that fulfill the requisite economic standards and conditions. Points along the roadmap should include the following: a) Start with an investment agreement: The blueprint for trans-Atlantic investment principles agreed to in April 2012 is a start. But there is no binding US-EU investment relationship, and that should change, if only to provide an up-to-date legal footing to supersede existing bilateral investment treaties (BITs). The US currently has up-to-date BITs with eight of the 27 EU member states.

Under the terms of the Lisbon Treaty, the EU has full responsibility for negotiating investment agreements with third countries. This confidencebuilding measure could offer an early opportunity for the US to recognize the EU’s post-Lisbon legal personality.6 In this, Washington would have the support of other actors, such as the European Parliament, that have called for expedited negotiations of EU-wide investment treaties.7 After a period of dormancy, the USEU Investment Dialogue has become more active in assessing the feasibility of such an agreement. A blanket investment accord that uses the EU’s newfound negotiating powers should take a negative listing approach, which assumes all sectors are included in the agreement unless otherwise specified rather than having to explicitly opt in each sector to the agreement. Several prominent trade experts have endorsed a negative listing approach, saying it would create an adaptive agreement that will stand the development of new technologies and sectors.8 b) Place a trans-Atlantic free trade agreement at the center of the compact: A trans-Atlantic free trade agreement (TAFTA) would signal a strong

commitment to strategic economic integration. Although existing tariffs are small, the volume of trans-Atlantic trade makes even the slightest tariff reduction a potentially significant source of growth. US-EU trade is estimated at approximately $600 billion annually, roughly the size of Switzerland’s GDP ($636 billion) and larger than Saudi Arabia’s ($577 billion), Poland’s ($531 billion) or Argentina’s ($447 billion).9 Eliminating trans-Atlantic tariffs could boost exports by an estimated 17 percent.10 In FTA negotiations, the US and EU often require guarantees for rule of law, property rights and other political reforms. But these are unnecessary in trans-Atlantic talks since labor conditions and environmental, health and safety standards are comparable.

Similarities between the US and EU economies minimize the potential distortive effects of such an FTA while maximizing mutual economic gains.

A TAFTA may provide the core of partnership between two sides, but it would remain insufficient for recasting the trans-Atlantic economic relationship, whose unique nature requires thinking beyond classic trade agreements. c) Push the EU on its vision for liberalized services, especially in the digital sector: In services, integration across key sectors— telecommunications, insurance, banking and financial services, and IT—is a driver of job creation. The administration should consult with the EU early and often on principles for Internet-based services to prevent disparate standards for data protection and retention, as well as for online commercial activity. The US and EU have already experienced some alarming incidents that hint at potential conflict in this area in the coming years.

Washington should make it a priority to avoid actions that could lead to a balkanized regulatory environment for e-commerce between the world’s two largest online markets. Moreover, the two sides should work together for an open and inclusive dialogue on a plurilateral International Services Agreement (ISA).

The Trans-Atlantic Economy

11

US-EU Investment vs. Global National GDP 7000

in billions of USD

6000 5000 4000 3000 2000 1000 0

Australia

India

Brazil

United Kingdom

France

Germany

Sources: WorldBank; US Census Bureau, Foreign Trade

d) Maintain a sustained, forward-looking approach to regulatory convergence or mutual recognition: The latent economic potential in the trans-Atlantic regulatory space is so large that the US Chamber of Commerce estimates that even a halving of non-tariff barriers could yield a 3 percent increase in GDP growth for the US and Europe.11 The reduction of regulatory barriers is the no. 1 priority for German companies operating in the US.12

The reduction of regulatory barriers is the no. 1 priority for German companies operating in the US. Regulatory convergence or mutual recognition will not be easy and cannot be bridged in one agreement.

Labor, environmental and health and safety standards are not sufficiently comparable. As such, many sectors must be negotiated individually. This is especially so given the deep-seated tradition in the US for the transparency of notice-and-comment rulemaking overseen by the US Court of Appeals for the DC Circuit, the second-most powerful court in the US and the federal court primarily charged with judicial

12

The Trans-Atlantic Economy

review of federal regulatory actions and regulations.

Political pressure must be sustained to address next-generation sectors in which regulation will play a key developmental role. These sectors include e-mobility, smart-grid technology, nanotechnology and cloud computing. Initial gains on regulatory work in the TEC have been promising but have also alerted policymakers and regulators to the arduous nature of such technical negotiations. But in recent months, interest in including the regulation in a potential agreement has increased from numerous sectors. This process has been important and should continue.13 e) Explore opportunities for greater cooperation on intellectual property regulation: Intellectual property (IP) is an area in which the US and Europe enjoy a comparative advantage over the rest of the world. For both, IP is the foundation of an innovation economy, and significant gains have recently been made in easing IP registry. In March 2013, the US will switch to a first-to-file patent-registry system consistent with that of the EU and much of the rest of the world.14 The EU took the major step at the June 2012 European Council summit of finalizing a common European patentfiling process, which will lower costs

Total Investment US-EU

Japan

China

significantly for patent registry. But more can and should be done to strengthen collaboration in creating a system that respects IP regulation while accounting for development concerns, particularly in low-income countries. Intellectual property provisions in the US-Korea and EU-Korea FTAs can form a starting point for discussions between the US and EU on the issue. f) Establish clear-cut rules for the transAtlantic procurement market: EU public procurement, an important signaling tool for economic policy, represents 18 percent of the area’s GDP. The US has long benefited from eased access to European procurement markets, particularly in defense but also in healthcare, infrastructure projects and public-service-related IT. The two sides should consider a bilateral procurement agreement that allows savings for governments in this time of public costcutting. Europe’s procurement market remains more open than the US’s. That said, the European Commission and some member states, notably France, have been publicly considering the idea of restricting access to the European procurement market, including via a “Buy European Act”. Questions about retaliatory measures and reciprocity should be of concern to the US.

US-EU Trade vs. Global National GDP 900 800 in billions of USD

700 600 500 400 300 200 100 0

Argentina

Norway

Saudi Arabia

Poland

Belgium

Trade US-EU

Switzerland Indonesia

Turkey Netherlands

Sources: WorldBank; US Census Bureau, Foreign Trade

g) Develop a multi-sector codex of principles to present a trans-Atlantic united front in negotiations with third countries: Over the past five years, one of the most effective areas of USEU economic cooperation has been developing soft guidelines for jointly managing economic relationships with third countries. The US and the EU have, for example, already established successful principles of information and communication technology and international investment.

These are constructive initiatives and can serve as the basis for an additional codex of principles that would allow the US and Europe to present a united front to emerging markets. Developing a series of trans-Atlantic united front (TUF) principles for third-party negotiations, whether on sectoral components of trade, investment agreements or market access requirements, could serve as a gateway for third countries to become more economically interoperable with both the US and EU simultaneously. It could also promote common rules with relatively low transaction costs.

By creating such a codex, the US and Europe can inculcate negotiating behavior while maintaining flexibility in their approaches toward rising third countries. A codex of TUF principles

could also serve as an impetus for bilateral and multilateral engagement, be it in the EU´s current negotiations with Japan, India and Mercosur or the US´s role in the Trans-Pacific partnership (TPP). The two sides can also benefit from provisions existing in bilateral FTAs that both have with third countries as the basis for their negotiations.

2. Provide early political backing for the conclusions of the High-Level Working Group for Jobs and Growth: The Office of the US Trade Representative (USTR) and its European counterparts undertook in 2012 a massive assessment of six economic portfolios. They presented an interim report of their findings at the G20 meeting in Mexico in June 2012 and will present a final report in early 2013. The US administration should offer a fullthroated endorsement of the HLWG´s conclusions and recommendations in spring 2013. This will make the process consistent and demonstrate that US commitment to deeper trans-Atlantic economic integration transcends the limits of political parties and fouryear presidential terms. The HLWG’s report should be the basis for action towards an agreement, but the Obama administration should consider

enhancing the recommendations by offering additional proposals in some of the areas outlined in this section.

The administration must strive for an ambitious, strategic vision that can graft the technical parts of the HLWG´s recommendations into one meaningful political narrative. This overarching vision—which should be stewarded at the highest level—must incorporate the geo-economic goals of: 1) a sustainable recalibration of the US-EU economic relationship and 2) a maintenance of accessible economic liberalization process that is consistent with multilateral bodies such as the WTO, and that attempts to reignite global trade and investment liberalization in the face of the Doha round stalemate.

3. Frame the trans-Atlantic compact as a concrete contribution to Europe’s efforts to overcome the eurozone crisis: Folding the trans-Atlantic economic compact into a wider growth agenda will lock in the strategic saliency of the initiative as both sides struggle to find new sources of growth and competitiveness. The situation in Europe is more acute given the eurozone crisis, and some European countries, such as Spain, recognize that trade can improve

The Trans-Atlantic Economy

13

economic conditions in the eurozone south. The trans-Atlantic economic compact would serve as a tangible demonstration of American partnership with Europe’s economic hardships in a way that is politically palatable for Congress. The administration should encourage the European Commission and member states to frame this initiative in similar terms to their domestic audiences.

4. Consider jointly suspending the Doha round: Many analysts and former high-level officials have stated that Doha now acts as an impasse to a constructive reset of trade liberalization, and are calling for its suspension. Acknowledging that the Doha round is a stumbling block to further multilateral integration would be an important step towards returning the WTO system to its position as the focal point of multilateral negotiation for international trade liberalization.15 The US and EU should also work together to establish the broadest possible coalition to avoid assigning blame. If possible, this coalition should include influential states from the global south and should perhaps emerge from a G20 summit.

5. Reorganize the collection of bodies responsible for the transAtlantic economic compact under one umbrella initiative: Since the 1995 New trans-Atlantic Agenda, there has been a marked proliferation of consultative bodies tasked with addressing policy questions and reducing barriers to business.

But this dense tangle of councils, committees and working groups still lacks explicit and coherent coordination that can prevent redundancies, siloed processes and stymied outcomes. Two business associations at the heart of the commercial relationship, the TransAtlantic Business Dialogue (TABD) and the Business Roundtable, stated that the work thus far has been perceived as “a largely technocratic exercise, a grab bag of issues addressed in a rather

14

The Trans-Atlantic Economy

ad hoc fashion by a disparate range of institutions, with little sense of urgency or overall strategic direction”. They concluded that in economic matters, “the US-EU relationship punches below its weight.”16 [see page 16 for the US-EU Bilateral Economic Cooperation Matrix] In an attempt to address this, the Transatlantic Economic Council (TEC), launched in 2007, was meant to provide a strategic and interdisciplinary approach to regulatory, trade and investment cooperation. But the TEC was quickly bogged down in one highly technical regulatory issue. Its unique strength as an interdisciplinary strategic workshop for the trans-Atlantic economic relationship was eroded. Today the TEC is effective, but still highly technical.

Since Obama first took office, the TEC’s work has been complemented by the formation of the Innovation Action Partnership (2009), the US-EU Energy Council (2009) and, most recently, the HLWG (2011). This bevy of councils and working groups should be streamlined into one interagency process.

The new administration should appoint the TEC or a similarly structured council to serve as the one umbrella initiative implementing the HLWG’s policy recommendations. For all its past challenges, the TEC has demonstrated modest successes in bridging regulatory divides on issues from e-health to electric vehicles to cargo-safety certification.

Given the complexity of this economic relationship, a comprehensive government approach has long been recognized as necessary. In particular, this would include the cooperation of relevant regulatory authorities including those associated with energy and climate change as well as financial matters.

Moreover, this umbrella initiative should be chaired on the US side by a high-profile administration official whose ownership would add urgency to adopting a transAtlantic economic compact and whose position would allow him or her to pivot across departments and agencies. There is precedent for high-level international

initiatives being localized in the Office of the Vice President. Trans-Atlantic economic compact negotiations chaired by the US vice president would lend substantial urgency in Washington to the work of the initiative.

6. Avoid the mistakes of the past; don’t allow for make-or-break points to logjam negotiations: In the early phases of its 2012 negotiations with the EU, the US used as a litmus test its desire for substantial reductions in EU tariffs on American agricultural products. This decision to tackle such a sensitive issue was one reason for the failure of the 2008 negotiations in the TEC and, on a global level, the Doha round. In response, concerned trade experts have called for the trans-Atlantic partners to avoid pursuing a “single undertaking” agreement that would have the effect of a “big bang” but could get hung up on one intractable issue.17 Given the geopolitical significance of this project, such a scenario could set back the potential for recalibrating the trans-Atlantic economic relationship, perhaps indefinitely.

The administration must strive for an ambitious, strategic vision that can graft the technical parts of the High-Level Working Group´s recommendations into one meaningful political narrative.

Rather, the Obama administration should take a cumulative approach with bold but discrete deliverables to build a reservoir of accomplishments that feed into the trans-Atlantic economic compact process. The White House should route all negotiations along parallel tracks with modular time frames that are bridged by an overarching strategic process.

7. Push for early and sustained involvement of Congress in the trans-Atlantic economic compact: A bipartisan cross-section of Congress has demonstrated its preference for an ambitious HLWG final report. In 2012, Sens. John Kerry (D-Mass.) and Rob Portman (R-Ohio) issued a strongly worded letter advocating for a comprehensive push to “quickly formulate ambitious proposals to remove unnecessary barriers to trans-Atlantic commerce and investment.”18 The letter, signed by 20 senators (six Democrats

and 14 Republicans), demonstrates an interest in a comprehensive economic deal with the EU. The bipartisan House membership in the Transatlantic Legislators’ Dialogue (TLD) also affirmed its interest in “the need for tangible steps to stimulate trade and investment” between the two sides of the Atlantic.19 The administration should take advantage of this to lay the groundwork for trade-promotion authority for an agreement to signify to Congress and Europe that the US is committed to an ambitious economic agenda with

Europe. Such fast-track authority from Congress would facilitate concluding a TAFTA and other elements of a cumulative agreement as the basis for the trans-Atlantic economic compact.

More broadly, any comprehensive partnership will require greater buy-in from legislators on both sides of the Atlantic, particularly those in Congress, than has been seen over the past decade.

Deep economic cooperation between the US and Europe could be enhanced by a rewiring of congressional relations on a committee-to-committee basis.20

CASE STUDY: THE EU’S BOOMERANG POSITION ON THE ANTI-COUNTERFEIT TRADE AGREEMENT (ACTA) Between Fall 2011 and January 2012 and after years of protracted negotiations, the US trade representative, the European Commission (with 22 EU member states) and eight other, mostly advanced industrial countries signed the Anti-Counterfeit Trade Agreement (ACTA). A first-of-its-kind plurilateral agreement among first-mover nations, the treaty was aimed at articulating a culture of copyright enforcement within signatory states.21 Under negotiation since 2006, ACTA is essentially a framework agreement not meant to affect current law in signatory countries. For that reason, the previous two US administrations, which negotiated ACTA, could sign it without congressional ratification.22 The agreement was seen as a singular success for the US, which was perceived as ACTA’s most ardent champion.

In the post-Lisbon EU, however, the European Parliament can ratify or reject the EU’s international agreements with third countries. And European legislators in general are asserting themselves more aggressively in EU affairs, particularly in the area of trade. For years, corners of the EP signaled their intent to reject ACTA, citing concerns about enforcement and insufficient coordination with the European Commission during negotiations.

The Commission tried to diffuse allegations that ACTA would lead to privacy violations and extend the potential for domestic surveillance by submitting the agreement to the European Court of Justice for review. By that point, however, the EP had already expressed its commitment to render a verdict on the agreement. On July 4, 2012, parliamentarians resoundingly voted down the agreement, 478 to 39, with 165 abstentions. The vote came after the agreement had already been rejected by all five committees with jurisdiction over it.

The case of ACTA demonstrates that the EU’s political constituencies on trade and regulatory agreements are significant and growing. In areas from sanitary and phytosanitary standards on US agriculture products to privacy and data protection requirements on e-commerce, significant political differences will be difficult if not impossible to dislodge. These can, however, be identified and mitigated if timely attention is paid to Europe’s legislative bodies, in particular the EP. European negotiators themselves are only now becoming accustomed to the new reality in which the EP and national legislators can be game-changers. The Parliament is a highly effective barometer for how acceptable trade accords and principles will be among the EU’s 27 member states. The US must remain attuned to this.

The Trans-Atlantic Economy

15

US-EU Bilateral Economic Cooperation Matrix White House (National Security Council)

High Level Regulatory Cooperation Forum (est. 2007) regulatory principles and best practices

(Office of Management and Budget)

Transatlantic Economic Council (est. US-EU Summit, May 2007) container supply scanning; e-Mobility; e-Health; ICT; ENERGY STAR labeling; SME cooperation; nanotechnology; cloud computing

TEC Secretariat policy and regulatory tracking hub

Department of Energy

Department of State

Innovation Action Partnership (est. U.S.-EU Summit Oct 2009) innovation and R&D policy; raw materials policy; eco-friendly product development

Department of Commerce

Transatlantic High-Level Working Group on Investment (re-est. 2011) investment agreement practices; third country issues; global investment issues; shared investment principles

US Trade Representative

Department of Treasury

Transatlantic Intellectual Property Rights Working Group (est. 2005) engagement on IPR issues in third countries; customs cooperation; public-private partnerships; trade secrets (added in 2012)

US-EU Energy Council (est. U.S.-EU Summit Nov. 2009) technology and research (DOE); security and markets (DOS); energy policy (DOE and DOC)

US-EU High Level Working Group on Jobs and Growth (est. U.S.-EU Summit Nov. 2011) interim report recommended a comprehensive trade agreement

Transatlantic Economic Council (TEC)

Permanent working group not in the TEC

US-EU Financial Markets Regulatory Dialogue (est. 2002) financial supervision and reform; accounting and auditing standards; derivatives; supervision of hedge funds and alternative investment fund managers

Temporary working group not in the TEC

NOTE: this is not a comprehensive list of all departments and agencies involved in the US-EU economic cooperation. The Department of Health and Human Services, the Department of Agriculture, the EPA, NIST, the Department of Justice, and many others. The selected departments and agencies represent the hubs for the various existing economic dialogues.

16

The Trans-Atlantic Economy

MEMO ON

THE EUROZONE CRISIS The State of Play The eurozone crisis will remain a foreign policy challenge for the duration of President Obama’s second term, and it will almost certainly still be a key issue for the administration when it leaves office on January 20, 2017. The Organization for Economic Cooperation and Development (OECD) dubbed the eurozone crisis the “greatest threat” to the world economy.1 In his valedictory remarks at the G20 over the summer, former World Bank President Robert Zoellick highlighted that the world is facing a “Lehman moment” if the eurozone is unable to act decisively.2 Several recent incidents—including the accelerated timetable toward a banking union, the European Central Bank’s (ECB) announcement of the Outright Monetary Transactions (OMT) program, the entry into force of the European Stability Mechanism (ESM) after Germany’s constitutional court ruling paved the way for its ratification, the Dutch elections, and hints at a potential public-sector writedown on Greek debt in 2016—have taken some of the acute sting out of the eurozone crisis. But it is by no means over, and the implications for the US are high. It will require sustained attention at the highest levels throughout Obama’s second term. Key political and economic decision points already dot the roadmap through 2015.

The magnitude of the crisis will color all other areas of the US’s relationship with Europe in 2013, as covered in this manual.

Short- to medium-term policy is focused on three areas: immediate crisis management (troika assistance programs and ECB intervention), synchronization (fiscal union and economic coordination), and financial

The magnitude of the crisis will color all other areas of the US’s relationship with Europe in 2013... stability (banking union). After two years of ad hoc measures, institutions and operations have largely taken form to provide immediate assistance to eurozone countries shut out of bond markets. The ESM’s establishment creates a permanent and legally sound institution for pooled lending to these countries. Financial assistance to distressed states from the IMF, the temporary European Financial Stability Facility (EFSF) and the European Commission has been paired with conditionality based on austerity, revenue increases through tax reform and privatization, and structural and labor-market reforms.

As a forward-looking counterpoint, European officials led by Germany have focused on creating instruments meant to coordinate, monitor, and constrain fiscal activity. These include the Fiscal Compact, at whose heart is a balanced-budget amendment written into member state constitutions; the Euro-Plus Pact, an intergovernmental arrangement aimed at incorporating provisions for monitoring and maintaining competitiveness into national law; the European semester, a preliminary national budgetary review process undertaken by the Commission; and the “six-pack”, a strengthened Stability and Growth Pact that includes measures for punishing non-compliant member states and for monitoring and coordinating wider macroeconomic imbalances. In addition, the Germans have proposed the creation of a socalled “currency super commissioner” with the power to veto state budgets in accordance with the evaluation based

on the European semester and the use of contracts between member state parliaments and the Commission to maintain pressure on national political leaders to follow through with structural reform commitments.

Each of these has promoted fiscal tightening as a means of addressing the eurozone’s internal imbalances. While current-account imbalances within the currency union have decreased over the past two years, this has been achieved largely on the back of deficit countries’ reductions in demand. The IMF and others have called for a complementary policy of demand promotion in surplus countries, largely through investment in capital-intensive infrastructure projects.3 But despite intense social unrest across the eurozone and, according to the IMF, “unacceptably high” unemployment, public-sector attempts to ignite growth and curb unemployment in much of Europe have remained minimal.4 Eurozone governments have outlined the broad contours of a banking supervision regime to be housed at the ECB covering the eurozone’s largest banks that, once in place, would create a framework for standardized recapitalization of distressed eurozone banks by the ESM, as agreed at the June 2012 EU summit. The IMF and others have made unequivocal assertions that a banking union should include a single supervisory mechanism as well as a eurozone-wide resolution authority and joint deposit guarantees.5 The December European summit has begun to consider in earnest how some of the most politically sensitive issues, including cross-border resolution and

The Eurozone Crisis

17

depositors’ insurance schemes, might be addressed in 2013 and beyond.

Some of the financial balkanization that gripped the European banking system has shown signs of abatement. Capital flight from the periphery has begun to slow. But deep divisions remain in the banking sector with some banks heavily dependent on the ECB and some with great exposure to sovereign debt.

All the currency union’s members still have majority public support for remaining in the eurozone.

Yet, of the 12 eurozone states that have held elections since the crisis began, no government has survived wholly intact.

Nine of these states have dismissed governing coalitions completely in favor of the opposition.

As a backdrop to the political process, the ECB has attempted to provide breathing room for a durable solution to the crisis. ECB President Mario Draghi has been the central figure in managing the crisis, deploying unconventional monetary policy that, since August 2012, has eased the acuity of the crisis.

The OMT framework—which will allow the bank to purchase sovereign bonds on the secondary market from banks in countries, subject to the conditionality of the EFSF/ESM rescue programs—has been announced but not activated at the time of this writing. The third in a series of ECB initiatives aimed at relaxing pressure on bond markets, OMT follows the Securities Market Programme (SMP), a low-volume ECB intervention launched after the dramatic upward drift of Spanish and Italian bonds during summer 2011, and two long-term refinancing operations (LTROs) in December 2011 and February 2012, which pumped approximately €1 trillion of cheap loans into the eurozone banking system. The SMP and LTROs were accompanied by

18

The Eurozone Crisis

a respite in political negotiations. As market pressure on decision-makers let up, negotiations slowed among European heads of government and the Eurogroup of finance ministers. Concern has increased about complacency creeping into discussions of banking union.6 The eurozone governments have demonstrated remarkable resilience in the crisis. Despite several acute points that had the potential to derail the eurozone, the 17 member states have maintained their austerity-driven policy course—albeit at significant political, financial and social cost. The value of the euro on foreign exchange markets has stabilized and strengthened slightly in 2012. Since 2010 it has never fallen below $1.20 and has usually hovered around $1.32. It should be remembered that the euro’s intended natural exchange rate to the dollar was $1.17 at its inception in 1999 and that it was trading at 85 US cents at the time of the launch of the physical currency in 2002. All the currency union’s members still have majority public support for remaining in the eurozone. Yet, of the 12 eurozone states that have held elections since the crisis began, no government has survived wholly intact. Nine of these states have dismissed governing coalitions completely in favor of the opposition.

Systemic uncertainty has existed since 2010 and has given rise to new negotiating behaviors. Crisis management has centered on a delicate intergovernmental balance between consensus-building and horse-trading.

The political result has been threefold: 1) it has led to a highly unstable decisionmaking process characterized by layered political timetables and potential veto points; 2) it has contributed to decay at the center of the EU and its institutions, with the notable exception of the ECB; and 3) it has accelerated the

centrifugal trend within Europe and its constituent states.

Crisis management has been ad hoc, largely public and personalitydriven. A paradigm shift has occurred from consensus-based, commissioncentered policy solutions, known as the community method, to national interestbased solutions, which have come to be known as the intergovernmental or union method—after German Chancellor Angela Merkel’s 2010 College of Europe speech. Without institutional clarity, the decision-making process remains nonlinear and creates greater risk as the potential for political defection rises.7 Member state politics, rather than institutions and process, are the central force behind EU decision-making. Early challenges to crisis management in 2013 will largely be political. These will include the eventual Spanish request for a troika assistance program, national elections in Italy and Germany, and political instability in Greece. Austria, Cyprus and Malta will also hold national elections in 2013, and five other eurozone states have fragile or unstable governing coalitions (Belgium, Finland, Greece, the Netherlands and Slovenia).8 The union method has contributed to the diminished role of EU institutions, and a lasting erosion of trust in them since the inception of the crisis. As parallel political debates over the crisis have taken place in each of the 17 eurozone countries, Brussels has become the proxy for ideological differences between Europe’s left and right. It is a kaleidoscope spitting out refracted images of failed policies that seemingly confirm the domestic political proclivities of one side or the other.

It is blamed by national politicians for austerity, by the left for painful structural reforms and unemployment, and by the right for social and labormarket overregulation and a permissive

Without institutional clarity, the decision-making process remains non-linear and creates greater risk as the potential for political defection rises.

attitude toward moral hazard. With weak leadership and only tepidly defended by key national figures, the EU has experienced a downward spiral in credibility. Its rules-based order and community-method-based institutions have been especially hard hit. This tendency can be seen in debates around cuts to the Multiannual Financial Framework (MFF), the EU’s mediumterm operating budget for 2014–2020.

In this context, political leaders can take advantage of the cleaving of institutional power at the EU’s center to plot a politically expedient course for crisis management. But in the long run, that could foster a greater remoteness between Europe’s citizens and the decision-making process.

In addition to the fractured institutional architecture and increased questions about democratic accountability, future policymaking agility is in question. Many of the tools developed since the eurozone crisis’ onset—the fiscal compact, the six-pack, the European semester, and a more muscular ECB—have the effect of restricting policymakers’ maneuverability. While these tools are intended to create credible guarantees about members’ commitment to fiscal discipline, there is a risk that the EU is: 1) establishing a fiscal Maginot Line, a set of restraints and coordination mechanisms that would have preempted the last crisis but do not necessarily address current and future crises; and 2) limiting the ability of the eurozone public to judge the efficacy of crisis-management policies.

The normative decay at the center of the EU and its institutions has also contributed to centrifugal forces in Europe. The crisis’ effects have ricocheted throughout the EU and profoundly altered the way that several important European states perceive themselves within the continent. Two cases stand out as having particularly marked implications for Washington: the UK’s increasing euro-skepticism leading to existential questions about

its European political identity and the democratic backslide in some of Central Europe’s EU member states, particularly Hungary and Romania. These forces are also manifesting themselves in regional tensions in the UK, Spain and Belgium.

Given the role that public funding has traditionally played in binding these regions to their nation-states, the spirit of austerity could test the legitimacy of central governments. Finally, the crisis has affected the EU’s lure for aspirational states on its border, such as Turkey [see page 56].

Many of the tools developed since the eurozone crisis’ onset—the fiscal compact, the six-pack, the European semester, and a more muscular ECB—have the effect of restricting policymakers’ maneuverability.

It is against this backdrop that an overhaul of the EU’s long-term institutional architecture is being discussed—a qualitative leap toward political union with democratic accountability, pooled debt issuance and more robust eurozone-wide automatic stabilizers. All touch on two missing elements in the current eurozone architecture: 1) the necessity of implicit or explicit transfers to balance and stabilize the currency area; and 2) the hint of an aesthetically clean and politically transparent and accountable arrangement. The so-called “Europe’s future” debate has prompted numerous concept documents, including Toward a Genuine Economic and Monetary Union, issued by Council President Herman Van Rompuy; Commission President Jose Manuel Barroso’s September 2012 State of the Union address and the Commission’s communication on a Blueprint for a Deep and Genuine Economic and Monetary Union; and Merkel’s 2012 speech to the European Parliament.9 The gap between immediate crisis

management and long-term grand vision is where European credibility will be most tested. Outlined visions have been characterized by a soaring rhetoric that remains unmatched by concrete roadmaps on how to achieve political union. Of these, the foreign ministers’ report is by far the most ambitious, but it has been disavowed by the German chancellor and Finance Minister Wolfgang Schäuble, despite their foreign ministry’s leadership in the effort.

Perhaps the most realistic proposal in terms of vision and the cross section of political ownership is the EMU proposal.

The presidents of the European Council, Commission, ECB and Eurogroup were involved in its drafting and will serve as a basis for decision in 2013.

Thus far, the economic effects of the eurozone crisis on the US have been mixed. Like Germany, the US has benefited from the inflow of capital into its bonds, which are still perceived as a safe-harbor asset compared to Europe’s.

Despite the uncertainty that has accompanied protracted congressional budget negotiations since January 2011, interest rates on US treasury bills continued to slip even after Standard and Poor’s downgraded US sovereign debt in August 2011. Rates kept falling at least partially because of capital flight from peripheral Europe. As such, the eurozone crisis had the indirect effect of alleviating potential market pressure on US policymakers embroiled in fiscal negotiations.

The gap between immediate crisis management and long-term grand vision is where European credibility will be most tested.

That said, with its $5 trillion commercial relationship with Europe, the US economy remains exposed to the eurozone crisis in three key ways. First, trade with Europe, which accounts for around 24 percent of US goods and

The Eurozone Crisis

19

services exports,10 has been affected by deteriorating European consumer demand. Perhaps the most acute impact is on the National Export Initiative (NEI), which seeks to double US exports by 2015.

Second, trans-Atlantic investment stock in the US accounts for 72 percent of total foreign direct investment and originates through US affiliates and subsidiaries of European firms and European banks.11 In an effort to bolster capital at home, European banks have already begun a deleveraging from US holdings, which contributed to a 28 percent year-on-year decline of European FDI into the US in the first three quarters of 2011.12 Also, weakened consumer demand in Europe will hurt the return on investment of Europe-based US FDI. Finally, direct US bank exposure to Greece, Portugal, Italy, Spain and Ireland totals $770 billion, or 7.5 percent of total overseas exposure, not including credit default swaps (CDSs) and other offsets intended to manage that risk. Indirect US bankingsector exposure to the eurozone crisis through its linkages to assets in the UK, France, Italy and Germany could not only affect the balance sheets of US banks but also pose a potential credit risk to the US real economy. The current recessionary pressure in Europe will continue to act as a drag on the US and global economies as well.

The blowback from a eurozone collapse or even the exit of a few countries could envelop the US economy for the next decade. According to the Bertelsmann Stiftung, the costs of a Greek exit would lead to a 0.9 percent decline in US GDP between 2013 and 2020 when compared with a baseline scenario of no exit. And the contagion effects would increase the likelihood of further exits of other Southern European member states, including Portugal, Spain and Italy. In the event that Portugal were also to exit, the projected decline in US GDP would be 3.3 percent (a loss of $365 billion). A Spanish exit in addition to that would cost the US economy 11 percent of its GDP (a loss of $1.244 trillion), and the cumulative effect including Italy would cause the US economy to suffer losses of 25 percent of GDP over seven years

20

The Eurozone Crisis

...the US, as the underwriter of European security, has a wholly legitimate role to play in helping to guide the future of European integration. ($2.825 trillion).13 By comparison, the Congressional Budget Office estimates that the cost of the US’s going over the fiscal cliff would have been a 0.5 percent contraction in US GDP in 2013, a net 2.5 percent correction under projected 2013 GDP growth of 2.0 percent.14 Aside from the economic interconnectivity across the Atlantic, the US’s significant equities in the eurozone lends credibility to Washington’s continued role in the region’s crisis management.

The administration must shape its policies with this interconnectivity in mind. First, the US, as the underwriter of European security, has a wholly legitimate role to play in helping to guide the future of European integration. The US military, with four combat brigades comprising around 80,000 troops stationed in Europe,15 is the largest contributor to NATO financially and militarily, and it is perceived as the informal guardian of stability and territorial integrity from Estonia to Portugal. Additionally, the US credit line to the IMF, Washington’s only direct participation in the troika, represents 18 percent of the IMF’s total firepower.16 IMF does not disclose from which members of its shareholders it draws upon in its assistance packages.

However, if it were to draw from all shareholders, the US is proportionally responsible for around $5 billion for both packages for Greece, approximately $5 billion in Portugal and $4 billion in Ireland of the currently allocated €403 billion of troika assistance for the three countries. This is roughly the equivalent to the cumulative contributions of the Netherlands and Finland to the EFSF/ESM.

European Perspectives The crisis has drawn out political fault lines, many of which had been in remission for the previous decade.

These include cleavages between the eurozone’s north and south, members

and non-members, Germany and France, local and national governments, and, most recently, the IMF and the Eurogroup. Differences among the member states are largely embedded in fundamental differences in social contracts, stark policy divergences over the past decade, and serious inequities in current economic performance. In the absence of a robust common European political culture, discussion and debate has retrenched in individual countries.

Germany’s centrality to an eventual resolution of the crisis is widely acknowledged. Usually quite sensitive to international perception of its political action, Germany has been largely unmoved by criticism from partner states inside and outside the eurozone and international organizations such as the World Bank, the OECD and the IMF. Merkel’s government has instead relied on a formula of policy prescriptions and political tactics: 1) the primacy of austerity as a policy prescription, followed distantly by structural reform promotion; 2) delayed decision-making driven by domestic political timetables; 3) a key role in lowering expectations in the run-up to EU summits and other potential turning points, and occasional post-summit policy clawbacks; 4) undefined hints of future political union.

Assets in Germany, particularly sovereign bonds, have become attractive to investors looking for refuge from the currency uncertainty of the eurozone south. The glut of excess capital in Germany has had a marked effect on policy behavior. The country’s low borrowing costs combined with a relatively agile labor market (a product of massive structural reforms under the Gerhard Schröder government) and a general decline in the value of the euro made Germany a credible investment destination and competitive global exporter in 2010 and 2011. As a result, Germany remained largely impervious to the economic hardship that gripped the

Greece: 2010 Bailout Breakdown

73%

22% 5%

Greece: 2012 Bailout Breakdown

European Union Contribution

European Union Contribution

(Greek Loan Facility)

US Contribution to IMF Funding

78%

Rest of IMF Members’ Contribution

18% 4%

(EFSF/ESM)

US Contribution to IMF Funding Rest of IMF Members’ Contribution

Source: European Commission; IMF

Source: European Commission; IMF

Ireland: Bailout Breakdown

Portugal: Bailout Breakdown

21% 53%

22% 5%

Irish Cash Reserves and Liquid Assets European Union Contribution

(EFSM/EFSF/bilateral loans)

US Contribution to IMF Funding

67%

27% 6%

European Union Contribution (EFSM/EFSF)

US Contribution to IMF Funding Rest of IMF Members’ Contribution

Rest of IMF Members’ Contribution Source: European Commission; IMF

rest of Europe. The country’s consumer demand is above its 2008 level, the only European state where that is the case, and its intra-eurozone current-account surplus still stands at 2.3 percent of GDP. The generally benign domestic economic climate has left Germans largely unaware of the real effects of the eurozone crisis, although this could change marginally if the German economy slows down in 2013 as expected.

Against this backdrop, Merkel’s stabilitydriven leadership has been popular domestically. She is seen as proving the moral rectitude of German economic management and as a consistent, conviction-driven and thus credible leader. But her leadership has been largely reactionary. And the political system is full of legal restraints, from

Source: European Commission; IMF

Differences among the member states are largely embedded in fundamental differences in social contracts, stark policy divergences over the past decade, and serious inequities in current economic performance. caps on German maneuverability placed on it by the German Constitutional Court to the central role of the Bundestag and the hawkish Bundesbank, an institution of considerable political sway. Given past reticence to take swift action, German leaders are likely to postpone major decision-making or destabilizing events until after September 2013 national elections.

The ECB has emerged as the other prominent actor in the eurozone crisis, building on its credibility with financial markets and political leaders.

Unlike successive EU summits, whose communiqués are greeted by markets with diminishing marginal returns, the impact of statements by ECB President Mario Draghi in the European Parliament in December 2011 and July 2012 have been recognized as turning points in managing the crisis. While the ECB has shown itself capable of creating the space for political leaders to act to resolve the crisis, it has been careful not to assume that role.18 The dialogue between the ECB and Berlin, and the subsequent endorsement of the OMT program by Merkel, lent the process

The Eurozone Crisis

21

CASE STUDY: THE NATURE OF GERMAN LEADERSHIP UNDER ITS EU PRESIDENCY IN SPRING 2007 Policy preferences of European states traditionally tend to toggle between their Atlanticist identity and European identity. This has been the case for states such as the UK, Poland, and the Czech Republic and, to a lesser extent, France and Italy. In contrast, Germany tends to manifest its Atlanticist and European identity simultaneously. Germany oscillates between an outward-looking, values-driven foreign policy rooted in simultaneous expressions of Atlanticism and pro-Europeanism and a more inward-looking, insular policy more narrowly defined by self-interests. The former has been seen at several inflection points in German postwar history, including 1955-58 (German NATO accession and the establishment of the Treaty of Rome), 1985-86 (Plaza Accords and Single European Act) and 1989-92 (German reunification in NATO and the Treaty of Maastricht).

The 2007 German EU presidency is the latest example and could provide some predictive power for the near future. Fresh off its wildly successful hosting of the 2006 World Cup, Germany hit its zenith in the spring of 2007 when the country’s European and Atlanticist strategies coalesced in a diplomatic campaign that employed all the country’s natural political strengths: 1) its zest for technocratic management, 2) its penchant for consensus-building, and 3) use of economic institutions imbued with deep geopolitical meaning.

Germany assumed the rotating presidency of the European Union in the first half of 2007 at a time with the union had been set adrift by its failure to pass the EU Constitution Treaty. After years of introspective and painstaking negotiation, the arduous ratification process went down in defeat when voters in two of the EU’s core members, France and the Netherlands, rejected the constitution in referenda. It was Germany under Angela Merkel’s leadership that salvaged the rudderless European project, repackaging the EU Constitution into a leaner, more technical document that became the Treaty of Lisbon, signed under the subsequent Portuguese presidency. The political investment of the Merkel government single-handedly revived the EU to the extent that at least one observer deemed the most lasting legacy of her first term in leadership.17 During this period, the Merkel government engaged a campaign to rebuild relations with the US after the estrangement between the two countries—and the US and Europe more broadly—in the run-up to the Iraq war. The capstone of the normalization was the May 2007 US-EU Summit in Washington, which launched the Transatlantic Economic Council (TEC) a cross-ministerial body seen at the time as a means of upgrading relations between the US and the European Union to the highest level of economic cooperation. Along with the Open Skies Agreement, the TEC was designed as a somewhat technocrat body, but it was intended as a deeply symbolic political reconciliation of the US and Europe in the wake of the intense strain of the previous four years.

This is not to say that Germany’s simultaneous assumption of Atlanticist and European identities always leads to durable outcomes. After all, Merkel’s subsequent December 2009 decision to limit the imbued powers and institutions granted under Lisbon Treaty, which many expected to lead to a more centralized EU role in European political and foreign-policy decisionmaking, demonstrated that she is capable of U-turns, even on signature achievements. Nevertheless, its 2007 tandem campaigns toward Europe and the US could provide insight into how German leadership might be best deployed in the current environment.

Given past reticence to take swift action, German leaders are likely to postpone major decision-making or destabilizing events until after September 2013 national elections. much-needed political cover in Germany, despite the Bundesbank’s protests.

Maintaining the primacy of democratic institutions has been a central implicit message of the ECB, even as elected policymakers, recognizing its ability to take decisive action and be less susceptible to public opinion, intend

22

The Eurozone Crisis

to cede responsibility to it over banking supervision and potentially a role in recapitalization, wind-downs and deposit protection. As the US’s 2008 experience with TARP and the Federal Deposit Insurance Corporation (FDIC) demonstrates, decisions around the fate of the financial sector could open up the ECB to greater political scrutiny.

France is a key swing state in the eurozone system and will face important political tests in 2013. Balancing between fiscal tightening and growth promotion has created a precarious position for the government under President François Hollande, which won election on a policy platform of increased social protection, high-income-earner tax increases (to 75 percent for the top marginal rate), wage increases and qualified reversals of changes in the retirement age, and an (unrealized) promise to renegotiate the Fiscal Compact. The French have guaranteed cuts in 2013 to reduce

the deficit from 4.5 percent to three percent. Finalizing the national budget will be an important test for the French government.

Moreover, France has traditionally demonstrated a low tolerance for structural reform as previous government attempts to address eroding global and, most recently, regional competitiveness have faltered. It recently adopted a €20 billion tax-credit scheme aimed at offsetting labor costs. Most elements of the Gallois report, a French answer to Germany’s Hartz labor reforms, have largely been put on ice. As the eurozone south engages in protracted reforms of the labor market and retirement benefits, France could increasingly find its relative competitiveness squeezed not only by Germany, but also by countries such as Italy and Spain.

Regarding future eurozone integration, Paris has implicit red lines that have not yet been challenged. As pioneers of the “Europe of states”, the French political classes will be one of the least comfortable with the notion of greater pooled sovereignty beyond fiscal coordination. The emphasis on solidarity before sovereignty has been a consistent policy position over the Sarkozy- and Hollande-era governments.

The UK, always an ambiguous EU member, has charted an unsustainable course characterized by threats of vetousage aimed at a domestic audience.

This threatens the future of British membership in the eurozone, which may be put up for a highly volatile referendum in 2015 following national elections.

Indirectly, the interaction between the UK’s place in Europe will inform the secession referendum in Scotland.

This has potentially far-reaching and unresolved questions regarding the future of successor states’ membership in international organizations, not to mention the future of Trident submarines at the Clyde Naval Base in Scotland.

Uncertainty around the UK’s future place in the EU contributed to the decision to scuttle the BAE-EADS merger.

Early in the crisis, the British were a proponent of eurozone integration, including cross-border transfers. British Chancellor George Osborne has long attributed the UK’s weak economic performance to a confluence of factors, including eurozone areas governance creditability and the need for crossborder demand adjustments. But constraints in the Conservative Party combined with a souring of British public opinion have led to tougher lines on spending in Europe and clashes over regulatory competence. Both issues culminated in the high-profile threat of a British veto of the Fiscal Compact at the December 2011 EU summit (which led to the Compact’s intergovernmental passage outside of EU law). The German government has been instrumental in attempting to bridge this divide and keep the UK engaged in Europe, siding with it—over traditional continental partners including France—on the size and structure of the Multiannual Financial Framework.

...the US Treasury Department has shown itself to be an effective, if not always appreciated, broker among major stakeholders, including the ECB. Recommendations for 2013 US engagement in resolving the debt crisis is controversial and requires great sensitivity. The first Obama administration’s strategy was one of intermittent, informal engagement in EU affairs. This proved effective in certain acute moments including consultations with the Spanish government in May 2010,19 extended consultations at the Camp David G8 summit after the French and Greek elections, and Obama’s public statement of support for a banking union on the sidelines of the G20 summit in Los Cabos, Mexico, in June 2012.

Moreover, the US Treasury Department has shown itself to be an effective, if not always appreciated, broker

among major stakeholders, including the ECB. The Fed’s liquidity swap facility has also played an important role. These currency agreements have helped guarantee liquidity in eurozone central banks and have eased foreign-exchange fluctuations of eurodenominated assets.

The US must continue to approach the crisis with recognition that the EU comprises the world’s largest concentration of advanced industrial democracies. That said, Washington can contribute as a partner and a power to the eurozone’s success.

1. Recognize the effects of the US budget battles on the it’s normative leverage in the eurozone crisis: While the US’s own debt standoff is not necessarily seen through the lens of Washington’s credibility as a partner, a protracted fiscal impasse will have unintended consequences beyond US borders. Slowly, global confidence in US fiscal policymaking has been eroded as events unfolded: the short-term negotiations in spring 2011, the debtceiling brinksmanship the following summer, the inaction of the debt supercommittee, and the destabilizing measures cumulatively known as the fiscal cliff (sequestration, a two-percent increase in the federal payroll tax, and the expiration of the Bush-era tax cuts, the alternative minimum tax and automatic stabilizers). Gridlock could continue throughout 2013. The need to again extend the debt ceiling and the use of continuing resolutions as a mechanism for funding the government will add to the conundrum.

The US’s tenuous fiscal position undermines its ability to act as a broker in the eurozone crisis. The G20 finance ministers’ meeting in Mexico City highlighted the concern of potential knock-on effects of sustained fiscal brinksmanship in Congress, particularly on the German finance ministry. A decisive resolution in early 2013 would strengthen the US’s credibility with eurozone leaders.

The Eurozone Crisis

23

2. Pursue an integrated approach to US involvement in the eurozone: Through consultation with the ECB, proximity to financial markets, and crisis management through its stakeholder role in the IMF, the Treasury Department has focused primarily on short-term, technical aspects of crisis management.

The US has largely remained silent on the political aspects of the crisis, which include long-term strategic discussions on topics such as institutional architecture, security risks, and the potential intra-European and global implications of EU action or inaction.

Yet it is an inconvenient truth that the eurozone’s woes are not an addendum to foreign-policy challenges facing the US and EU but a challenge in their own right. As such, the State Department’s role in US engagement in the crisis should be enhanced.

The long-term legitimacy of policy prescriptions will ultimately be based on eurozone member states’ ability to return to the growth and employment that serves their citizens.

The administration should expand its crisis-related diplomacy in three ways in 2013. First, it should define a united and resolute eurozone with effective, democratic, and accountable release valves for its population as in the strategic interest of the US. Second, the State Department has vast on-theground infrastructure and human capital that can complement the Treasury Department’s financial expertise. The administration should increase bilateral consultations on the eurozone crisis with governments in member state capitals such as London, Prague, Bratislava, Ljubljana and Helsinki. The often consensus-based EU system allows

24

The Eurozone Crisis

for a number of potential veto points, including in political centers outside the eurozone. A pre-emptive, broadbased outreach to non-euro members, often countries with which the US wields greater influence than with core Europe, could help reduce the risk of unforeseen events. Finally, the State Department should engage directly with and support the Future of Europe Study Group of 11 foreign ministers. This group is an ideal space where the US can articulate how it envisions the EU’s best serving joint strategic interests.

3. Continue to promote lessons learned from US banking- system reform: The US experience in the immediate months after the 2008 financial crisis offers lessons that could help EU leaders. Banks’ ability to lend to SMEs and capital-intensive infrastructure projects will depend on whether EU member states are able to restore trust in the banking system. This can be done by establishing a transparent and credible financial ecosystem, even more important in the context of public-sector austerity. The US Troubled Asset Relief Program’s (TARP) role of forced capital injections into the banking sector, the Treasury Department’s robust, depoliticized stress tests for banks, and the FDIC’s agility and discretion in winding down failed banks offer lessons for eurozone leaders as they consider measures to restore confidence in the banking sector.21 One of the most political aspects of banking reform is the timing. Regulatory slippage in the US has been a reality since 2008 as new rules laid out in the DoddFrank reform have been postponed.

The US should encourage the EU to enact banking-union regulation that is well timed and does not promote pro-cyclical behavior that will further depress an already tight lending market.

The US and EU have worked intensively to minimize the potential for regulatory arbitrage among financial sectors in their jurisdictions, particularly with

regard to the implementation of Basel III into regulation. They also must work together to coordinate implementation timetables for reform.

4. Encourage a balanced approach, with greater emphasis on growth-oriented policy: Long-term legitimacy of policy prescriptions will ultimately be based on eurozone member states’ ability to return to the growth and employment that serves their citizens. Aside from the certainty provided by credible institutions and decision-making, and the return of competitiveness, growth will come from unlocking private and public finance. For example, the US JOBS (Jumpstart Our Business Startups) Act, which encourages SME and start-up funding by lowering barriers to smaller loans and crowd-sourced finance, offers two lessons for member states looking to increase financing for young businesses.22 The US could also promote dialogue on the usage of tax incentives for growth and hiring, the role of infrastructure banks, and the potential for project bonds issued at the EU level.

In many of these areas, the US has much to learn from Europe as well. Finally, a broad-based trans-Atlantic Economic compact that includes trade, investment and regulatory liberalization is the greatest immediate pro-growth initiative in which the US could play a direct policy role [see page 11].

5. Keep the IMF involved in crisis management: In the past, Europe has demonstrated solidarity for major US priorities in the IMF board. For instance, partially at the behest of the US, European countries increased their credit availability at the disposal of the IMF in its efforts to support Latin America marred in the debt crisis of the 1990s.

IMF provides important technical assistance though its experience with diverse financial and debt crises.

Moreover, debate between eurozone

politicians and IMF officials has moved crisis management negotiations forward. The Eurogroup decision to explore official sector involvement (OSI) in a writedown of Greece’s debt once the country’s primary balance sheet re-enters surplus was driven by the international community’s formal participation in the talks. The IMF maintains a formal negotiating stake in the eurozone for global players outside it. Given the potential implications for the US and other major economies, this involvement is important.

6. Remain cognizant of political timetables and outcomes: Despite high political volatility, policy prescriptions have varied little since May 2010. Upcoming elections in Italy (early 2013) and Germany (September 2013) could fundamentally alter the political situation. The German election could set a ceiling for reform (it is the only ballot that could lead to a course correction in crisis-management and institution-building scope, sequencing and timing of policies), and the Italian vote could set a floor for change (tail-risk management, reform commitment).

The SPD takes a punitive line toward the banking sector, while the party’s troika leadership prominently endorsed the notion of mutualized European debt obligations in August 2011, has supported transfer schemes, and continues to author working papers on plans that would promote public sector investment. The SPD is exploring creation of a redemption fund that would establish joint liability for debt over 60 percent of GDP, more robust usage of the European Investment Bank (EIB), and the Commission’s issuance of so-called “Delors Bonds”, earmarked for specific infrastructure projects. It also played an important role in forcing the government’s acceptance of a financial transaction tax (FTT) as a condition for passage of the ESM and Fiscal Pact.23 The Greens have supported similar programs.

Whatever the outcome, the election could increase the German government’s room for maneuver and most likely lead to policies more compatible with the rest of the eurozone. The US should begin its outreach to opposition parties to hear their vision for crisis management and future integration.

The German election is the only foreseeable political event that could re-direct the eurozone’s policy course.

Despite Merkel’s personal popularity, the probability of a change in the German governing coalition is high.

Three coalition options are most likely: 1) a cross-ideological grand coalition between Merkel’s CDU and the main center-left party, the SPD; 2) a center-left red-green coalition; or 3) an unconventional black-green coalition between the CDU and the Europhile Green Party. Each of these new formations would rattle the Berlin consensus, with its emphasis on austerity. Although the campaign will most likely not be run explicitly on alternatives to managing the crisis, the SPD and the Greens have fundamental differences with the current government, that will be difficult to bridge.

The Eurozone Crisis

25

MEMO ON

POST-AFGHANISTAN NATO The State of Play For the next two years, NATO’s most pressing concern will be its exit strategy from Afghanistan. The May 2012 Chicago summit declaration outlined NATO’s withdrawal plan.1 The Afghan National Security Forces (ANSF) will take the lead for security nationwide by mid-2013; in parallel, the NATO-led International Security Assistance Force (ISAF) will shift its mission from combat to providing training and aid for the ANSF, while gradually drawing down its forces

by Dec. 31, 2014.2 After 2014, NATO plans to remain involved by training, assisting and helping to fund the ANSF given Afghanistan’s fiscal limits.3 The end of NATO’s longest out-of-area military engagement—it took command of ISAF on Aug. 11, 2003—will naturally be cause for concern, not least because the Afghan mission has provided the alliance with a clear sense of common purpose in the past decade. Nonetheless, NATO can draw confidence from some of its recent successes, as the alliance held together in Afghanistan despite travails.

In 2011, with the UK and France taking the lead, it staged a successful intervention in Libya’s civil conflict that protected the rebels, toppled the Gaddafi regime,4 and limited civilian casualties. NATO recently deployed the first phase of its missile defense system to protect Europe from attacks by rogue states, and continues to attract potential members, with Georgia, Macedonia, Bosnia and Montenegro keen to join the alliance.5 Yet the interventions in Afghanistan and Libya also highlighted significant weaknesses and divisions within the alliance that could undermine its cohesion and effectiveness in the future. The campaign in Afghanistan is unlikely to end in a clear victory.

26

Post-Afghanistan NATO

The end of NATO’s longest out-of-area military engagement will naturally be cause for concern, not least because the Afghan mission has provided the alliance with a clear sense of common purpose in the past decade.

At best, the country will achieve a precarious stability, caught between the deficiencies of the Afghan security forces and the continued threat posed by the Taliban.6 The interventions also highlighted familiar concerns about unequal responsibilities, the widening capabilities gap between Europe and the US, and the uneasiness of certain countries about out-of-area operations.

The variability in troop contributions, the national caveats that member states placed on the use of their forces and the asymmetry of casualties and risk exposure between partners created tension and hindered the war effort in Afghanistan.7 Meanwhile, the intervention in Libya, despite French and British leadership, would not have

been possible without extensive US operational and logistical support. In the opening phase of the war, the US fired more than 110 Tomahawk missiles to disable Libya’s air defense system, commanded the no-fly zone operations enforced by allies,8 and provided 75 percent of intelligence, surveillance and reconnaissance data along with 75 percent of the refueling planes. Many countries remained on the sidelines during the Libyan campaign, either for political reasons or because they lacked the capabilities to help, and only eight of 28 NATO member states engaged in strike sorties. Moreover, public opinion polls in member states confirm a clear intervention, making the prospect of future out-of-area operations less feasible.

Green-on-Blue Attacks and ISAF Casualties (2007-2012) 60 50 40 30 20 10 0

2007

2008

2009

Green-on-Blue Attacks Source: ISAF

2010

2011

ISAF Soldiers Killed

2012

(as of September)

Aside from the tense international context, NATO will have to contend with two major developments that threaten to hinder Europe’s already limited ability to act as a security provider and peacekeeping force. The latest US defense “Strategic Guidance”,10 published by the Pentagon in January 2012, detailed a planned US pivot toward Asia in order to deal with China’s military rise. The Strategic Guidance also announced the withdrawal of a quarter of American forces stationed in Germany, bringing the US permanent military presence on the continent down to just under 70,000.11 US officials are quick to point out that these moves are not a pivot away from Europe, underlining their pledge to contribute a US-based Army brigade to NATO’s Response Force and the fact that the new guidance confirms the US’s continued commitment to Article V.12 Yet despite these reassurances, the new guidance still sends an unmistakable warning that Europe will be expected to do more for its security and rely less on the US. Indeed, Europe cannot expect the same level of support from the US in the future, considering the latter’s decision to pare back planned defense increases over the next decade by a total of nearly $487 billion. The budgetary process known as “sequestration”, could prompt another $472 billion in total reductions over the same period.13 On top of that, Europe’s debt crisis and resulting

Attitudes Towards Defense Spending 100 80 in percent

60 40 20

Don’t Know

Descrease Spending

Maintain Spending

UK

Spain

Slovakia

Sweden

Romania

Portugal

Poland

Netherlands

Italy

Germany

France

Bulgaria

Russia

Turkey

0 US

NATO thus faces an uncertain future.

The weaknesses revealed in Libya and Afghanistan are likely to plague the alliance for many years after the end of combat missions. Defining a new common purpose and role will be further complicated by a challenging international environment. The world the alliance will confront in the coming years is likely to still be defined by a vast array of threats, many of them borderless, including: terrorism, cyber attacks, piracy, energy disruptions and the consequences of climate change.9 Regions in NATO’s backyard, especially the Middle East, remain extremely volatile and could see tensions escalate into serious conflict.

Increase Spending

Source: GMF Transatlantic Trends

austerity measures are having a dramatic impact on defense spending across the continent. The economic downturn will likely lead to a 30% drop in total military spending by EU member states between 2006 and 2014.14 If that trend were to endure over the longer term, there could be very significant consequences for both Europe and NATO: Europe could effectively lose a great part of its capacity to act in the security sphere, even in cases where it could muster the political will. The alliance could be compelled to turn inward, incapable of tackling many of the acute challenges in the current international context.15

European Perspectives The same burden-sharing debates and divisions that afflict NATO apply within Europe. Currently, France, the UK and Germany represent 65 percent of all defense expenditure in NATO Europe and 88 percent of research and development (R&D) investment.16 The economic crisis has not affected defense spending in an even manner across the continent.

Military budget cuts have ranged from more than 20 percent for the smaller EU member states, with Lithuania cutting 36 percent in 2010, to 10–15 percent, on average, for the majority of middle-sized countries (the Czech Republic reduced its defense budget by 10 percent in 2011

and 2010). The larger EU countries have limited their cuts to about 8 percent to be introduced between 2011 and 2015.

States such as Finland and Denmark have recorded steady military spending through the crisis, while Poland and Sweden have actually increased their defense budgets.17 The UK continues to view NATO and cooperation with the US as essential to its security and remains a strong proponent of out-of-area operations.

Over the years, it has proven to be a reliable and committed member of the Alliance. Second only to the US, the UK has provided the largest international troop contribution—presently 9,500— to the Afghan mission. It also took a leading role with France in the Libya campaign. But “the operational nature of the ‘special relationship’ is at risk” as a result of the austerity measures adopted

by Prime Minister David Cameron’s coalition government.18 While the UK announced a 7.5 percent cut in real terms to the defense budget over four years, in practice defense spending will actually drop by nearly 25 percent since the previous Labour government had overcommitted its defense budget.

The current coalition has decided to balance its budget and to fund over commitments with existing resources.

Post-Afghanistan NATO

27

European Military Spending by Sub-Region

in billions of USD (constant, 2010)

800 700 600 500 400 300 200 100 0

1988 1990 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Central Europe

Eastern Europe

Western Europe

Source: SIPRI

The size of the regular army is set to fall from 104,000 troops to 90,000 by 2015, and to 82,000–84,000 by 2020. In addition to these agreed cuts, the UK will find itself without a carrier strike capability until 2020.19 While the UK’s main challenge with regard to NATO revolves around the impact of British austerity measures on the operational capacity of its military, Germany is plagued more by questions of leadership and purpose.20 For most of the history of the alliance, during the Cold War and the enlargement phase of the 1990s, Germany was a loyal and enthusiastic supporter of NATO. But that has given way to ambivalence in the past decade as NATO’s strategy evolved toward more out-of-area operations.

Fear of overstretch and an insufficient threat perception partially explain Germany’s reluctance to get involved in campaigns outside of Europe.21 Last year, Berlin chose to stay on the sidelines of the intervention in Libya and withdrew its crews from NATO’s Airborne Warning and Control System (AWACS) aircraft in the Mediterranean,22 much to the dismay of its main NATO partners. The backlash over Libya has at least convinced some German officials

28

Post-Afghanistan NATO

that Berlin’s security policy has a real credibility problem.23 A recent initiative by a number of European foreign ministers, including Guido Westerwelle, is trying to address this by advocating deeper European military integration, to face the challenges of austerity and turn Europe into a stronger partner for the US.24

his country’s allies: he agreed to delay the Afghan withdrawal and toned down his criticism of the alliance’s missile defense system. It seems unlikely that Hollande will go back on Sarkozy’s decision to return France to NATO’s integrated structures, but he is intent on injecting new life into European defense projects.

It remains to be seen to what extent new French President François Hollande will depart from his predecessor, Nicolas Sarkozy, when it comes to NATO policy.

Under Sarkozy, France seemingly followed a more Atlanticist path. In 2009, the country ended its 43-year exile from NATO’s integrated military structure.

In addition, Sarkozy maintained his country’s presence in Afghanistan and took on a leadership role in the Libyan campaign. But Hollande and his foreign minister, Laurent Fabius, were opposed to France’s return to NATO’s integrated military structure, and during the presidential campaign they pledged to withdraw the troops stationed in Afghanistan by the end of 2012.25 Since assuming office, however, Hollande has acted pragmatically. During the Chicago summit in May 2012, he accepted a number of compromises as gestures to

NATO’s road ahead, as it prepares to wind down its presence in Afghanistan, will unquestionably be arduous. The Alliance will need to re-define its purpose and maintain its ability to face a plethora of threats in a context marked by austerity and fiscal restraint. But this challenge – maintaining NATO’s effectiveness with fewer resources – can become a great opportunity for Europe and the US to push through needed and comprehensive reforms of the Alliance.

Through close cooperation, Europe and the US can develop a NATO with a more efficient organization and improved defense culture, which preserves its relevance by tackling new threats, and which remains engaged with partners on a global scale.

Recommendations for 2013

Looking ahead, and remaining mindful of the constraints of the current economic context, the US government should avoid publicly berating its European allies over their failures to match spending targets.

Lecturing cannot change the facts of austerity and will only cause more ill will. A more restrained attitude would at least improve atmospherics. Moreover, excessive focus on burden-sharing promotes the view that Europe’s defense difficulties are only a matter of spending levels. The fact is that Europe does not always spend wisely, does not invest enough in R&D and struggles to properly deploy its existing assets. Finally, the preoccupation with hard power also downplays the important contributions and resources the Europeans dedicate to the larger field of security, including donor aid, civilian missions and homeland security.27 2. Pursue the comprehensive reforms that will be required to make smart defense an effective tool: Smart defense—essentially specialization and pooling and sharing of assets— has become a major buzzword in recent

120 100 80 60 40 20

Don’t Know

No Longer Essential

UK

Spain

Slovakia

Romania

Portugal

Poland

Netherlands

Italy

Germany

France

Bulgaria

0 Turkey

Undoubtedly, member states must continue investing in hard power and capabilities so NATO can remain an effective organization. But the fixation on the defense spending target of two percent of GDP has ultimately proved to be counterproductive, and will remain so in coming years. The two-percent goal is simply not a realistic target at present.

According to the latest figures, aside from the US, only Greece and the UK currently reach it—and that might prove temporary considering the UK’s planned defense cuts and Greece’s serious debt crisis.26 With the rest of Europe also facing significant economic challenges, the NATO member states are unlikely to meet the two-percent target anytime soon, even if Western economies recover dramatically.

Is NATO Still Essential for Security?

US

1. Consider NATO’s defense spending target for member states a useful, but not dominant, guideline:

Still Essential

Source: GMF Transatlantic Trends 2012

times as NATO aims to do “more with less” in light of austerity. There are 24 multinational burden sharing projects in motion that fall under the smart defense banner, including programs for the sharing of specialized munitions, the pooling of maritime patrol aircraft, and medical support. The European Defense Agency (EDA) has also made a number of proposals for pooling and sharing of military capabilities. These are all important steps, but smart defense and pooling and sharing are tools rather than ends in themselves. Additional reforms will be needed to ensure that smart defense is truly effective.

First, the US should support the EU in making the European Defense Equipment Market more efficient. It is weakened by a procurement process in which states mainly reward their national industries, and is highly fragmented—there are too many producers in comparison to the larger US defense market, reducing the prospects of economies of scale and scope. Encouraging market consolidation through industry mergers, creating EU common R&D programs, and fostering a single European market for nonstrategic equipment would be important moves in the right direction.28 Second, the US should push the EU to fully implement existing measures that aim to integrate the defense market. Two important directives passed in 2008-09

aimed to combat inefficient regulations governing it: Directive 2009/81/EC stipulated that, from August 2011 onward EU governments must allow for open competition in military procurement, unless there are legitimate security concerns; and Directive 2009/43/EC makes it easier to export defense-related products among EU member states. In order to make these two directives fully effective, member states need to avoid an excessively cautious approach when defining which equipment is sensitive enough to be excluded from competition, and they should establish a common list of military equipment, which would benefit from general licenses across the EU.29 Third, from an operational standpoint, NATO member states will need to closely coordinate and to prepare contingency plans for these shared assets. Recent NATO operations, such as in Libya, proved divisive and, as mentioned, a number of states remained on the sidelines. “Access contracts” would ensure that members can still access shared equipment for operations even when one of the involved parties prefers to opt out. Finally, the US should support the creation of a permanent European Military Operations Headquarters (OHQ) and encourage the UK to lift its opposition to that project. Creating a permanent OHQ could significantly improve Europe’s ability to provide

Post-Afghanistan NATO

29

security, encourage its involvement in overseas missions and facilitate pooling and sharing arrangements.30 3. Improve the organization’s effectiveness with a leaner, streamlined and more efficient NATO: NATO already took a step in the right direction at the 2010 Lisbon summit by agreeing to a plan to reform its agency structure. By the end of 2014, NATO’s previous 14 agencies will have been consolidated within four larger bodies: the Communications and Information Agency, Support Agency, Procurement Organization and Science and Technology Organization. But more can be done to make NATO more efficient. Suggestions include improving the way in which the North Atlantic Council conducts business—for example, more focus on strategic thinking and consultations and circulating draft speeches ahead of time rather than reading them at meetings— and delegating more operational authority to the secretary general. In particular, after the member states have approved NATO’s budget, the secretary general should be able to decide how to allocate resources and organize and structure the international staff.31 4. Adapt NATO’s decision-making model to deal with the challenges of a multi-tiered alliance: Despite NATO’s commitment to collective defense, in practice it has become multi-tiered. Members are divided by threat perceptions, strategies, resources and willingness to incur casualties. While this development is a challenge to cohesion, it could be lessened somewhat if the alliance reformed its decision-making approach.

Consensus is the foundation of NATO’s decision-making process and remains an ideal: The alliance is meant to be one of sovereign states rather than a supranational body. Yet it need not be an iron-clad rule. Not only has the consensus rule proved flexible in the past, but adding other decision tools could allow NATO to avoid paralysis

30

Post-Afghanistan NATO

in cases when allies disagree sharply.32 Constructive abstentions could be one such way forward: While certain sensitive votes would still require unanimity, in other cases states should have the option to abstain so missions are not delayed. Adopting constructive abstention would it more acceptable for states to remain on the sidelines of an operation without reprimand (as Germany did in the Libyan campaign), while encouraging these states to refrain from criticizing an operation if they opt out.33 Also, in light of NATO’s growing number of partnerships worldwide, the alliance should consider involving close non-member allies in relevant debates and votes.34 5. Strengthen and deepen the cooperation between NATO and the European Union: Though their headquarters are only a few miles apart in Brussels and their relationship has mildly improved in recent years, cooperation remains lackluster. The current economic context will likely be an incentive for the organizations to work closer together, if only to avoid excessive duplication and because they are complementary to a certain extent, but a more meaningful partnership will depend first on solving the Greek-Turkish dispute over Cyprus.

In the meantime, the EU and NATO can still take a number of measures to deepen their ties, including: coordinating between NATO’s future strategic concepts and future European security strategy documents; creating a comprehensive strategic approach that blends their experiences from recent military and civilian missions; maintaining an open and continuous dialogue between NATO’s smart defense program and the European Defence Agency’s pooling and sharing initiative; encouraging more secondments of EU and NATO officials to the other institution, including stronger links between the two organizations’ Situation Centers and establishing a joint training program for deployment missions as a prelude for a joint training academy.35

6. Develop a NATO-Russia partnership that is less formal but more substantive:36 NATO-Russia relations have undoubtedly improved since the low point in summer 2008 when military ties were frozen as a result of the war in Georgia. The challenge for the coming decade will be to build on this development, so the US reset in relations can “graduate” toward more substantive achievements.

Moving away from the overly formal, and somewhat disappointing, NATORussia Council will help to achieve that goal, as will actively seeking to enlarge the areas of cooperation between NATO and Russia.

A more flexible Russia approach will have multiple benefits for NATO. It will make it easier for the alliance and Moscow to build on an ad hoc basis to the domains in which they already work together, adding to an already impressive list that includes Afghanistan, counterterrorism, nonproliferation and combating piracy.

It will send the message that while NATO welcomes Russia’s cooperation, it does not need it. Moscow will have to decide how much or how little it is prepared to work with the alliance; and NATO recognizes that Russia, often for domestic reasons, will not always be receptive to closer relations. An “a la carte” attitude will allow NATO to use incentives to shape the long-term parameters of its relationship with Russia. If ties continue to improve in the coming decade, NATO should consider offering Russia some sort of nonmember partnership or observer status.

Russia would not be offered Article 5 guarantees, but could take part in debates and decision-making on areas of mutual interest. If successful, the same status could be extended to other countries, such as Georgia or Ukraine.

7. Promote the alliance’s unparalleled security expertise as a vehicle for global NATO: The concept of a “global NATO” has proved divisive among members, but since the alliance has already established precedents through out-

of-area operations and worldwide partnerships, the idea that it could revert to a regional organization seems far-fetched. The tension over global NATO, however, could be diminished if the alliance concentrated its efforts on strengthening its position as a security hub and provider of expertise. NATO has an unparalleled pool of skills and experience, training and assistance capacities, which it can share with partners and other regional organizations such as the African Union or the Gulf Cooperation Council. NATO can promote preemptive crisis management to other regions of the world. Fulfilling that aim will mean maintaining and expanding its existing partnership programs, which include: The Euro-Atlantic Partnership Council and Partnership for Peace (22 European states); The Mediterranean Dialogue, which involves Egypt, Israel, Algeria, Jordan, Mauritania, Morocco and Tunisia; The Istanbul Cooperation Initiative, which works with Bahrain, Qatar, Kuwait, and the United Arab Emirates; The NATO Partners (Australia, Japan, South Korea, New Zealand, Pakistan, Iraq, Afghanistan, and Mongolia); and the Support for African Union program, which assists the AU mission in Somalia.37 8. Clarify NATO’s cyber-security doctrines and build ties with the private sector:38 NATO has had to confront cyber attacks numerous times, dating back to its 1999 war in Kosovo and the later attacks against Estonia in 2007 (as well as the attacks on neighbors such as Georgia in 2008). The alliance has taken positive steps since 2007, including establishing a Cyber Defense Center of Excellence in Estonia to focus on strategic and doctrinal guidance; setting up a Cyber Defense Management Authority in 2008 that manages operations across the alliance; creating a Computer Incident Response Technical Center (NCIRC) to provide constant tactical technical responses to nonpolitical cyber threats; awarding a substantial cyber defense contract to a team co-led by US firm Northrop Grumman and Italian firm Finmeccanica to equip 50 sites in 28

countries to detect and respond to cyber attacks; and running the Cyber Coalition 2011 exercise with six partner states to respond to a fictional attack.39 Since the threat of cyber attacks will likely become more pervasive and sophisticated in the coming decade, NATO will need to step up its efforts and expand on the measures it has taken since 2007.

Before it can increase the resiliency of its member states, NATO will first need to clarify certain matters of doctrine, in particular agreeing on shared definitions of privacy, what exactly constitutes a cyber attack, and the networks involved.40 The alliance needs to consult in order to determine the types of attacks that may warrant a resort to Article 5 and prepare the necessary contingency plans (for the moment, cyber attacks fall under the purview of Article 4, which only requires consultations).41 NATO should focus on improving the overall cyber security of the alliance by helping to establish standards for resiliency for when attacks occur that could apply not only to the NATO networks, but also to the networks of the national militaries.42 It can act as a center of excellence for exercises and encourage information-sharing. Finally, becoming a more effective player in the cyber field will also require that NATO build bridges with a wider number of partners, ranging from ministries of the interior and intelligence services to industry and private security companies.43 9. Make energy security an integral part of NATO’s mission: NATO’s venture into the field of energy security is still a very recent phenomenon.

The topic became particularly urgent in 2006 after the Russia-Ukraine gas dispute disrupted supply to parts of the EU. The 2008 Bucharest summit initially provided NATO with a very limited and defensive mandate in regard to energy security, before expanding that role in the 2010 Strategic Concept. Yet more needs to be done to turn the alliance into a more substantial player in this field.

NATO needs to organize regular consultations between member states on energy, and adopt a wider perspective that does not solely focus on Russian supply, to strengthen its internal cohesion on the matter. Energy security cannot be reduced to the divisive field of NATO-Russia relations. Additionally, as in the field of cyber security, NATO will benefit from closer cooperation with the private energy companies and their expertise in the field. It should also take advantage of its partners worldwide (since many of these states are either energy producers or transit countries) to deepen energy consultations. Energy topics should also be added to the training courses of NATO’s educational facilities, to prepare diplomats and military officers to confront future challenges. Finally, NATO will have to pay close attention to the security dimensions of climate change, such as the impact of ice melting on shipping and security in the Arctic.44 10. Share US best practices about veteran re-integration with all NATO member states: The US has a long history of focusing on the topic of reintegration of veterans into the workforce. The Department of Veteran Affairs, the second largest US federal department, oversees a vast number of health care and benefit programs, including the so-called G.I. Bill 2.0 (the Post-9/11 Veterans Education Assistance Improvement Act) passed by Congress in December 2010. Considering the difficult economic context, the sizable number of non-US troops who have served in Afghanistan, and the limited scale of veteran focus in Europe, the continent would greatly benefit from the US’s best practices and its experience in the field of veteran reintegration.

Post-Afghanistan NATO

31

MEMO ON

THE ARAB UPRISING The State of Play On Dec. 17, 2010, in Sidi Bouzid, Tunisia, street vendor Mohamed Bouazizi— fed up with constant harassment from the local police and the confiscation of his produce cart—set himself on fire in protest ultimately causing his death. Within a few weeks, the whole Arab world was ablaze. The region’s dangerous mix of repressive and autocratic governments, pervasive corruption, human rights abuses and stuttering economic growth made it fertile ground for revolution. By Jan. 14, 2011, a mere four weeks after Bouazizi’s self-immolation, general protests in Tunisia had succeeded in overthrowing Zine El Abidine Ben Ali, the autocratic leader in power since 1987.

Tunisia’s dramatic achievement immediately resonated across the Arab world. Within days of Ben Ali fleeing his country, demonstrations broke out in Egypt, Oman, Jordan and Saudi Arabia; mass protests forced Egypt’s strongman Hosni Mubarak out of office on Feb. 11; and unrest moved on to further countries, including Libya, Bahrain, Morocco and Syria. The fate of these opposition movements varied across the region, shaped by the differing goals of the protesters—from regime change in North Africa to reform from within in the Gulf—and the spectrum of responses from the various governments. The reactions ranged from yielding to protesters’ demands (Tunisia and Egypt) all the way to brutal crackdowns leading to full-blown revolutions (Syria and Libya).1 The Arab uprising blindsided Europe and the US, and tore apart the Faustian pact that had characterized European policy towards North Africa—overlooking the human rights abuses of autocratic

32

The Arab Uprising

The outbreak of the Arab uprising proved a humbling experience for Europe, which was taken by surprise by the protests and embarrassed by its close ties with the autocratic rulers of North Africa. rulers in exchange for those rulers maintaining security and stability in Europe’s backyard.2 Eventually, however, the US and the leading European states recovered from their initial shock, acknowledged their past mistakes and took steps to make sure they moved to the “right side of history”. They opted to back protest movements and to condemn governments who tried to repress these movements by force. In Libya, NATO, led by the UK, France and the US, intervened in order to protect civilians from Moammar Gaddafi’s forces and decisively tipped the balance in favor of the rebels.

policy challenges for Europe and the US. While the international community has so far refrained from any direct military intervention in Syria, that country’s civil conflict rages on and risks spilling over its borders. The impact of the eurozone crisis on Western donors threatens the strong promises of support for the Middle East and North Africa, with many countries still waiting for promised funds.5

Europe and the US also played a prominent role in establishing the Deauville partnership to aid Arab countries in transition. The G8 summit in May 2011 led to an agreement between G8 members and major international institutions (such as the IMF, the World Bank, the European Bank for Reconstruction and Development, and the European Investment Bank) to pledge $40 billion in aid from 2011 to 2013 for Egypt and Tunisia. A later meeting in fall 2011 upped the pledge to nearly $80 billion and extended the aid to Jordan, Morocco and Libya.3

Furthermore, Europe and the US are grappling with the emergence of new political actors that do not view them favorably. Islamist parties, despite their minor role in the protests, have come out on top in the various elections held across North Africa since the start of the uprising. Ennahda gained 37 percent of the votes in Tunisia in the October 2011 elections; the following month, the Justice and Development Party gained the largest number of seats in Morocco (107 out of 395, with 27 percent of the votes); and the Freedom and Justice Party, founded by the Muslim Brotherhood, won nearly 45 percent of the seats in the Egyptian parliamentary election.6 In June 2012, Muslim Brotherhood member Mohamed Morsi won the presidency in Egypt.

In the past two years, the Arab uprising has caused (and is still causing) seismic changes across North Africa and the Middle East. The regional transition will continue to unfold over the long term and will be volatile.4 The lingering uncertainty will present significant

The violent protests outside the US Embassy in Cairo in September—in response to an anti-Islam film made in the US—also underscored the fact that the establishment of democracy in North Africa will not necessarily translate into pro-Western governments; the

concurrent terrorist attack in Benghazi, Libya, that left the US ambassador and three other diplomats dead, as well as the attempted attack against the British ambassador’s convoy in Benghazi a few months earlier, were grave reminders of the continuing security risks.7 Finally, the stability of many of the regimes across the Arab region remains precarious, especially in North Africa: Egypt’s Morsi is facing major protests over the drafting of a new constitution, while lawlessness poses a major concern in the Sinai region; In Libya, the General National Congress lacks authority, with much of the real power in the hands of the regional militias; and Algeria and Morocco’s commitment to reform appears questionable at best.8

European Perspectives The outbreak of the Arab uprising proved a humbling experience for Europe, which was taken by surprise by the protests and embarrassed by its close ties with the autocratic rulers of North Africa. But the uprising also persuaded the EU and many member states to rethink their approach towards the region, in particular North Africa, and to place a greater emphasis on nurturing civil society as opposed to simply cooperating with local authorities.

Two major setbacks drove France to shift its policy towards North Africa and the Middle East. President Nicolas Sarkozy’s pet project, the Union for the Mediterranean, launched in July 2008 to provide new momentum to the EuroMediterranean Partnership, never really delivered on its grandiose promises.

The outbreak of Arab uprisings also caused great embarrassment for France by underlining the close ties between French officials and the Ben Ali family in Tunisia, a symbol of France’s complicit relations with autocratic regimes in North Africa.9 In the short term, to mark a decisive break with the past, Sarkozy quickly switched to providing firm support for the Arab revolutions, took a leading role in the response to the Libya conflict and pushed for G8 financial support. In the longer term, Sarkozy’s foreign minister, Alain Juppé, took steps to recalibrate France’s strategic approach

towards North Africa and the Middle East, emphasizing the importance of values over security, protecting fundamental freedoms, building more ties with civil society and engaging with all actors, including Islamic parties.10 Sarkozy’s successor, François Hollande, and his Foreign Minister Laurent Fabius have, for the most part, endorsed this new approach towards the Arab region.11 Hollande also promises to play an active role in the efforts to remove Bashar alAssad in Syria, with France taking the lead as the first Western country to recognize the newly formed coalition of Syrian opposition groups.12 As for North Africa, because of its position as a leading donor—in 2010 France gave a total of $595 million in aid, compared with $505 million for EU institutions— France will continue to play a vital role in the region.13 The backlash against its hands-off approach to the Arab uprising has also led Germany to readjust its diplomatic approach. In particular, though Foreign Minister Guido Westerwelle declared his support for the uprising during a visit to Cairo’s Tahrir Square, Germany dismayed its allies on both sides of the Atlantic by staying on the sidelines of the Libyan intervention. That decision appeared even more eye-opening in light of a €1.5 billion deal to sell 200 Leopard tanks to Saudi Arabia while the latter was helping authorities in Bahrain to repress prodemocracy protests.14 As a consequence of the strong criticism of its stance on Libya, Germany opted to take a more proactive stand. To that end, Westerwelle made a timely trip to Algeria, Libya and Tunisia in early 2012, promising to invest more resources to help democratic development in the region.15 This new emphasis notwithstanding, trade and economic objectives will likely continue to fundamentally shape Berlin’s policies towards the Arab world—the substantial rise in arms sales to Algeria from €20 million in 2010 to €400 million in the two years since being yet another example.16 But Germany has also learned lessons from Libya, and will make sure in the future to be in the middle of the pack, as opposed to an outlier, when it comes to major security challenges involving

the Western alliance. This pragmatism is seen in its willingness to send Patriot missiles to Turkey to help defend the latter’s border with Syria.17 Like other European states, the Arab uprising came as a complete surprise to the UK, whose diplomatic and intelligence resources failed to predict the revolutions—in part because agencies had cut resources devoted to the region in previous years.18 Like France, though, the UK quickly switched to a resolute support for the uprising, including taking a leading role on Libya. Despite the slow pace of change in the Middle East and North Africa, Prime Minister David Cameron will remain firmly committed to the process of transition, driven by his view that it presents a great opportunity for the region and that any backsliding towards authoritarianism would be detrimental to the interests of the UK.19 In regard to the Syrian revolution, London has played and will continue to play an active role. Though it has not endorsed military intervention, the UK has provided humanitarian aid and non-lethal equipment to the Syrian opposition, intelligence reports (along with Germany) on Syrian government troop movements and agreed with France to speed up efforts for the opposition to create a government.20 Cameron also recently floated the idea that London would be willing to arrange a safe exit, and possible immunity, for Assad if this could help end the conflict.21 Like the individual member states mentioned above, the first response of the EU institutions to the Arab uprising can only be described as lackluster and hesitant. But the initial inaction of member states, combined with the timely 2010 revision of the European Neighborhood Policy (ENP)—a bilateral tool for relations with eastern and southern neighbors—enabled the EU to take a leading role. The joint communication22 provided in March 2011 by Commission President Jose Manuel Barroso and High Representative Catherine Ashton outlined a new approach towards the Arab world: It laid out an aim (supporting transitions and deep democracy in the region), the

The Arab Uprising

33

Official Development Assistance 450 In Millions of USD (2009-2010)

means to achieve it (the so-called “3 Ms” of providing better access to money, European markets and mobility to the region) and a methodology (“more for more”, or a more serious attempt at enforcing conditionality when providing aid).23 A later joint communication24 in May 2011 outlined the results of the ENP review, and promised an additional €1.2 billion of funding, on top of €5.7 billion already budgeted, for the 2011– 2013 period.25 Looking ahead, the EU will continue to rely on an expanded ENP as its main tool to support the process of transition in the Middle East and North Africa. The ENP’s budget is slated to reach €18.2 billion for the 2014–2020 period, or a 40 percent rise from the amount available for 2007–2013.26

400 350 300 250 200 150 100 50 0 Algeria

Recommendations for 2013 Both Europe and the US care about the Middle East and North Africa, but the US has more vital interests in the Middle East whereas Europe has higher stakes in the future of North Africa. Both allies agree that economic and political progress are interrelated when it comes to democratization in the Arab world, but Washington puts more stress on economic development as opposed to Brussels’ commitment to political reform.27 Europe tends to favor government-to-government cooperation, while the US is more willing to work directly with civil society organizations. But these divergences can be an opportunity, rather than a challenge. By working together Europe and the US can offer better long-term policies towards the Arab transition precisely because they have complementary, rather than identical, approaches. Building on existing cooperation, especially at the ground level, by exchanging best practices and expertise, Europe and the US can avoid unnecessary duplication and offer a wider toolkit of approaches to their Arab partners.

1. Promote regional integration, starting with North Africa: The autocratic regimes that dominated North Africa helped to create closed

34

The Arab Uprising

Egypt

Jordan

Libya

Morocco

United States

EU Institutions

France

Germany

Tunisia

Source: OECD, foreignassistance.gov

societies, with often very negative economic and political consequences.

The trans-Atlantic partners can help undo that legacy by promoting wider regional integration, with the EU taking the lead because of its existing ties with the region. The US should actively support Brussels’ efforts to establish closer cooperation between North African states. Doing so will provide much-needed help to revitalize and expand intra-North African trade, and with a clear focus on projects that would involve multinational cooperation.

Moreover, the US should encourage the EU to redefine its trade relations with North Africa in a way that further benefits the latter’s development. In particular, the US can push the EU to open up its agricultural market to North African products and increase investments in areas, such as solar energy, that could help create jobs. Washington can also suggest that Brussels extend its wider customs union with Turkey to countries along the southern Mediterranean coast, which would help to boost intra-regional trade in North Africa.28

2010 Trade with North African States Trade with the EU 27 (% of total trade)

Trade with the US (% of total trade)

Trade with the rest of North Africa (% of total trade)

50%

16.5%

2.7%

Egypt

31.9%

8.2%

3.9%

Libya

64.9%

4.2%

5.4%

Morocco

53.1%

6%

3.8%

Tunisia

69.7%

2.6%

8.4%

Algeria

Source: European Commission Trade Statistics, 2010

2. Strengthen regional partnerships to provide a better framework for peaceful change: US and European efforts to promote democratization in the Arab world, as well as to safeguard existing achievements, are more likely to be successful if they fully involve regional actors and institutions. To that end, Europe and the US should focus on establishing closer cooperation with Turkey and the Gulf Cooperation Council (GCC)—the political and economic union between Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.29 Turkey and the GCC, aside from their financial clout, share the European and American objective of creating a more stable and peaceful framework for the process of internal change in the Arab world. Turkey, in particular, would be a valuable asset because of its relative popularity among the Arab public and its successful recent model of economic reform30; having the GCC states on board could make it easier for the US and Europe to encourage domestic reform in those states without alienating them.

3. Decouple the Middle East peace process from the Arab uprising: The Arab-Israeli conflict remains a very significant source of tension, in particular within the Arab world. The fate of the Palestinians resonates deeply with other Arabs, and it is a powerful emotional card that governments often play. Injecting renewed momentum into the peace process is an essential objective for Europe and the US, but it is one that needs to be kept separate from the Arab uprising. Solving the longenduring Arab-Israeli conflict could have major repercussions for the security and stability of the Arab world, but it is unlikely to facilitate democratization in the region or help its people find jobs.

The process of reform in the Arab world will be hard enough on its own, and tying it to the peace process would only be counterproductive.

4. Develop a long-term strategy towards the Middle East and North Africa, but stay away from a “one-size-fits-all” approach: Through close consultation, the US and the EU need to rethink their overall approach towards the Middle East and North Africa. Europe (with the revised ENP) and the US eventually made some much needed policy adjustments in response to the Arab uprising, but in the long term this cannot be a substitute for developing a broader, more lasting political strategy to accompany the process of reform in the Arab world.31 Europe and the US should steer away from models such as the ENP, which tries to offer an overarching framework to address the diversity of situations across the Arab region. Instead, the EU and the US should aim in tandem to develop specific responses tailored for the sub-regions of the Arab world—one that works for the Maghreb (Morocco, Algeria, Tunisia, Libya and Mauritania) and Egypt, and one dedicated to the Mashriq (Iraq, Palestine, Jordan, Kuwait, Lebanon and Syria).32 5. Rely on the expertise drawn from Eastern and Central Europe’s post-Communist transitions: The Middle East and North Africa in 2012 are certainly not in an identical situation to that of Eastern and Central Europe after 1989. The political fault lines differ, with the Arab world undergoing a

The EU and the US should aim in tandem to develop specific responses tailored for the sub-regions of the Arab world—one that works for the Maghreb (Morocco, Algeria, Tunisia, Libya and Mauritania) and Egypt, and one dedicated to the Mashriq (Iraq, Palestine, Jordan, Kuwait, Lebanon and Syria). struggle for influence among autocrats, democrats and theocrats. Moreover, civil society organizations are weaker in the Middle East and North Africa than they were in socialist Europe and the Arab states also lack the positive catalyst for change created by the prospect of EU/ NATO membership.33 These differences notwithstanding, Europe and the US can still draw important lessons from the post-Communist transitions in Europe that could apply to the Arab world.

Europe and the US can support in-depth structural reforms, anti-corruption initiatives and judicial reform. They can help by striving to develop the private sector, with a strong focus on small businesses, by encouraging local governments to reduce excessive bureaucracy and subsidies, and by promoting efficient rather than rapid

European Neighborhood Policy (ENP) (2007–2013) ENP aid 2007–2010 (per annum, in millions of €)

ENP aid 2011–2013 (per annum, in millions of €)

Algeria

55

57.33

Egypt

139.8

149.76

Libya

2

20

Morocco

163.5

193.5

Tunisia

75

130

Source: European Commission, European Neighborhood Info Centre

The Arab Uprising

35

privatization. They can also point to experience of Eastern Europe and Russia as a warning about the dangers of speedy measures, how they can lead to incorrect implementation, and how the process can be hijacked by anti-reformers who want to consolidate their position.34 To facilitate transition processes in the Middle East and North Africa, the EU should build on its recently established Support to Partnership, Reform and Inclusive Growth (SPRING) program— which received a €350 million budget for 2011–2012—while Congress needs to green-light the State Department’s Middle East Incentive Fund, $770 million dedicated to supporting emerging democracies.35 6. Ensure that the MENA states have a real stake in the success of democratic and economic reforms: Undoubtedly, Europe and the US can play a very significant role in fostering meaningful change in the Arab world. But both partners need to be careful not to overstate their influence. Ultimately, the success of reforms in the Middle East and North Africa will depend on local actors and local authorities buying into the necessary measures; reforms will be less likely to be embraced by citizens if they are seen as imposed from the outside.

So Europe and the US will need to embrace flexibility, giving ample latitude to their Arab partners to determine the right steps and strategies to achieve the objective of democratization.

Moreover, the US and Europe need to be careful not to overspend in the region.

Excessive aid could easily lead to further corruption, and, in the case of state-tostate aid, reinforce the role of a state that is already far too dominant in the local economy.36

36

The Arab Uprising

7. Keep realistic expectations about the impact of conditionality, and define appropriate benchmarks for each country: While conditionality was always theoretically a part of aid to the Middle East and North Africa, the US and the EU have tried to reinvigorate that aim by creating a stronger correlation between funding and progress in political reform—such as the “more for more” methodology of the revised ENP. Yet the trans-Atlantic partners need to keep realistic expectations about the likely impact of conditionality. Such an approach will be hard to sell in countries that have recently undergone regime change and popular empowerment.37 Furthermore, the amount of money offered is unlikely to create enough leverage on its own to push stillauthoritarian governments towards meaningful change, and withholding money could create an opportunity for other countries—such as China or Saudi Arabia—with very different priorities than Washington and Brussels to step in and provide support.38 Thus, the EU and US need to prioritize their efforts, focusing on a narrower set of benchmarks and trying to use their influence at important junctures, rather than as a continuing effort.39 From that perspective, both partners can work closely to define, through negotiations, specific and tailored benchmarks with each country receiving aid. In the case of transitional states such as Libya, Egypt and Tunisia, these benchmarks would center mostly on building and expanding their civil societies, including strengthening the press, guaranteeing an independent judiciary and setting parameters for civilian-military relations.

For monarchies such as Morocco, Jordan and Kuwait, the objectives should be more modest at first, concentrating on limiting the power of the ruler and creating a larger political space for opposition groups.40

8. Remain on the “right side of history” and pursue a strategy of outreach with all components of civil society, including groups hostile to the West: The EU and the US can induce meaningful change in the Arab world by focusing on a bottom-up approach, targeting and building civil society, in complement to the method that underlines institutional reforms. By consistently siding and working with protesters and other forces pushing for democratization, Europe and the US can help to foster goodwill among Arabs throughout the region, even if that means occasional tension with allied governments. Such a stance will also help the West better anticipate long-term trends in the region, rather than simply react to developments.41 US public diplomacy efforts to cultivate underserved communities in Europe are a great and inexpensive model for a successful outreach strategy towards civil society in the Arab world;42 as well as a good counterpoint for the EU, which has too often favored liberal local groups at the expense of actors such as the Islamist parties.43 By building networks and contacts outside of the traditional elites, by making sure not to pick winners and losers in electoral processes, by tracking future movers and shakers, the US and Europe will develop a fuller picture of the countries they are monitoring. Such outreach will also help present a more nuanced picture of the West among the Arab world, especially if the State Department continues to invite civil society leaders to the US as part of its International Visitor Leadership Program. Finally, at the grassroots level, the US and Europe can have a meaningful impact by concentrating on providing training and expertise on community organizing, electioneering, organizing parties and political campaigns.

9. Ensure that Europe learns from US partnerships with civil society and use of social media in the Arab world: The US government has worked hand in hand with the private sector—including companies like Howcast, Google, Facebook and YouTube—to promote democracy and build ties with civil society movements in the Middle East and North Africa. It has also developed websites such as movements.org, which links civil society groups across the Arab world with each other and enable them to create and share documents such as Creating Grassroots Movements for Change: A Field Manual and How to Bypass Internet Censorship. The EU can learn from the American expertise and best practices by focusing on digitization, using social media and technology as engagement tools, and creating partnerships with the private sector in order to improve its outreach with civil society groups and build up networks connecting young leaders in the Arab world.44

10. Protect telecommunication tools from the specter of repression and censorship: If the Arab uprising confirmed the role that communications and social media can play in promoting reform, it also showed the wide efforts of repressive governments to neutralize these same communication tools. The EU and the US need to develop policies to counteract autocratic regimes’ censorship. That could include providing firm and uncompromising support to telecommunications operators when faced with pressures to turn off the Internet and mobile phone networks (as happened in Egypt); developing contingency technical plans in situations when governments do actually switch off networks; and enforcing strict regulation of repressive use of technology, as well as dual-use technologies.45

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37

MEMO ON

COUNTERTERRORISM AND HOMELAND SECURITY The State of Play The US and Europe have the largest and most open trade, travel and finance arteries in the world. In an age when permeable borders can lead to security gaps, the two Atlantic powers must reconcile the inherent policy tension between economic openness and internal security. The US-European partnership on homeland security in the post-Lisbon Treaty era has been labor-intensive but constructive. Three areas have defined US cooperation with Europe on counterterrorism since 2009: 1) the philosophy behind the policy approach; 2) travel and cargo-screening policy; and 3) intelligence-sharing. Each area will require sustained attention in the next administration.

While the US and Europe have converged in their threat perceptions since 9/11, the EU and a majority of its member states still perceive terrorism through the lens of law enforcement rather than national security. As a result, the policy tools that have evolved—the common definition of terrorism, the introduction of the European Arrest Warrant and legal measures to freeze terrorists’ financial assets—focus primarily on law enforcement. The Obama administration’s early semi-shift away from the “war on terror” model has been welcomed in Europe. The administration has turned to considering more broadbased economic and political conditions while narrowing acute military operations on Al Qaeda. Criticism of the Guantanamo Bay detention facility has consequently become more muted.

Criticism of the increased use of drones is the exception—but even here, the preemptive US effort to demonstrate that they are a tool rather than a fundamental shift in approach has yielded positive results.

38

Counterterrorism and Homeland Security

In an age when permeable borders can lead to security gaps, the two Atlantic powers must reconcile the inherent policy tension between economic openness and internal security.

US travel and cargo shipment policy has tightened considerably in recent years as the administration implements the recommendations of the 9/11 Commission Act. The law tightened requirements for the Visa Waiver Program (VWP) and introduced the Transportation Security Administration (TSA)’s 100 percent cargo screening of inbound international flights.1 It also led to the creation of the Electronic System for Travel Authorization (ESTA) in 2009 and the subsequent travel-promotion fee. And the installation of body scanners by the US and international partners following the 2009 Christmas Day underwear bomb attempt has accelerated.

The US vetted Europe-wide cargo screening standards with the EU’s transport authority, DG MOVE, and in June 2012 both sides signed a mutualrecognition agreement on cargoscreening standards.2 EU officials and citizens have raised concerns about other policies, such as the implementation of body scanners, VWP, and ESTA. But calls for investigating whether ESTA should be labeled “visa light” and potential retaliatory measures have subsided.

Intelligence-sharing-agreement negotiations have been the centerpiece of US-EU counterterrorism cooperation since 2009. This will continue in 2013.

The EU has had jurisdiction over a number of data-sharing accords.3 Two in particular—the Terrorist Finance Tracking Program (TFTP), also known as the SWIFT Agreement, and the Passenger

Name Records (PNR) Agreement—have drawn much attention recently amid contention between the two blocs over balancing security and privacy, the scope and duration of data retention and legal recourse. Since the Lisbon Treaty granted the European Parliament veto power over international agreements in 2009, arduous but ultimately successful negotiations have led to guarantees that US authorities analyzing and storing data about EU citizens complied with EU law.

The US-EU Data Protection Agreement, an umbrella accord under negotiation and meant to apply to all transAtlantic terrorism and other crime, aims to address this primary area of disagreement. The agreement could expedite negotiations on future transAtlantic accords governing personal data transfers by setting a framework for privacy that dislodges the issue. It could recast the culture of data transfer and with implications for other areas, such as cybersecurity and intellectual property rights (IPR). A data-protection agreement should be a top priority for the new administration.

In more operational areas related to terrorism and transnational crime, information-sharing continues at a bilateral level between the US and EU member states. Efforts to integrate cooperation across member states on counterterrorism, including via the EU Counterterrorism Coordinator and Europol, still face challenges. Member states remain distrustful of these

centralized authorities and have resisted granting them additional powers or access to the most sensitive information.

Such fragmented jurisdiction should remain a source of concern for the US.

European Perspectives While Europeans noticed a marked improvement in cooperation on counterterrorism in the Obama administration’s first term, cognitive dissonance still exists between the US, the EU and some member states. This tension is at least partially due to US behavior toward Europe; at times the

US has been perceived as either acting unilaterally (e.g., the imposition of ESTA and its associated fee) or seeking out the path of least resistance, sometimes negotiating with the European Commission and sometimes with the member states, ultimately causing tensions between the two. This has been the case with the VWP negotiations, and the Obama administration considered a similar strategy for the PNR negotiations. But this piecemeal approach is deeply resented in Brussels, as the 27-member bloc struggles to achieve a unified position on justice and

While Europeans noticed a marked improvement in cooperation on counterterrorism in the Obama administration’s first term, cognitive dissonance still exists between the US, the EU and some member states.

THE STRUCTURE OF THE TRANS-ATLANTIC TRAVEL ECONOMY

The trans-Atlantic travel market has strong seasonal fluctuations. In 2011, the number of travelers to the US from Europe ranged from about 600,000 in January to about 1.3 million at its peak in July, a difference of 700,000 people. In travel from the US to Europe, the picture is even more pronounced.

The sector is also somewhat vulnerable to exogenous shocks based on both

Travel between the US and EU (2007-2012) 1,700,000 1,500,000 Number of Passengers

The liberalized US-European travel market is at once an economic boon to the trans-Atlantic economy and a potential gap in US homeland security policy. To understand sustained US efforts to create a travel market that is both open and secure, it is important to examine the scope of this economic relationship. Total travel-related output of the international travel industry in the US was $1.9 trillion dollars in 2011.

The US enjoys a net sectoral trade surplus in travel of $42.8 billion, most of which comes from Europe. The industry includes 14.4 million jobs, which while at least partly international in nature, are primarily in small and mediumsized enterprises (SMEs).4 Former US Commerce Secretary Gary Locke has stated that SMEs make up “80 percent of the travel and tourism industry.”

The promotion of international travel and tourism dovetails with the Obama administration’s focus on job creation through SME growth.

1,300,000 1,100,000 900,000 700,000 500,000 300,000

Jan - Dec 2007

Jan - Dec 2008

US Travelers to the EU

Jan - Dec 2009

Jan - Dec 2010

Jan - Dec Jan - May 2011 2012

European Travelers to the US

Source: ITA, Office of Travel and Tourism Industries

economic downturn and political risk.

For instance, the zenith of the financial crisis at the collapse of Lehman Brothers in September 2008 was accompanied by a precipitous drop in the number of international travelers to the US.5 The Oct. 3, 2010, State Department travel alert warning of a potential terrorist attack in the UK, France or Germany prompted 19 percent of travelers to cancel their travel plans and 52 percent to reconsider travel to Europe according to one survey.6 The effect of the economic downturn was a precipitous drop in travelers from major European countries in 2009, with some recovery in 2010 and 2011.

However, recovery has not occurred in all major European markets, as seen in the 16 percent drop in British travelers to the US since 2008. These numbers bely an even more dramatic drop in total spending by European visitors during their time in the US. Since 2008, British spending has declined by 27 percent and German spending by 3 percent.

While French travel and spending hit record highs in 2011, its ranking as a top international spender has dropped after decreasing 14 percent in 2009 and 1 percent in 2010.7 In total, travel-related spending from European countries has fallen by $6.29 billion since 2008.8

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home affairs (JHA), particularly in the European Parliament and DG JUST, the Department of Justice’s counterpart in the European Commission.

Brussels has traditionally questioned the blending of CIA (intelligence) and JSOC (military) activities in US counterterrorism policy.

The EU counterterrorism coordinator, among others, believes the American method creates “de facto accountability gaps” over which congressional intelligence and defense committees lack proper oversight. For the EU, issues such as the status of Guantanamo and increased use of drone strikes raise questions about US respect for constitutional and international law. Brussels wants to see Guantanamo close, but Europeans’ opinion is divided over unmanned drone attacks. In any case, neither issue will seriously affect the US-EU relationship in the near future. The UK already has armed drones in Afghanistan, and Italy will have surveillance drones there beginning in 2013. France also has plans to use military drones for reconnaissance and attack missions.

European political leaders, including German Chancellor Angela Merkel, French President François Hollande, and EU foreign-policy chief Catherine Ashton, have not publicly criticized the practice of targeted killings.

Positions on travel policies, including those concerning the VWP and body scanners, remain patchy across the EU. But Brussels’ role in this area is growing.

Extraordinary rendition and secret detention of terrorist suspects are additional areas in which significant European opposition to US counterterrorism practices has arisen.

The EU outlined in February 2012 how military detentions could have a negative impact on international cooperation. But US operational policy in this area is bilateral. Some member states, including Germany and the UK,

40

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have held parliamentary inquiries about US government malfeasance but have failed, from the EU’s perspective, to be rigorous enough.10 Other member states have not formally addressed rendition and detention. The European Parliament has passed a non-binding resolution to reopen member state investigations into secret CIA renditions in several Central European countries.11 On intelligence sharing, bilateral relationships remain critical and member states want to maintain that.

The UK is extremely comfortable with its open intelligence sharing relationship with the US. While the British have a special position with certain opt-outs on EU decisions in the realm of freedom, security and justice—a position that could be complicated by the block JHA opt-out announcement by the British Home Office12—they can opt into agreements, as they did in March 2012 with the US-EU PNR agreement.13 In fact, the UK had its own PNR system in place and shared information exclusively with the US. London also led the effort to create the EU’s PNR directive. German intelligence also cooperates closely with the CIA, the FBI, and the US military.

But after an incident in which a German intelligence tip led to the killing of German-citizen Islamists in US drone attacks in Waziristan, Pakistan has raised the issue domestically and compelled Berlin to establish limits on sharing information on German citizens.

Positions on travel policies, including those concerning the VWP and body scanners, remain patchy across the EU. But Brussels’ role in this area is growing.

The EU called for and approved a common European position on body scanners,14 but member states have been given the leeway to decide to use the technology or not and some, including Spain, Italy, and France, have wavered or refrained from doing so due to privacy concerns.

Others, including the Netherlands and the UK, have been among the first to implement it: The Dutch were the first to embrace the technology since the 2009 underwear bomber departed for the US from Amsterdam’s Schiphol airport.

Finally, there is a deep sense in the EU that its privacy and data protection safeguards are superior to those in the US. EU Justice Commissioner Viviane Reding has stated that Washington should catch up to the “gold standard” being set by Brussels.15 The EU has its own data-protection system, currently under reform through proposals that came from the commission and are working their way through parliament.

Recommendations for 2013 These heavy, sometimes frustrating negotiations have placed cooperation on a sounder footing for 2013 and beyond; they have allowed the US to work with the EU as a meaningful partner and could serve as a model for US-European relations in other policy areas. Given the high stakes for the safety and rights of citizens on both sides of the Atlantic, the expression of trust between the US and Europe in this area has been impressive. The primary responsibility of the next administration will be to guarantee successful implementation of recent agreements while simultaneously building on broader initiatives like VWP reform and the comprehensive Data Protection and Privacy Agreement.

1. Monitor implementation of new agreements: In its first term, the Obama administration initiated significant changes in data sharing and screening relationship between the US and Europe. Implementation of these agreements across member states should be monitored with the utmost care. Hiccups in implementing the agreements will be followed closely by local media, especially in areas involving US officials from agencies such as Customs and Border Protection (CBP) and TSA. These could lead to high-profile hearings and possible backlash in national parliaments and the European Parliament in particular. PNR data exchange and no-fly enforcement must strictly adhere to the terms of the agreement for flights to and from the US. Incidents such as the recent case of a Cuba-bound flight from Spain could put

these delicately negotiated agreements under renewed scrutiny.16 At the same time, the US should also remain cognizant of patchwork implementation across member states and be willing to raise these concerns both nationally and in Brussels.

2. Understand institutional limitations, particularly regarding independent legislatures: Both sides need to recognize that administration negotiators are not the only decision makers. Legislators have an important, often underappreciated, role. The EU has called for the US to repeal section 1021 of the National Defense Authorization Act (NDAA) and end indefinite detention of terrorist suspects.17 It would also reopen the Privacy Act to give European citizens judicial redress regarding their personal data.18 But these efforts would require congressional revision, which is unlikely given their low priority for US constituents and Washington’s legislative gridlock. Likewise, the EU’s institutional structure grants the European Parliament an important voice in international agreements, and it is prepared to speak up. Concerns about the US ignoring civil liberties or privacy concerns, and its tendency to dictate trans-Atlantic counterterrorism policy, resonate loudly in the European Parliament. a) Pursue VWP reform early in 2013: The administration should seek areas in which progress with Congress can be made. On VWP, the Obama administration should promote a retooling of the program so that it is at once more secure and practical. The Polish remember the president’s pledge to reform the VWP system to allow for Poland’s admission, made at his first joint press conference with President Bronisław Kamorowski in December 2010 and renewed during Obama’s visit to Poland in 2011. A bipartisan, bicameral group of legislators introduced legislation in 2011 that would facilitate a path to VWP for the remaining four EU “outs” (Poland, Bulgaria, Romania and Cyprus) in the coming years.19 Much of

the most vociferous Senate opposition to an expanded VWP dissolved in 2012.

Implementing a more sound VWP regime for Europe will have two constructive consequences: 1) it will fulfill the administration’s commitment to Poland that it would enter VWP during Obama’s term in office and 2) it will hasten the convergence of an EU-wide VWP regime that is consistent with the postLisbon mandate to introduce uniform visa policies.

3. Promote forward-looking forums for discussion: Forums such as the High-Level Contact Group (HLCG) on private and data protection are important for perpetuating talks on fundamental differences between systems. These forums are the most effective vehicle to achieve agreement on methods that satisfy concerns on both sides of the ocean. To strengthen US-EU ties, the Department of Homeland Security (DHS) and the Department of Justice on the one hand and the JHA Council, DG HOME, and DG Just on the other could aim for more exchanges between officials. Greater interlocutor links between the National Counterterrorism Center (NCTC) and SitCen, the FBI and Europol, the Department of Justice and Eurojust, DG MOVE and the TSA are also recommended.20 These working-level relationships help generate trust that leads to cooperation. Mutual recognition of certifications and standards in areas such as cargo security, a most efficient policy tool for both sides, is a product of frequent operational meetings of bilateral working-level forums. They can be venues for talks on frontier topics such as civilian usage of repatriated unmanned aerial vehicles (UAVs).

Moreover, the EU is negotiating an intraEU TFTP agreement, an intra-EU PNR agreement, Europol, and Eurojust in 2013 and will reform its data-protection regime in 2014. These could affect the US approach to agreements with Europe.

The forums would guarantee consistency in rapidly evolving legal frameworks in the US and the EU.

4. Pursue the widest possible agreement on data protection and privacy with mutual recognition at the core: The umbrella US-EU Data Protection and Privacy Agreement under negotiation is an ambitious undertaking that could remove one of the most difficult barriers to US-EU cooperation on counterterrorism. The precedents set in this agreement will have spillover effects on the commercial sector.

Both sides should ensure that an agreement is as robust as possible. The EU has the legal authority to negotiate [data protection and privacy] with third countries, and the Commission and the European Parliament have seized this mandate. European data transferred to a third country must be met by “an adequate level of protection” by those countries. This gives the Commission authority to decide whether the US appropriately handles EU citizens’ personal data.

The EU has the legal authority to negotiate [data protection and privacy] with third countries, and the Commission and the European Parliament have seized this mandate.

The HLCG has determined that major differences on redress principles exist.21 Some European leaders have insisted that all Europeans have the right to redress before an impartial and independent tribunal regardless of their nationality or place of residence, as the EU Data Protection Directive maintains.

The US Privacy Act, however, limits judicial redress to US citizens and legal permanent residents.22 Even though the DHS privacy office offered administrative redress to non-US persons in 2009,23 key members of the European Parliament prefer their citizens to have access to judicial review.24 The alternative to amending the Privacy Act is ensuring

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that US treatment of the redress issue is “nondiscriminatory”, perhaps by using mechanisms in the privacy offices of DHS or the Department of State to create assurance elements. Some in Brussels would like to see a retroactive application of the umbrella agreement to past US-EU data-sharing agreements.

But this would require renegotiating numerous treaties, which would be laborintensive and potentially damaging to the transatlantic relationship.

The US’s emphasis on mutual recognition is a step in the right direction. It would provide an understanding that both sides value privacy and civil liberties, albeit with different sets of rules. This should be complemented by recourse assurances and, in particular, US-based institutions that could build trust with Europeans on implementation of these

assurances, perhaps including a highprofile role for the Privacy and Civil Liberties Board. Mutual recognition with assurances for both sides will ease future negotiations. It will also go a long way toward assuaging European concerns about US counterterrorism policies perceived as unilateral.

5. Support European JHA integration efforts:

EU-level engagement on all these issues would improve internal coordination and make Brussels a more effective negotiator with the US on other, similar issues that require urgent evaluation and coordination. In many areas, such as using Advanced Imaging Technology (AIT) at airports, the US should pursue policy objectives at the EU level and enforcement objectives at the member state level.

While there is no EU-wide exclusive implementation competence in homeland-security policies, the EU sets many standards for member states that make security policies more effective.

More consistent EU-wide competencies facilitated agreements on TFTP and PNR despite fragmented member state positions.25

Moreover, the US should encourage the EU’s Counterterrorism Coordinator, DG HOME, and Europol to centralize information sharing among member states. The links between these bodies and the US could be enhanced by a USEuropol partnership, making Europol a more valuable resource than it has been thus far.

The ESTA Life Cycle Validity of ESTA application data (actively on the books)

42

Two years

Information inactive but maintained in DHS database

One year

Archived for retrieval for law enforcement, national security, or investigatory purposes

12 years26

Counterterrorism and Homeland Security

Status of EU Countries in the US Visa Waiver Program (VWP) and Schengen EU Member State

Status of VWP Participation

Member of the Schengen Area

Austria

VWP participant, effective 1991

Member, effective Dec. 1, 1997

Belgium

VWP participant, effective 1991

Member, effective March 26, 1995

Bulgaria

2005 roadmap country

Pending

Cyprus

2005 roadmap country

Pending

VWP participant, effective Nov. 17, 2008

Member, effective Dec. 21, 2007

VWP participant, effective 1991

Member, effective March 25, 2001

Estonia

VWP participant, effective Nov. 17, 2008

Member, effective Dec. 21, 2007

Finland

VWP participant, effective 1991

Member, effective March 25, 2001

France

VWP participant, effective Oct. 1989

Member, effective March 26, 1995

Germany

VWP participant, effective Oct. 1989

Member, effective March 26, 1995

Greece

VWP participant, effective April 5, 2010

Member, effective March 26, 2000

Hungary

VWP participant, effective Nov. 17, 2008

Member, effective Dec. 21, 2007

Ireland

VWP participant, effective April 1, 1995

Not a member

VWP participant, effective Oct. 1989

Member, effective Oct. 26, 1997

Latvia

VWP participant, effective Nov. 17, 2008

Member, effective Dec. 21, 2007

Lithuania

VWP participant, effective Nov. 17, 2008

Member, effective Dec. 21, 2007

VWP participant, effective 1991

Member, effective March 26, 1995

VWP participant, effective Dec. 30, 2008

Member, effective Dec. 21, 2007

VWP participant, effective Oct. 1989

Member, effective March 26, 1995

2005 roadmap country

Member, effective Dec. 21, 2007

Portugal

VWP participant, effective Aug. 9, 1999

Member, effective March 26, 1995

Romania

2005 roadmap country

Pending

Slovakia

VWP participant, effective Nov. 17, 2008

Member, effective Dec. 21, 2007

Slovenia

VWP participant, effective Sept. 30, 1997

Member, effective Dec. 21, 2007

VWP participant, effective 1991

Member, effective March 26 1995

Sweden

VWP participant, effective Oct. 1989

Member, effective March 25, 2001

United Kingdom

VWP participant, effective July 1988

Not a member

Czech Republic Denmark

Italy

Luxembourg Malta Netherlands Poland

Spain

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MEMO ON

CYBER SECURITY The State of Play The US and Europe have seen a dramatic increase in cyber incidents in the past two years. An analysis of such events since 2006 shows that of 97 known major incidents, 44 were aimed at US-based targets and 28 at European targets, including the highly publicized attacks in Estonia in 2007 and Georgia in 2008.1 Even excluding unreported incidents, the danger these subversive activities pose to the most essential arteries of economic activity in the US and Europe is clear. The US intelligence community believes cyber espionage represents a larger threat than traditional espionage.2 And these threats are increasing.

Two trends are changing the threat landscape. First, with greater reliance on smartphones and other handheld devices, networks are increasingly going mobile. Storage and access points are growing via new network resources such as cloud computing. Second, service and control functions, including commercial payments ranging from large money transfers to small retail purchases with swipe cards, are migrating online. These commercial transactions are not solely monetary; they are also tied to transfers of highly sensitive personal identity data. In both cases, cultural shifts are driving individual online connectivity and eroding barriers of state-based jurisdiction, increasing vulnerabilities for nefarious actors to exploit.

When the Internet was created, the initial concern was openness, not security. Its guiding philosophy has long been one of open access developed by a “self-regulated, non-governmental community”.3 As a result of this openness, two factors color the cyber security approach of early-adoptive digital societies such as the US and Europe:

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Cyber Security

The central tension of cyber security policy is the inherent tradeoff between regulating a secure and safe cyber space while creating an online environment that fosters optimal economic and political outcomes for citizens across the globe.

1) offensive capabilities dominate defensive capabilities; and 2) the primary determinant of vulnerability is the degree of technological integration. For these reasons, a Maginot Line against cyber incidents will not work.4 Cyber security policy cuts across a tangle of interlocking policy areas, from defense to homeland security, from criminal justice to commercial policy and civil liberties. Protection of military assets, cyber cover in combat operations and offensive military capabilities are the areas to which the US government and EU member states have devoted the greatest resources.

Protecting areas of the private sector that are fully dependent on the Internet, hardening the defense and resilience of critical infrastructure, and combating cyber crime and e-espionage, all directly linked to economic security and law enforcement, is also important. At the same time, maintaining a free and open global Internet that is a conduit for civil discourse and organization has become a central tenet of democracy. The central tension of cyber security policy is the inherent trade-off between regulating a secure and safe cyber space while creating an online environment that fosters optimal economic and political outcomes for citizens across the globe.

The Government Accountability Office (GAO) has sounded the alarm about US cyber policy’s failure to keep pace with the threats.5 The lack of needed

skills across government agencies and departments is magnified by the need to create a coherent international policy on cyber security. The inability of the 112th Congress to pass comprehensive cyber security legislation means that the administration will have to set policy on these issues within the limits of current law, domestic and international.

Exploration of collective cyber defense with Europe will require merging disparate security concepts into an overarching cyber policy encompassing trade, offensive capabilities, resilience, data protection and the creation of international norms.6 US and European threat assessments are similar, and Europe represents a natural cyber security partner for the US, bilaterally and internationally.

Indeed, there is a robust trans-Atlantic linkage for much of the financial sector as well as for many Internet services and social networks that are repositories for highly sensitive personal information.

US military bases in Europe are also reliant on the continent’s infrastructure.

But the dense net of interconnectivity facilitated by the size and openness of European states, the formation of their single market and their early adoption of Internet technology all make Europe a uniquely challenging cyber security landscape.

Some analysts have advocated for a clear division of labor on European cyber security policy between a pooled

offensive capability centered at NATO and protection of civilian assets centered at the EU at the continental level. But unbundling these aspects could open gaps in policy. Given that, the US’s longterm approach to Europe as a partner on cyber security should direct as much cooperation as possible on civilian-based policy and Internet governance to the EU level, limiting NATO to narrowly defined defense-based cooperation. Pressure on the European Commission to establish minimum standards on incident resilience and response, including the need for all states to have contingency plans for cyber incidents and laws on cyber crime has slowly been increasing.

The EU has an important role to play, particularly in citizen- and industrycentered policies of defensive resilience, raising of awareness and public-private partnership development.

The US’s long-term approach to Europe as a partner on cyber security should direct as much cooperation as possible on civilian-based policy and Internet governance to the EU level, limiting NATO to narrowly defined defensebased cooperation.

The NATO and US-EU Lisbon summits in 2010 were the first to place cyber security policy at the heart of the transAtlantic relationship. NATO’s 2010 Strategic Concept called on the alliance to create a cyber security policy and an action plan for implementation, which was later adopted at the 2012 Chicago summit.7 Work since then has aimed to improve centralization of NATO-asset cyber protection, hardening networks in member states and refining policy and training. Meanwhile, US and EU leaders established a joint working group on cyber security with a mandate in four policy areas: 1) incident management; 2) public-private partnerships; 3) awareness raising; and 4) cyber crime.8 After a rocky start, the US-EU working group has delivered some promising outcomes. A

Cyber Preparedness Stress Tests Large European states

Small European states

Higher degree of preparedness (four stars or greater)

France, Germany, Spain, UK

Denmark, Estonia, Finland, Netherlands, Sweden

Lower degree of preparedness (fewer than four stars)

Italy, Poland, Romania

Austria

Source: Cyber Security: The Vexed Question of Global Rules, SDA and McAfee, January 2012. EU member states not included in the stress test survey: Belgium, Bulgaria, Cyprus, Czech Republic, Greece, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Malta, Portugal, Slovakia, Slovenia

November 2011 joint exercise, entitled “Cyber Atlantic”, ran scenarios dealing with critical infrastructure compromises and cyber theft.9 The issue of market access and source-code disclosure requirements in third countries, an area in which the EU could prove to be a potent partner, was added to the agenda.10 And cooperation in 2012 on botnets and smart grid protection demonstrate further momentum.

European Perspectives Although there has been a marked increase in discussion on cyber security at the European level, European policy for handling incidents is patchy.

Differences among states range from some of the most sophisticated resilience and offensive capabilities to some of the weakest in the developed world. Cyber security is a market-based issue, and as its single market develops, the EU has rightfully sought to increase its role in policymaking.

Especially in states that are lagging, the EU has an important role to play in setting and standardizing cyber policy. An uneven legal framework is complicated by varying conceptions of privacy and data protection. As with policy questions related to homeland security and online intellectual property rights, cyber security concerns will be a political focal point at the national and EU levels in coming years. The US should monitor these developments closely.

The EU can be a confusing cyber security partner for the US. The European External Action Service (EEAS) is still playing catch-up in its efforts to establish

a coherent external face for European cyber policy. The EEAS has a role as an external actor, but the EU’s Common Foreign and Security Policy (CFSP) has yet to promulgate an international profile for EU Internet governance.

Furthermore, protection of EU institutions is still seen as underdeveloped; a European Parliament report bluntly stated that EU institutions are “poorly protected”.11 A CERT for EU institutions was established in 2011 after a battery of high-profile breaches to critical institutions including the EEAS, the EP and the EU’s emissions trading system.

The long-term spying on the European Council by a Chinese cyber syndicate linked to the Chinese People’s Liberation Army is the most recent high-profile revelation that reaffirms the vulnerability of Brussels-based institutions.

In terms of ambition and development of offensive capability, the UK hews most closely to the US. London’s 2010 national security strategy recognized cyber security as one of four top threats.12 Cyber security is also one of only two areas in the UK national budget that was not cut amid recent austerity measures. Highly sophisticated exercises between the public and private sectors, in particular the financial-services industry, have created solid national crisis-management networks. London has taken a leading role in crafting international norms.

France’s cyber security policy, meanwhile, benefits from a highly centralized, statedriven culture. The state’s central position in security and economic life and its regulatory propensity foster a high degree

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45

of trust in its role as the guardian of cyber space. That, combined with a desire to project strength in cyber space, makes France a formidable global cyber power.

ANSSI, its cyber security hub, doubled its staff in 2011.13

Establishing credible, internationally recognizable definitions for gradations of attack and potential targets such as critical infrastructure will facilitate responses that can be coordinated within and across governments.

Germany is a different type of cyber security partner from the UK or France but is attuned to the position of many European states, particularly those in Central Europe. Berlin does not view cyber security through the prism of national security as much as the UK or France do, though it opened a Cyber Defense Center in June 2011.14 Germany’s historical, cohesive policymaking between industry and government makes coordination on cyber security easier for the Germans than for others, including the US. Germany also boasts a deep reserve of savvy hacker communities such as the Chaos Computer Club (CCC), which has played a role in identifying and mitigating past threats. But Germany maintains strict legal barriers on cooperation between intelligence-sharing and limited tolerance for domestic surveillance on the general public. Even the use of cyber weapons is viewed with great ambivalence.15 For this reason, cyber and information security plays a larger role in domestic politics in Germany than in the UK or France and will constrain Berlin’s ability to monitor nefarious online activity and coordinate preventive action with the private sector.

Beyond this, a la carte coalitions of European states can provide the US with important international allies and resources.

Some states, such as the Netherlands and Sweden, have identified Internet freedom as an international priority.16

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Cyber Security

Recommendations for 2013 US and European cooperation on cyber security and e-governance more broadly will inevitably intensify in 2013 as both sides of the Atlantic look to build domestic legislation to govern this space. Simultaneous international consultation, especially with each other, will provide the US and Europe a sound basis for developing cyber security norms and provide both with a blueprint on how to engage other actors bilaterally and multilaterally.

1. Coordinate with Europe bilaterally and multilaterally on language for cyber security policy: Terminology often poses the first problem for lawmakers in the US and Europe. This is not a theoretical exercise. Establishing credible, internationally recognizable definitions for gradations of attack and potential targets such as critical infrastructure will facilitate responses that can be coordinated both within and across governments. It will also start to provide a firmer basis for the application of domestic and international law as well as treaty obligation. a) Devise commonly understood categorizations for cyber attack in conflict vs. cyber attack as conflict: The UN report on cyber security in 2010 led to the establishment of some key applications of international law in the case that cyber offensives are coupled with kinetic attack and states generally recognize the application of the Law of Armed Conflict to cyber attacks in war situations. The US and Europe agree that armed assault can be committed through cyber means.

Ambiguity remains, however, regarding the threshold at which a cyber attack, by itself, reaches a degree to which it could be regarded as an act of military aggression. Although the 2010 NATO Strategic Concept hinted that Article IV consultations and even Article V invocation could apply in the event of a massive cyber attack, the US and Europe maintain a strategic ambiguity regarding the threshold of its invocation.17 While this ambiguity has its advantages, it can diminish the potential for credible deterrence and prevent the development

of rational behavior among states, addressing salient policy questions such as state culpability and proportional response with potential adversaries. b) Consult on how to commonly define critical infrastructure and pursue a nuanced approach to its regulation: The US’s 2003 National Security Strategy to Secure Cyberspace includes a robust definition of critical infrastructure.18 However, in some policy areas, the US definition of when such infrastructure has been breached is under debate.

Europe is engaging in a similar debate.

The EU’s current definition of critical infrastructure is limited to the energy and transport sectors.19 Some have criticized this narrow definition, calling for the inclusion of telecommunication and ISP infrastructure, financial services, health, food and water supply systems, and nuclear research and industry.20 Cyber space has become a public good, one susceptible to government regulation and protection. Although 80 to 90 percent of the critical infrastructure in the US and Europe is in private hands, governments still must assess if compliance with their standards can remain voluntary or mandatory. This is not the same for all sectors, as incentives differ. For example, most analysts agree that the financial sector is the best prepared to protect against cyber incidents, as it is subject to a high volume of low-level phishing, crime and fraud daily. Given the synchronous development of standards in this area on both sides of the Atlantic, the US and EU should hold joint discussions with trans-Atlantic industry on common definitions of critical infrastructure and interoperable standards, with provisions and time frames for both mandatory and voluntary protection and disclosure of breaches.

Finally, liability and insurance should play a greater role in a frank assessment of risk in the trans-Atlantic dialogue on public-private partnerships. The threat of cyber attack and associated losses must be accurately priced. Discussions should consider to what degree—in sectors like electricity and water—the risk is

socialized, i.e. there is a tacit expectation that the government will cover the cost of the fallout from an attack.

best practices, including clearly defined benchmarks, could lower liability risk and create an active two-way partnership.

in particular, has been slow to accept its role in defending against state-based or -sponsored attacks.

c) Inculcate a multi-stakeholder governance approach: The governance role once dominated by state actors is shared by the private sector online.

A multi-stakeholder environment makes treaty enforcement difficult. The decentralized governance of the Internet means that governments are but one actor at the table determining the law of the cyber frontier.

2. Maintain an open, inclusive and user-responsible environment for shaping governance norms:

While attribution continues to be problematic, especially given the circuitous nature of botnets used to deploy attacks, monitoring of ISPs and packet sniffing is standard in many countries from whose territory cyber incidents. In Russia, for instance, SORM legislation already gives the state sweeping authority to monitor online activity. When an attack occurs, a state’s relation to it usually falls into one of three broad categories: ignorance or a permissive environment, an abetting environment or active participation.21

The culture of shared governance between US and EU authorities on the one hand and the ecosystem of industry, NGOs and hacker communities on the other should be improved, particularly at the multilateral level. While the US and most European member states have well-worn consultation with the private sector, universities and NGOs relevant to cyber security policy, NATO and the EU, in particular, remain weak in these areas.

Many of the major private-sector entities susceptible to attack are essentially trans-Atlantic in nature. And while the US and Europe will never develop the kind of quasi-paramilitary relationship with their hacker communities that some authoritarian governments have, it is important for both to be aware of the human capital that could be of use in a cyber attack. In particular, the US should encourage the EU to take stock at both the national and European levels and reach out to these informal networks for their own defense and resilience purposes.

The setting and enforcing of high “cyber hygiene” standards is paramount. Since due diligence and avoiding individual human error play such an important role in protecting against attack, efforts to raise threat awareness must penetrate to the most grassroots level of businesses and local communities.

The US and EU should work together with the private sector across the board to negotiate appropriate intermediary roles for industry, focusing on disclosure and data protection. These discussions should be nuanced and recognize differences across sectors. A mix of compulsory and voluntary protocols and

The playing field of Internet governance is shifting rapidly. Europe is increasingly recognizing that maintaining a multistakeholder model for Internet governance centered at the Internet Corporation for Assigned Names and Numbers (ICANN) will yield more open, transparent and democratic outcomes than alternative models centered at the UN. Since its inception, ICANN has been a custodian of IP numbers, the DNA of the Web. It has continued to be a respectable steward, taking advantage of the relatively open and entrenched legal tradition in the US and well-established norms for its activity. The US and Europe should promote an active role by ICANN’s Government Advisory Council (GAC) and look for ways to get vested state, civil society and private-sector actors involved.

The US should continue to make the case that an outcome-centric model for domain issuance remains best served

by ICANN’s current governance and oversight structure. That said, the US and Europe should jointly bolster the consultative role of the GAC and the UN’s Internet Governance Forum (IGF), especially to include non-state actors from underrepresented and repressive states as well as looking to the normative shaping role that the Council of Europe, OECD and OSCE can play.

3. Recast the discussion on attribution: The US and Europe should shift away from attribution at the granular level and instead reframe informal international discussions about states’ responsibility for massive cyber attacks conducted by non-state actors originating from their sovereign territory. The challenges of attribution make attempts at establishing the source of an attack of little value when shaping policy. The EU,

Together the US and Europe should open up discussions on norms centered around gradations of responsibility. States that allow their cyber territory to be used as a safe haven for malicious activities (cyber crime, espionage or attack) should be held accountable in the same way they are expected to prevent physical territory from serving as a safe haven for terrorists.22 Given the available regulatory and law enforcement instruments with which to police it, cyber space cannot be seen as a vacuum for which states are not responsible.

At the same time, the US and Europe should make clear that they will not accept the pretense of action against cyber attackers and criminals as a justification for crackdowns on Internet freedom.23 As is often the case with anti-terrorism policy, regimes in China and Russia, among others, have tried to equate criminal activity— online property theft, disruption and destruction—with political speech and government opposition.

4. Encourage the EU and member states to develop cohesive cyber policy coordination and clear international representation: In recent years, responsibility for US policy in the three areas outlined here has become more clearly defined. Classical cyber offensive and military defensive capability is centered at the Pentagon.

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47

Critical infrastructure protection, government asset protection and privatesector cooperation is centered at the Department of Homeland Security and the FBI. Internet freedom policy is managed primarily by the State Department, along with players from the White House and Commerce Department.

Europe should develop a similar division of labor for resilience, critical infrastructure protection and defense.

NATO’s role should be narrowly targeted to deal with military assets, and its response should be limited to cyber incidents that would trigger collective defense. This narrow scope of action should be clearly defined. For other issues, the EU and member states should work on developing “one number to call” in Europe, a cyber coordinator that can reach across the Directorate General for Home Affairs, DG Connect, the European Network and Information Security (ENISA), EEAS and Europol portfolios as well as coordinate with member states and the private sector. The need for a cyber coordinator with proper resources and reach is more urgent in Europe even

than in the US. Overlapping jurisdictions between member states in the EU’s single market create an environment wrought with moral hazard.

Despite its remote location on the Greek island of Crete and its somewhat difficult history in defining its role, there is a key role for ENISA in cyber coordination.

It has been instrumental in technical harmonization across Europe, including supporting the establishment of national Cyber Emergency Response Teams (CERTs), a sort of cyber-FEMA to protect and restore resilience to compromised systems, the establishment of national and European cyber strategies, technical assistance for responsible agencies, and the creation of protocols for policy setting, disclosure and information sharing.24 5. Build on the work of the US-EU Cyber Security Working Group in 2013: The working group has become a solid basis for trans-Atlantic cooperation.

Changes in the policy architecture in

Europe—the comprehensive Strategy for European Cyber security in February 2013 and launch of the European Cybercrime Center—as well as potential US legislation on cyber security in 2013 will make the first year of President Obama’s second term a key time to expand on recent confidence-building and to coordinate international action. a) Add a pillar to the working group on carrots and sticks in cyber security: The US and Europe should realize the full advantage of the carrots and sticks they possess, including three foreign policy tools that the EU can effectively wield internationally: sanctions, trade agreements and market access, and development assistance.

In some cases, such as Egypt and Syria in 2011-12, US- and Europemade technology was used to surveil government opponents. The US and EU should work jointly to identify dualuse technologies that can be deployed in the service of censorship, repression and hostile intelligence-gathering.

They should include frank discussions of the sale to autocratic countries of

Intersections in Cyber Security Policy

Offensive Cyber Capability Development Military Asset Protection in Operations Intelligence Gathering & State Espionage Trade in Dual-Use Online Monitoring & Censorship Technology

Offensive & Defensive Military Capability (National Security)

48

Cyber Security

Corporate E-espionage

Online Fraud & Identity Theft

Botnet & DDoS Incidents IPR Protection Critical Infrastruction Protection (CIP) CERT Networking & Crisis Management Internet Governance

Domain Name System Governance

Online Awareness Raising & Cyber-hygiene Privacy & Data Protection Policy Child Pornography

Cyber-Crime (Commercial & Economic)

Internet Freedom (Human Rights & Democracy)

such technology, such as deep packet inspection (DPI) technology and Internetfilter products, which could result in tech companies playing a complicit role in regimes’ repression.

Supply chain cooperation should also be accelerated. The US-EU Working Group has added common-approach market access requirements for source code in third countries to its list of priorities. Both market access and procurement requirements are strong policy instruments that the US and EU share. International trade agreements and procurement contracts should reflect security concerns and the integrity of source code. The US and Europe should remain vigilant as they upgrade their telecommunications infrastructure. Their concerns include foreign companies, in particular from China, as well as transAtlantic companies with significant manufacturing activity in China.

Finally, the US and EU should coordinate on how to include cyber norms in development dialogues with third countries. Development and assistance should include agreements with donor countries on proper state behavior in cyberspace and accompanying provisions governing criminal behavior. The US and EU should issue a joint statement condemning states that act as safe havens for criminal cyber syndicates. b) Bolster cybercrime cooperation and combat against e-espionage as a frontline in overall cyber security: Lowgrade advanced persistent threats—in particular e-espionage and cyber crime— represent the most immediate threat to both the US and Europe. Purveyors of cyber crimes such as theft and fraud aim to guarantee that their effect on a firm is just painless enough to preclude preventive or retaliatory action. Some sectors have significant disincentives to report attacks to authorities.

The OECD states that criminals are now offering the usage of their botnet/ zombie computer networks as a service to be weaponized for political purposes.25 Organized crime syndicates and their sophisticated cyber capabilities not only

offer states and terrorist organizations ready-made infrastructure for attacks, but also give them grounds for plausible deniability if an attack is detected. Cyber crime is a potential breeding ground for future military operatives. These syndicates act as a virtual university of cyber warfare, one of the reasons that the UK government identified cyber crime specifically as one of the top four threats to national security.26 The US and Europe should work to break this co-dependency between cyber crime and more ominous national security threats. The EU will establish a European Cybercrime Center within Europol in 2013 aimed at coordinating intelligence sharing and law enforcement within the EU.27 As previously mentioned, member states have often been hesitant to disclose sensitive information to Europol. The US cannot be expected to move further in information sharing to European institutions than member states themselves. That said, the US can provide helpful practices and training to Europol personnel to accelerate the development of a robust informationsharing culture within the EU, that builds confidence in the agency’s confidentiality without compromising US information.

If stronger intra-European cooperation is achieved, the US will be able to use Europol as its favored interlocutor on cyber crime investigations.

The US and EU should also work together to create compatible disclosure requirements for companies on both side of the Atlantic. The US has been working on national standards for breach notification. This conversation with transAtlantic industry should be broadened to a transnational discussion, involving the European Commission, the European Parliament and national authorities.

Some legislative proposals have included requirements that if a breach may have revealed personal data, companies must disclose to consumers and clients as well as the Federal Trade Commission.28 Proponents of this legislation contend that it will incentivize private entities to boost protection of their Internet infrastructure with the aim of

preemptively avoiding the civil liability that could result from disclosure of such a breach. Any attempt to create a robust role for the private sector as enforcers of copyright and intellectual property laws online will be met with decisive resistance in Europe, particularly in states such as Germany.

Finally, the US should also press individual EU states to complete the ratification process of the council of Europe’s 2001 Budapest Convention on Cybercrime, the only binding international accord dealing with cyber issues. The Council of Europe’s Global Project on Cybercrime is a great export platform for promoting exchange of experience, assistance in accession to the Budapest convention and assessment of potential national cybercrime legislation. The US should become an active participant in the GPC’s Octopus Conferences.29 c) Understand the centrality of data protection: Air traffic and transportation, financial services companies, communications and major Internet companies with large reservoirs of personal information are all sectors at risk. The US and Europe share concerns about protection and retention of data and the size of the net that can be cast to gather information on those suspected of criminal acts or threats to national security. This has been a central policy concern in the transAtlantic counterterrorism relationship since at least 2007.30 The same is true in cybersecurity policy. President Obama threatened to veto any bill that did not contain “strong privacy and civil liberties protections.”31 The US should consistently demonstrate its safeguards on these issues to the Europeans. Both sides should aim to address cyber security exchange in the Comprehensive Data Protection Agreement, currently under negotiation.32 d) Take advantage of the full joint USEU cyber exercise: A full-scale exercise with private-sector involvement will be an important step to test government’s and industry’s ability to coordinate in the event of a large-scale cyber incident.

The Europeans say the joint Cyber

Cyber Security

49

e) Increase the trans-Atlantic dimension of cyber security-related R&D: Joint research and development cooperation for online security technology is ripe for greater trans-Atlantic cooperation. The US should encourage the EU to prioritize the training of cyber security professionals and R&D as a priority area in its Horizon 2020, a $80 billion R&D package currently under negotiation in the EU.33 Moreover, the US and EU should look at potential opportunities to collaborate on cyber-

Atlantic exercise in November 2011 was enormously constructive for assessing the legal and technical gaps in crisis management in the EU and its member states. The two sides are planning a fullscale cyber exercise in 2014. Such joint exercises should continue, along with private-sector initiatives and outreach to “white hat� hackers who can provide expertise in a crisis. Joint exercises and simulations are key to developing these networks.

related R&D, including cooperation with American universities and research centers. In particular, the US and EU should work together to guarantee that the legal requirements in Horizon 2020 do not render cooperation on cyber security research impossible.

Where they stand: EU member states and cybersecurity policy as of early 2012 National CERT? (year established)

Membership in European government CERT group?

Cybersecurity strategy? (year established)

Participation in 2011 Cyber Atlantic exercise?

Yes (2008)

Yes

Yes (2012)

Yes (Planner Team)

Yes (2009)

No

No

Yes (Planner Team)

(year established)

Yes (2008)

No

No

N/A

Membership in European government CERT group?

Yes (2010)

No

No

N/A

Yes (2008)

No

Yes (2011)

N/A

Yes (2009)

Yes

No

N/A

Ratification of Budapest Convention?

State Ratification of Budapest Convention?

National CERT?

Cybersecurity strategy?

No

No

(year established)

50

Participation in 2011 Cyber Atlantic exercise?

Yes

Yes (2006)

No

Yes (2008)

Yes (Planner Team)

Finland

Yes

Yes (2002)

Yes

Yes (2008)

Yes (Planner Team)

France

Yes

Yes (1999)

Yes

Yes (2011)

Yes (Planner Team)

Germany

Yes

Yes (2001)

Yes

Yes (2011)

N/A

Greece

No

Yes (2008-09)

No

No

N/A

Hungary

Yes

Yes (2005)

Yes

No

Yes (Planner Team)

Ireland

No

No

No

No

N/A

Italy

Yes

Yes (2004)

No

No

Yes (Planner Team)

Latvia

Yes

Yes (2006)

No

No

N/A

Lithuania

Yes

Yes (2006)

No

Yes (2011)

N/A

Luxembourg

No

Yes (2008)

No

Yes (2011)

N/A

Malta

Yes

Yes (2002)

No

No

N/A

Netherlands

Yes

Yes (2002)

Yes

Yes (2011)

Yes (Planner Team)

Poland

No

Yes (2008)

No

No

N/A

Portugal

Yes

Yes (2002)

No

No

N/A

Romania

Yes

Yes (2011)

No

No

Yes (Planner Team)

Slovakia

Yes

Yes (2009)

No

Yes (2008)

N/A

Slovenia

Yes

Yes (1994)

No

No

N/A

Spain

Yes

Yes (2006)

Yes

No

Yes (Planner Team)

Sweden

No

Yes (2003)

Yes

No

Yes (Planner Team)

United Kingdom

Yes

Yes (2007)

Yes

Yes (2011)

Yes (Planner Team)

Sources: Council of Europe, ENISA, European Government CERTs Group

MEMO ON

ENERGY & CLIMATE CHANGE The State of Play The US and Europe face the mutual challenge of how to achieve sustainable energy security that effectively addresses climate change amid severe financial and fiscal constraints.

First, the path for further trans-Atlantic climate and energy cooperation beyond 2012 will depend on how both partners achieve economic progress in the near term. Both the US and Europe are struggling to fight high unemployment rates (particularly among youth), slow or receding economic growth and exploding national budget deficits. As a result, addressing climate change and transforming energy systems risk falling to the bottom of the political agenda on both sides of the Atlantic.

While climate action may be seen as costly, several European countries— predominantly Germany and Denmark— have embarked on low-carbon pathways for their energy infrastructure. They are on track to generate 95 percent of their electricity from renewable sources by mid-century. The economic effects of these policies have been significant for both countries. Germany’s renewable energy development has created almost 400,000 new jobs, outstripping the number of people employed in the traditional automobile sector. Germany’s early investment in a low-carbon energy transition and measures to stimulate it are thus being rewarded, as the country is developing into an innovation hub for clean technology.

Another aspect that will be decisive in forming trans-Atlantic relations on energy and climate is that the US will likely become a major net energy exporter while Europe remains highly dependent on energy imports from Russia and the

While climate action may be seen as costly, several European countries—predominantly Germany and Denmark—have embarked on low-carbon pathways for their energy infrastructure.

Middle East.1 The next decade will see decisive developments for global energy markets, as the US is set to overtake Saudi Arabia and Russia as the world’s biggest oil producer by 2017.2 This will have immediate implications. A similar trend is expected with natural gas, as US production is projected to grow by more than a third in the coming years, from 20.2 trillion cubic feet in 2008 to 27.9 trillion cubic feet by 2035.3 Europe is seeing the opposite: Its domestic natural gas production will fall from 10.6 trillion to 8.3 trillion cubic feet in the same period.4 The US natural gas boom is predominantly due to the rise in shale gas production, which is set to grow fivefold, from 2.2 trillion cubic feet in 2008 to 13.6 trillion cubic feet in 2035 as a majority of the gas is extracted from the Marcellus (55 percent of national total), Haynesville (10 percent) and Barnett (six percent) shale formations.5 Although Europe has vast proven shale gas reserves as well, it lags behind the US in development of this resource. Shale gas exploration varies greatly among the individual member states, as each country’s energy mix remains subject to national policy.

In many European countries, drilling has been subject to much controversy over the past few years, mainly due to local environmental concerns about the process of hydraulic fracturing, or fracking, that extracts the gas. France, with one of the largest proven shale gas reserves in the EU, is enacting a strict moratorium against exploration, and

countries such as Bulgaria and Romania are following suit. Poland, on the other hand, where exploration is eventually expected to confirm the largest shale gas reserves in Europe, views shale gas as an opportunity to significantly reduce its reliance on Russian imports, though there is no commercial shale exploration yet underway in Poland.6 So far, the European Union has refrained from taking a clear position on the issue.

Europe’s natural gas consumption is expected to increase from 19.5 trillion cubic feet in 2008 to 23.2 trillion cubic feet in 2035, primarily as a result of increasing consumption in the electric power sector.7 There is a Europewide consensus that natural gas is an important component of any clean energy strategy, as it will help to decrease the continent’s greenhouse gas emissions either by replacing coal-fired electricity generation or as baseload capacity for the growing use of renewable sources such as wind and solar.8 This trend will most likely be reinforced by Germany’s recent decision, in the wake of Japan’s Fukushima nuclear accident, to phase out nuclear power by 2022.

There has been a concentrated push to build new gas pipelines from Central Asia and Russia.9 This is a divisive topic in Europe, where countries in the east remain concerned about overdependence on Russian exports.

The recently inaugurated Nord Stream pipeline has the capacity to transport two trillion cubic feet of gas from Russia

Energy & Climate Change

51

to Germany per year while bypassing Eastern European countries such as Poland and the Ukraine. Poland favors the controversial Nabucco pipeline, which would transport gas from Azerbaijan via Turkey to Central Europe. The other route, South Stream, would transport Russian gas to Western Europe by bypassing the Ukraine. Yet the two projects remain controversial and are still mostly in the planning stages, even though Russia just recently begun construction on South Stream to underline its export dominance. As the US continues to develop into a natural gas exporter of global dimension, however, the European gas market could potentially become a market for US gas. Europe is preparing itself for this trend, with new LNG terminals currently under construction in Poland, France, and Spain.

...the US will likely become a major net energy exporter while Europe remains highly dependent on energy imports from Russia and the Middle East.

The international climate negotiations got a renewed boost at the Durban talks in December 2011. The EU was commonly perceived as having taken the leadership role by gathering the vast majority of members of the G77—the loose coalition of developing countries working together to enhance their bargaining position— to push for a new attempt at reaching an international deal, even willing to go it alone without targets for other major emitters. The Durban Platform laid out a relatively ambitious negotiation path leading up to an international treaty by 2015 that would go into effect by 2020.

All major emitters—including China, India, the US and Europe—have agreed to develop nationally appropriate mitigation commitments based on the concept of “common but differentiated responsibilities”.

However, most international climate analysts doubt that, in the current policy environment, targets could be ratified by all signatory states before 2020. Should a climate

52

Energy & Climate Change

US and EU Positions on Climate Change12 Science- and Knowledge-Based

US

EU

EU

No Climate & Clean Energy Policy

Strong Climate & Clean Energy Policy

US

Driven by Ideology & Interests

treaty fail to reach consensus in 2015, then the process would find itself at the same point it did after the stalled climate negotiations in Copenhagen in 2009. The immediate result would be that countries would be unwilling to sign up to any legally binding targets in the future, and focus would turn to alternate methods of mitigating climate change, such as geo-engineering.

One of the main breakthroughs at the Durban Platform was the foundation of the Green Climate Fund (GCF), which will manage a budget of $100 billion per year after 2020. However, there has been insufficient discussion on how the GCF is to reach this target, with funding coming predominantly from US and European government and private donors.10 The GCF will have an impact on the way in which US and European aid agencies harmonize their respective lowcarbon and climate strategies towards developing countries, and, in turn, an impact on their aid effectiveness.

European Perspectives The US can expect Europe to examine the effectiveness of its lead-by-example strategy over the next few years.11 Europe will have to prove to itself that a low-carbon path is economical, and even more important will be the way in which successes or failures are communicated abroad.

How does Europe view US climate and energy policy? After the federal energy and climate package failed in Congress in 2010, European leaders became somewhat sensitive to the difficulty in pushing a national, nonpartisan energy policy in the US. Congress is increasingly regarded as a body disinclined to act on climate change and clean energy issues.

The EU sees itself as the climate leader that, if necessary, is still willing to go it alone—as events in Durban and other events in 2012 have shown.

Climate change is consistently perceived differently between the US and Europe. Yet its consequences for both partners will be significant. While many Americans still debate whether climate change is man-made, Europe has increasingly moved past this stage, accepting the science on the issue and moving ahead to take comprehensive action. As Congress remains divided, the US has instead taken considerable executive action, including doubling fuel efficiency standards by 2035 and imposing greenhouse gas standards for new electricity sources that essentially prohibit building new coal-fired power plants without carbon capture and sequestration (CCS) measures. However, in the US and Europe alike, individual states differ on how far policies should go.

On the whole, climate and energy policies lie at the heart of Europe’s domestic political realm. Scientists have said that it will be necessary to reduce global greenhouse gas emissions by 80–95 percent below 2005 levels by midcentury in order to keep global average temperatures from increasing more than 2 degrees Celsius. In 2007, the EU set ambitious climate and energy goals—the so-called 20-20-20 targets— to be reached collectively by all 27 member states by 2020. These targets included an emissions reduction by 20 percent below 1990 levels, a 20 percent reduction in primary energy use achieved through increased efficiency13 and a 20 percent renewables target for final energy consumption.

The EU is now debating whether to raise the greenhouse gas reduction target from 20 to 30 percent below 1990 levels by 2020 as part of its Low-Carbon Economy Roadmap and the Energy Roadmap 2050 consultations, which are supposed to lay the foundation for cutting greenhouse gas emissions by up to 95 percent by 2050. However, such a Europe-wide goal needs to be approved by all member states—and Poland, which gets 95 percent of its electricity production from coal-fired power plants, has continually vetoed such a target.

The EU institutions have no power over national energy mixes. Increasingly, other climate-skeptic Eastern European member states are supporting Poland’s position, bringing into focus an internal division on the energy and climate issue that will most likely continue into the near future. Many of these countries, under Poland’s leadership, are unlikely to accept any legally binding targets beyond 2020, while progressive member states such as Germany, Denmark and the UK fear for Europe’s international climate leadership at the next crucial negotiations process post 2015.

Climate and energy issues lie at the heart of European foreign policy as well.

The EU prides itself on its low-carbon pathway and perceives itself to be an international leader on the issue, aiming to continue to sell the message abroad.

EU officials would like to see a climate multilateralism tied to a set timetable and based on a top-down approach.

But because of the current difficulty in pushing the international community in this direction, the EU is increasingly willing to set its own standards or policy mechanisms that could affect other countries, especially the US, as Europe’s largest trading partner. Two such regulations stand out and could potentially lead to the world’s first carbon trade war.14

The EU prides itself on its low-carbon pathway and perceives itself to be an international leader on the issue, aiming to continue to sell the message abroad.

EU officials would like to see a climate multilateralism tied to a set timetable and based on a top-down approach.

The first policy instrument is the European Emissions Trading Scheme (EU ETS), a market instrument by which Europe aims to decrease its own greenhouse gas emissions. From 2014 onwards, all air travel in and out of the EU will be regulated under this scheme. Originally, foreign air travel was to be included starting in April 2013.

However, due to intense pressure from the US, China and India, who threatened to engage in retaliatory measures, EU Climate Commissioner Connie Hedegaard delayed it by one year.

Meanwhile, European officials are keen to stress that the suspension of this measure is subject to progress within the International Civil Aviation Organization (ICAO) and would be reintroduced in late 2013 if no measures by ICAO had been taken. It is expected that the issue will remain high on the trans-Atlantic policy agenda throughout 2013, even after President Obama signed a bill that

exempts US airlines from participating in the EU ETS. The other standard likely to have an impact on trans-Atlantic climate relations is the EU Fuel Quality Directive. This regulation requires member states to reduce the greenhouse gas intensity of fuels used in road vehicles by 6 percent by 2020. In order to measure progress towards this target, the Commission is proposing measures that take into account the full lifecycle of greenhouse gas emissions as well as reporting regulations for fuel suppliers. As such, the EU is in the process of penalizing oil from US shale formations and the Canadian tar sands due to its high lifecycle emissions. The Commission is set to come up with a new proposal in early 2013, which will be based on an impact assessment of this directive. For example, the EU proposal is to label oil extracted from tar sands as causing 22 percent more greenhouse emissions than conventional oil. This would make it unattractive for Europe’s fuel suppliers, who have had to abide by rules to cut their products’ impact on global warming. Within the EU, greenhouse gas emissions from road transport account to around 26 percent of overall greenhouse emissions, so the consequences on the climate could be considerable.15

Recommendations for 2013 There are some prospects for cooperation when it comes to restructuring the US and Europe’s energy and transportation systems to fight climate change.

However, the trans-Atlantic partners must navigate a difficult landscape with significant differences in their respective policy settings. One such obstacle would be the contrast between the US’s fossil energy abundance and Europe’s fossil energy scarcity. Another obstacle would be the differing pace at which the two partners are addressing the climate change issue. Overall, there is need to rethink how trans-Atlantic cooperation on energy and climate issues could become more strategic. This entails not only defining the right messages to be transmitted to the EU, but also

Energy & Climate Change

53

identifying the agents most qualified to transmit those messages. A robust transAtlantic energy and climate dialogue will send strong signals to third countries, such as China and India.

1. Reinvigorate the US-EU Energy Council and re-define topics for discussion in the Working Groups to cover issues of strategic importance to both trans-Atlantic partners: The council was launched in 2009 as an official dialogue forum to “promote new and ongoing cooperation on energy security and markets, energy policy, energy technology research.”16 Yet since its launch, it has suffered from a growing indifference among US and European leaders alike. In light of the pressing issues outlined above, the US and the EU need a forum that will have high policy significance to both parties.

The US should use a reinvigorating of the council to send positive signals to Europe and to reassert its relevance in international climate and clean energy politics. This can be done in several ways: a) Include shale gas in the council’s energy security working group: One area of discussion should focus on the environmental and economic impact assessment of shale gas extraction, as this is an area of significant interest to both parties with an impact on the increasingly globalized gas market.

International energy experts are predicting a sharp increase in natural gas production through mid-century. Yet the current discussion around shale gas on both sides of the Atlantic remains highly divergent. b) Use the same working group to encourage Europe to build LNG import facilities for US gas imports: Northern and Mediterranean Europe are preparing for the import of liquefied natural gas (LNG) from abroad, and diversifying import routes with new LNG terminals currently under construction in Poland, France and Spain. As Europe has the potential to become a reliable importer of US LNG, it is in the US’s interest that European import terminals are

54

Energy & Climate Change

developed accordingly (and US export terminals likewise). In addition, the US should recognize that the successful conclusion of a free trade agreement (FTA) with the EU will have substantial strategic implications for EU energy security. Currently, gas exports are subject to a tedious interagency review process that makes export to Europe prohibitive. An FTA would expedite the LNG export permitting process at the US Department of Energy and build a stronger energy trade relationship across the Atlantic. c) Use the council as an instrument to strengthen competitiveness: The multiplier effect of developing common US-EU technology standards for renewable energy or energy efficiency is widely recognized. Even though this was the initial objective of the US-EU Energy Council, little progress has been made.

One way to start this process would be to coordinate and develop a technology road map. This would have a positive impact on trans-Atlantic trade of energyefficient appliances and batteries, as well as renewable energy technologies.

Particularly with regard to appliances, a trans-Atlantic labeling system could boost the competitiveness of both European and American products.

Both sides should also agree that only the most efficient products should be eligible for public procurement. d) Add a high-level strategy task force to the council structure: This task force would be able to quickly consider issues with potential severe and immediate effect on trans-Atlantic relations, such as the issue of including US airlines under a EU-ETS or the impact of the EU’s Fuel Directive on shale oil imports from the US. The task force should consist of the US secretaries of state and energy and the US trade representative, as well as the EU commissioners of energy, environment, climate action and trade.

2. Eliminate tariffs and other barriers on trans-Atlantic trade of environmental goods and services to promote exports, create jobs and advance green growth and sustainable development: Most such tariffs are low already (around 4 percent), and eliminating them would have immediate positive consequences for trans-Atlantic investment flows and market access, jobs and company profits. This could be done prior to the approval of a TAFTA by establishing an Environmental Goods List, similar to the one established under the AsiaPacific Economic Cooperation (APEC) in September 2012. Such a list should include core environmental products, such as renewable and clean energies, wastewater treatment technologies, air pollution control technologies, and environmental monitoring and assessment equipment.

3. Work closely with the EU on means of creating greater transparency and accountability in extractive industries: In recent years, through intergovernmental projects such as the Extractive Industries Transparency Initiative (EITI), both the US and EU have been active in reforming the models of corporate behavior of oil, gas and mining industries at home and abroad, particularly in countries with weak institutions.

In the US, the Dodd-Frank overhaul of the financial regulatory system contains a number of transformative measures that will deeply affect US economic diplomacy. One of its most innovative policy provisions was the Cardin-Lugar amendment (Section 1504), a provision aimed at making payments made by extractive industries to governments abroad and at home more transparent.

Together, the EU and US laws have the potential to transform the way business is done in extractive industries and help emancipate developing countries from the so-called “resource curse”.

Section 1504 could fundamentally transform the way that US-listed oil, gas and mining companies operate in third countries. The regulation stipulates that all such companies publicly listed on the New York Stock Exchange will be required to annually disclose to the Securities and Exchange Commission (SEC) all payments made to national, state and local governments on a project-by-project basis. A modular database of these disclosures will serve civil society groups who monitor the flow of money to governments in an effort to dry up the dark financial pools that fund endemic corruption in many resource-rich countries. The promulgation of rules by the SEC in August 2012 sets the stage for a new business culture between extractive industries and payments made to public institutions and officials. The European Commission, for its part, has introduced amendments to the Accounting Directive and Transparency Directive that would replicate the provisions of the CardinLugar amendment. It is currently under negotiation among the Commission, the European Parliament and member states, and the Parliament is expected to vote on it in early 2013.

4. Highlight the US’s domestic climate/energy successes to a European audience by engaging in a more active trans-Atlantic public diplomacy: European policymakers and citizens tend to neglect the US’s progress on energy issues and view it as an obstacle to international climate negotiations.

Often this view is fostered by one-sided media coverage in Europe. There is a strong need for reshaping the narrative by developing media engagement plans; Europe has already done this, and the US should follow suit. An annual transAtlantic media dialogue could invite key European economic reporters to the US to report on some of the positive climate/ energy stories happening at the state and local levels. Potential focus areas include the greening of the US military, the recent EPA greenhouse gas limits for new power plants, or the greenhouse gas emissions system in California. US embassies throughout Europe should follow up regularly with journalists and network with European media outlets.

Embassy staff should also acquire better knowledge of some of the progressive energy/climate trends now seen in the US.

5. Agree on new visa provisions that allow US businesses to attract and recruit graduates with advanced degrees in science, technology, engineering and mathematics (STEM): As progress on climate and energy policy is always subject to technological advancement, there is also an increased need for further trans-Atlantic cooperation in climate science and energy technology research. The US should actively strengthen the cooperation on these issues between US and European research universities, labs and companies by making it easier for recent European graduates from US institutions to gain US work permits and visas that last longer than the one year allotted to F-1 visa holders. A socalled “start-up visa” should be made available to foreign energy/climate entrepreneurs to allow for the necessary planning security.17

The US and EU should work together to guarantee that the implementation of Section 1504 and the revised Transparency and Accounting Directives creates a robust regime that allows payment tracking and has complementary project definitions, payment thresholds and exemptions so that the laws are not subject to regulatory arbitrage. They should consult on disclosure practices to make sure that they are interoperable across the Atlantic and can be swiftly implemented and enforced in the coming years.

Together, the EU and US laws have the potential to transform the way business is done in extractive industries and help emancipate developing countries from the so-called “resource curse”.

Energy & Climate Change

55

MEMO ON

TURKEY The State of Play Turkey finds itself in a paradoxical position. It has been a loyal ally of the West and has been a member of NATO since 1952—but its population widely distrusts the US and Europe. Despite knocking on the EU’s door for decades, it does not recognize the Republic of Cyprus’s ethnic-Greek government and maintains uneasy relations with Greece, France and other EU members. Despite its ambitions to become an influential and mediating power in the Middle East, Turkey appears at odds with an increasing number of its neighbors.

These difficulties, however, have not prevented Turkey from being regarded as a key partner by the US and many European countries.

The paradox extends to Turkey’s domestic situation. After the “lost decade” of the 1990s and the February 2001 banking crisis, the government initiated, with the help of a large IMF program, key reforms in 2002: restructuring the commercial banks, providing autonomy to the central bank and removing restrictions on foreign direct investment. These reforms, endorsed by the Justice and Development Party (AKP) and Prime Minister Recep Tayyip Erdogan when they came to power in 2003, provided a dramatic boost to the Turkish economy.1 Yet the recent downturn—GDP only grew at an annual rate of 2.9 percent in the second quarter of this year as opposed to more than 8 percent in the previous two years—has spotlighted Turkey’s longterm structural weaknesses.2 Though it decreased this year, the current account deficit remains high, making the country vulnerable to fluctuations in foreign investment, high inflation, and a struggling education system not suited for an advanced economy.3 Furthermore, future economic prospects are tied

56

Turkey

The stalled process of Turkish political reform has also caused apprehension in the US and Europe. to geopolitical developments beyond Turkey’s control.

The stalled process of Turkish political reform has also caused apprehension in the US and Europe. Driven by its desire to join the EU, the AKP made a promising start by reducing the powers of the 1991 anti-terror laws, abolishing restrictions on the freedom of speech and the press, and taking steps to end the costly armed struggle with Kurdish insurgents.

Aside from secret negotiations with the Kurdistan Workers’ Party (PKK) in 2005, Erdogan initiated conciliatory gestures such as relaxing the ban on Kurdish language-education and launching a state-run Kurdish-language TV station.4 However, prospects for democratic reforms, human rights and a peaceful solution to the Kurdish question have suffered important setbacks. The conflict with the PKK has escalated in recent months, and journalists, writers and Kurdish political activists have been jailed and prosecuted, undermining civil liberties.5 Relations between the AKP and the military are another major source of concern. Initially, the Turkish public welcomed Erdogan’s successful efforts to curtail the military’s power. It also initially supported two legal proceedings against senior officers accused of plotting to overthrow the government— the Sledgehammer trials and the case against the alleged ultranationalist clandestine organization Ergenekon. Yet many ordinary Turks have now become disenchanted by these proceedings.

In particular, the vast and continuous expansion of the Ergenekon case to include many government opponents has strengthened the impression that

the AKP is more interested in settling scores than achieving justice, and the dragging on of these cases has only added to the climate of uncertainty.6 Turkey’s foreign policy under the AKP has followed a very similar pattern to its domestic policy: an initial burst of promising changes followed by reversals.

The first series of domestic reforms enacted by Erdogan’s government helped to finally open membership negotiations with the EU in 2005, 18 years after Turkey had officially applied for membership. But the negotiations soon stalled, a victim of the slowdown in Turkey’s democratization process and the stubborn opposition of certain member states (especially Greece, Cyprus, Germany, France and Austria). The talks’ current prospects are hardly cause for optimism: in July 2012, Turkey froze its ties with the rotating EU presidency held by Cyprus, and only 13 of the 35 negotiation chapters have been opened so far.7 The latest annual EU report on Turkey’s candidacy had a scathing tone, highlighting “recurring infringements” of liberty, security, fair trial rights and freedom of expression.8 Turkey has also sought to translate its rising economic power into greater diplomatic influence in the Middle East, underpinned by the goal of ensuring “zero problems with its neighbors”.

However, for all its good intentions, Turkey’s more assertive approach has failed to avoid disputes with its Middle Eastern neighbors—problems that in many cases could directly affect the US and Europe. Turkey’s longstanding policy partnership with Israel took a

Turkey’s Annual GNI Growth & Inflation Rate (2000-2011) 60 50

in percent

40 30 20 10 0 -10

and begin reforms. But relations between Damascus and Ankara soon plummeted as the war escalated.12 After August 2011, Turkey cut ties to Assad and began to provide aid to the opposition. In June 2012, Syria shot down a Turkish fighter jet, and both sides exchanged mortar fire along their border in October 2012, bringing them dangerously close to open war. Such a conflict would not be welcomed by a Turkish public opposed to intervention in Syria; it would be disastrous for the region, and could also draw in Europe and the US, considering Turkey’s NATO membership.13

European Perspectives 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Gross National Income Growth (annual)

Inflation, Consumer Prices (annual)

Source: World Bank

serious turn for the worse after the 2008–2009 Israeli-Gaza conflict and the May 2010 Israeli raid on an aid flotilla headed from Turkey for the Gaza Strip.

After the release of a UN report on the flotilla incident in September 2011, Turkey downgraded diplomatic ties with Israel and suspended military cooperation. Reconciliation would be a great diplomatic asset for Europe and the US, but remains blocked by Turkey’s demands for an apology from Israel, compensation for the victims of the raid, and an end to the Israeli blockade of Gaza.

Turkey’s attempted rapprochement with Iran presented another problem for the US and Europe. Under the AKP, Ankara took steps to patch up its historically tense relations with Tehran, significantly increasing bilateral trade (from $1.25 billion in 2002 to $16.05 billion in 2011).9 Even more controversial, Turkey’s attempts to mediate the ongoing Iranian nuclear crisis undermined the delicate global consensus that the US and Europe were trying to build on sanctions.

Along with Brazil, Turkey signed a deal in May 2010 to outsource Iran’s enriched uranium in exchange for fuel, and voted the following month against a new round of UN sanctions against Tehran.

This rapprochement has, however, lost momentum since 2011, dragged down by the countries’ differences over the Arab uprising, Turkish support for NATO’s missile defense and Syria.10 This could provide an opportunity for more meaningful collaboration between Turkey and the West insofar as managing the Iranian nuclear crisis.11

...for all its good intentions, Turkey’s more assertive approach has failed to avoid disputes with its Middle Eastern neighbors—problems that in many cases could directly affect the US and Europe.

Finally, the AKP had also tried in past years to mend fences with Syria, which had long opposed Turkey’s close ties with the West. Until 2008, Turkey attempted to mediate the conflict between Israel and Syria and, in the early stages of the Syrian civil war, maintained relations with Syrian President Bashar al-Assad, pleading with him to stop the violence

Europe’s relationship with Turkey remains complex and multi-faceted.

Individual EU members have over the past seven years sought to manage their bilateral relationships with Ankara while outlining a position on Turkey’s EU candidacy. The issue has deeply polarized the union, pitting firm supporters (Spain, Sweden and the UK among them) against stubborn opponents (particularly, as mentioned, France, Germany and Cyprus). Since the opening of negotiations in 2005, Ankara has had to address EU concerns on Turkey’s size and potential power within the union, the ongoing Cyprus issue, and the social and political ramifications of admitting the EU’s first predominantly Muslim country. Through all this, the Turkish government has experienced diverging relations with Europe’s power brokers.

Turkey has found a British government eager to expand on already warm relations. The UK has sought to deepen ties as part of a broader strategy aimed at fostering closer partnerships with emerging economic powers. In 2010, Turkey was the UK’s 22nd largest export market, while the UK was Turkey’s 12th largest source of imports.14 Bilateral trade averages £6.5 billion per year, a figure the British government aims to double by 2015.15 It has also pursued a number of bilateral initiatives aimed at improving economic cooperation, such as the UK-Turkey CEO Forum.16 Geopolitically, the UK views Turkey

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57

as a rising regional and international power whose influence would be good for Europe in general and Britain in particular. One of David Cameron’s first overseas trips as prime minister was to Ankara, where he signed a strategic partnership agreement with Erdogan outlining joint commitments on bilateral, regional and international issues.17 In 2011, Cameron and Erdogan also established the Tatli Dil forum, bringing together individuals from the political, business and academic sectors in both countries. Cameron has criticized the EU for the slow pace of accession negotiations.

While sidestepping broader concerns over governance and internal cohesion, Cameron has argued that Turkish membership in the EU would increase the union’s international influence and have profound economic, security and diplomatic benefits.18 Unlike the UK, France’s relations with Turkey have become frosty, if not hostile, over the last four years. This deterioration resulted in large part from the policies of former president Nicolas Sarkozy, who was staunchly opposed

to Turkish membership in the EU. He blocked the opening of five critical chapters of Turkey’s EU agenda at the European Council’s 2007 accession talks, a blockade that remains in place.

Domestically, Sarkozy angered Turkish officials with his enthusiastic support of a 2011 French parliamentary bill making it a crime to deny the 1915 Armenian genocide. In retaliation, Erdogan froze relations, recalling its ambassador and denying French airplanes access to Turkish airspace, including military planes bound for Afghanistan.19 The striking down of the genocide bill by the French Constitutional Court and the recent election of François Hollande as president helped lessen the tension between Ankara and Paris. Full diplomatic relations have been restored, and the Turkish government has expressed confidence that Hollande will lift French objections to EU membership and move forward on the blocked chapters. But Hollande has been coy on the subject, describing himself as “non-reluctant” to support Turkish membership if Ankara completed all of the necessary accession

criteria.20 At the same time, though, he strongly supported the genocide bill, and his warm relations with the Armenian community in France and his support for an amended law in light of the court’s decision raise doubts over whether Paris’s position towards Turkey will significantly improve in the coming years.

Turkey’s relationship with Germany remains the most complex among its bilateral ties on the European continent.

The countries have maintained unique political, economic and cultural relations for decades, and their economies are still deeply interdependent. German exports to Turkey have risen 400 percent over the last 10 years, amounting to $20.1 billion in 2011.21 Likewise, Germany has emerged as one of Turkey’s most important trading partners. The 50th anniversary celebration of Germany’s guest worker program in 2011 highlighted the unique cultural connection established by the more than 3 million Turkish immigrants and people of Turkish descent living in Germany.

Roadblocks on Turkey’s Path to EU Accession Chapter openings blocked by the Council

Eight: Free movement of goods; freedom to provide services; financial services; agriculture and rural development; fisheries; transport policies; customs union; external relations

Chapters opened for negotiations, but closure blocked by the Council

Twelve: Free movement of capital; company law; intellectual property law; information society and media; food safety; veterinary and phytosanitary; taxation; statistics; enterprise and industrial policy, transEuropean networks; environment; consumer and health protection; financial control

Chapter openings blocked by France

Five: Agriculture and rural development*; economic and monetary policy; regional policy; financial and budgetary provisions; institutions

Chapter openings blocked by Cyprus

Six: Free movement of workers; energy; judiciary and fundamental rights; justice, freedom and security; education and culture; foreign, security and defense policy

No movement Successfully completed chapters

Five: Public procurement, competition policy; social policy and employment; institutions; other issues One: science and research

*The agriculture and rural development chapter is also blocked by the EU Council Source: House of Commons Foreign Affairs Committee. (20 March, 2012). UK-Turkey Relations and Turkey’s Regional Role: Twelfth Report of Session 2010-2012.

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Turkey

Yet despite these close connections, the relationship between German Chancellor Angela Merkel and Erdogan is lukewarm at best. Erdogan has repeatedly criticized Berlin for poor treatment of the Turkish minority and angered German officials by calling for ethnic Turks to “integrate, but not assimilate” into German society.22 For her part, Merkel has continued to resist calls for Turkish membership in the EU, preferring a “privileged partnership” status for Ankara. The future of this position may hinge on next year’s national elections, as Germany’s Social Democratic Party (SPD) has been far more bullish than the CDU on EU membership for Turkey.

Ankara’s uneven relationship with Europe’s major players has naturally translated into equally complex ties with the EU. Beyond its large trade relationship, EU-Turkey engagements continue to revolve largely around the membership process. As of 2012, only one of the 35 chapters of the acquis communautaire has been successfully negotiated (science and technology).

Only 12 other chapters have been opened, and their closure and the opening of the remaining 21 chapters have been blocked by Cyprus, France, Germany and the European Council as a whole. Resolution of the Cyprus question remains a key precondition, but little movement has taken place since the failed 2004 peace plan led

by Kofi Annan. Cyprus has vetoed six chapters, while the Council has frozen an additional eight because Turkey refused to open its ports to Cypriot shipping as required by the EU-Turkey Customs Union agreement.23 Yet the lack of movement on EU membership has also raised alarms among Turkey’s supporters that the EU is “losing Turkey”, especially as its foreign policy becomes increasingly independent of Brussels and public support for membership declines.

During a bilateral visit to Berlin in October 2012, Erdogan went so far as to say that the EU would lose his country permanently if Turkey wasn’t made a member by 2023, the 100th anniversary of the Turkish state.24 Eleven EU foreign

ministers signed an op-ed in late 2011 calling for the EU to make a renewed push toward membership for Turkey.25 The European Commission has also sought to inject new momentum by pushing the “Positive Agenda”, a series of working groups that will seek to speed up Ankara’s compliance with the acquis on 8 chapters.26 While not replacing the accession process, the Positive Agenda is viewed as a complementary tool to increase Ankara’s ability to close chapters should objections by EU member states ever be lifted.

Relations between NATO and Turkey have remained stable, if ambiguous. The stalled EU membership negotiations and the Cyprus question stand in the way of a deeper NATO-EU strategic relationship and fuller implementation of the Berlin Plus Agreement. Nonetheless, Turkey for the most part has adopted a common line with the EU’s NATO members on key flashpoints, particularly missile defense and the ongoing Syrian conflict.

Ankara has sought alliance solidarity against potential attacks by Syrian forces, requesting the placement of Patriot missile batteries on its territory and considering invoking Article 5 if tensions with Damascus escalated any further. European NATO states have expressed solidarity with Turkey, with German Defense Minister Thomas de Maiziere suggesting that the deployment of Patriot missiles would be done “with German soldiers”.27 However, European capitals, particularly Berlin, still remain concerned over a potential TurkishSyria war that could engulf the alliance, and have quietly pressured Ankara to limit the size and scope of NATO military requests.28

Recommendations for 2013 As the situation in Syria continues to unravel and as post-revolutionary conditions in other states (particularly Egypt) remain unclear, Turkey will remain an important actor in the region and a key partner for the next U.S. administration.

Yet maximizing the benefits of this partnership will require a foreign policy strategy that addresses the complex and in many cases interconnected issues that hamper closer

Yet the lack of movement on EU membership has also raised alarms among Turkey’s supporters that the EU is “losing Turkey”, especially as its foreign policy becomes increasingly independent of Brussels and public support for membership declines. partnership with the US and greater acculturation with its European allies.

1. Encourage Turkey to renew efforts to solve the “Kurdish question”: The next US administration, and its European counterparts, should encourage the AKP government to continue down the path of inclusion and openness towards its Kurdish minority.

The Erdogan government initially broke from its predecessors by recognizing that the Kurdish question requires a political solution rather than a military one, and initiated a number of overtures towards the Kurdish community, including most recently the 2009 “Kurdish Opening”, which granted unofficial amnesty to a small number of PKK militants. Despite these small concessions, however, progress has mostly been fleeting. Public opposition led little weight to be thrown behind the Kurdish Opening, and the Syrian war has complicated the conflict, prompting Erdogan to largely abandon political options in favor of a military solution once again. This approach also raises concerns over Turkey’s hardwon democratic consolidations. The government has grown increasingly authoritarian as it attempts to deal with the problem, suppressing freedom of expression and jailing journalists covering Kurdish issues deemed offensive to the government.29 The US recognizes the PKK as a terrorist organization and should continue to provide military and intelligence assistance to Turkey as PKK attacks escalate. Nonetheless,

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59

CASE STUDY: TURKEY’S ENERGY ROLE: A PATH TOWARDS EU MEMBERSHIP? One of the major deciding factors in whether Turkey joins the EU may very well be its role as an emerging energy hub between East and West. While Turkey only produces about 1 billion billion cubic meters (bcm) of natural gas annually inside its borders, its strategic location between Europe, the Middle East, and the Caspian region means that it is within reach of nearly 70 percent of the world’s known oil and gas reserves. Such a favorable location leaves Turkey in a prime position to become a major player on world energy markets.

The Erdogan government has sought to leverage this favorable position and transform Turkey into a gas hub for Europe and the region. Turkey serves as a central transit point for two major gas pipelines (the Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzurum pipelines) with plans to serve as a key connection point for the long-planned Nabucco pipeline that would bring Caspian gas to Central and Eastern European states. In June 2012, Erdogan and Azerbaijani President Ilham Aliyev reached an agreement on the construction of the Trans-Anatolian Pipeline (TANAP), a 1,250-mile-long pipeline with the potential to transport between 30 and 60 bcm per year from Azerbaijan’s Shah Deniz II gas fields through Turkey and on to Europe beginning in 2018.

Turkey’s increasingly vital role in the energy market will have profound ramifications for the region. For Europe, the plans for TANAP represent a large step towards the long-sought after Southern Corridor pipeline that will help the EU lessen its dependence on Russian hydrocarbons. For Turkey, TANAP could provide the leverage needed to induce a change of approach by Brussels toward membership. A Turkish state firmly within the EU and in prime position to ensure Europe’s energy security may be too enticing for Brussels to ignore.

the US and Europe should encourage the AKP to renew efforts at integrating Kurdish citizens into Turkish society.

Greater cultural rights, bilingualism in education and more autonomy in local government are legitimate concerns that should be addressed. The government can take advantage of upcoming efforts to reform the constitution by assuring that Kurdish representatives, such as the Peace and Democracy Party (BDP), have an active role in the process. The US and EU should also emphasize the important benefits of a political solution of the Kurdish question. The release of Kurdish journalists and the relaxing of restrictions on freedom of expression would have a substantially positive impact on Turkey’s allies and the Kurdish community. These actions would go a long way towards undercutting support for the PKK’s violent tactics and would be seen as a positive gesture that could aid accession negotiations with the EU.

60

At a minimum, the next US administration should signal its strong support for negotiations and offer to consult on chapters where it has a distinct interest in seeing Turkish reforms, particularly the judiciary and fundamental rights chapter.

2. Promote confidence-building measures between Turkey and the Republic of Cyprus through natural-resource cooperation:

month EU presidency in January 2013 to jump-start dialogue between Cyprus and Turkey and promote confidence-building measures that can address some of the longstanding issues affecting the relationship. One potential area of cooperation, ironically, is an issue that over the past year has furthered animosity between both sides: oil and gas exploration in the eastern Mediterranean. Since September 2011, the rights to significant gas reserves discovered in the Aphrodite gas field off the southern coast of Cyprus have been disputed. While Nicosia argues that the gas field falls within its Exclusive Economic Zone (EEZ), Turkey has maintained that Nicosia cannot claim its own EEZ without a comprehensive settlement and without the involvement of the island’s Turkish Cypriots.30

Europe and the US should use the conclusion of Cyprus’s rotating six-

The abundant resources off its coast could bring considerable wealth to

Turkey

Cyprus but also pose major challenges.

Nicosia will find it difficult to provide gas to Europe cheaply and quickly without constructing pipelines that run through Turkish waters.31 Recent Turkish saberrattling, meanwhile, will likely scare off drilling companies.32 Given the distinct disadvantages both Ankara and Nicosia face in developing these resources, cooperation is the most feasible option.

The US and EU should therefore encourage all sides to work together towards a comprehensive solution that allows the Republic of Cyprus to build pipelines through Turkish waters in exchange for sharing a percentage of the income earned from the gas with its Turkish Cypriot neighbors.33 The OSCE could also play a role here, as it has in recent years developed and implemented economic and resource-based confidencebuilding programs in areas of ethnic conflict, such as Georgia-South Ossetia/

US-Turkey Bilateral Trade & Investment Relationship 16,000

A Turkish state that is stronger economically, politically and democratically would aid Ankara’s desire to be a regional player and serve US interests in the region more broadly.

14,000 12,000 in millions of USD

Abkhazia and Moldova-Transnistria.34 Such a cooperative arrangement could be a first step toward an eventual solution to the standoff over Cyprus.

10,000 8,000 6,000 4,000

3. Look for alternative paths to progress on the Turkish-EU relationship:

2,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 US exports to Turkey

US FDI in Turkey

Turkey exports to US

Turkey FDI in US

Sources: US Census Bureau: Foreign Trade; BEA: Foreign Direct Investment *2008-09 FDI data from Eurostat, International Trade

EU-Turkey Bilateral Trade & Investment Relationship 100,000 90,000

in millions of USD

80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 EU exports to Turkey

EU FDI in Turkey

Turkey exports to EU

Turkey FDI in EU

Sources: Eurostat, International Trade; Eurostat, Balance of Payments *2011 EU-Turkey FDI data not yet published as this went to print

Solving the Cyprus and Kurdish disputes would substantially increase Turkey’s chances of achieving EU membership. But with negotiations currently at an impasse and growing concerns over Turkey’s future, the US should encourage Europe to seek alternative paths to achieve progress on the Turkish-EU relationship.

Such a path could be found in the early successes of the Positive Agenda. Both sides have already made strides in working groups focusing on energy and visa liberalization.35 At a minimum, the next US administration should signal its strong support for negotiations and offer to consult on chapters where it has a distinct interest in seeing Turkish reforms, particularly the judiciary and fundamental rights chapter. As the US has previously expressed concern over rule-of-law issues in Turkey, it could facilitate judicial exchanges between both countries similar to retired US Supreme Court justice Sandra Day O’Connor’s visit to Turkey in 2011.36/37 It should also encourage the expansion of negotiations beyond the selected eight chapters to include areas such as foreign, security and defense policy, where progress could lead to parallel improvement in EU-NATO cooperation. Perhaps most importantly, the US should draw direct links between democratic consolidation domestically and Turkey’s role in the region. A Turkish state that is stronger economically, politically and democratically would aid

Turkey

61

Turkey’s Main Trading Partners (2010)

22% 42%

12% 4%

EU

Iran

5% 6% Russia

9% China

Middle East & North Africa

US

Rest of the World

Source: European Commission

Ankara’s desire to be a regional player and serve US interests in the region more broadly.

4. Use stronger economic ties as a positive motor for improved Turkish-European and Turkish-American relations: While the volume and the nature of their trade with Turkey differ, both Europe and the US would benefit from addressing obstacles to better economic ties with Ankara. In the case of the US, the government can focus on the following steps: creating with their Turkish counterparts a new bilateral legal framework to spur investment and help build trade; ensuring that American and Turkish trade strategies converge; facilitating greater business dialogue and cooperation through new

62

Turkey

platforms between Turkish and US firms; and instituting closer consultation at a government and business level to aim for common views on issues on the G20 agenda.38 Involving Turkey in the ongoing US-EU free trade agreement negotiations (which are of great interest to Ankara) could also benefit relations between Turkey and the West.

The consequences of a rapprochement between Ankara and Tel Aviv would be significant not only for the region, but also for the EU and the US. In regard to the EU-Turkey partnership, the US can encourage and support efforts on both sides toward concessions

to ensure that the 1996 EU-Turkey Customs Union works more effectively, to boost trade, and to help improve atmospherics. In exchange for Turkey fulfilling promises to remove technical barriers to trade in areas such as import licenses and to guarantee enforcement of intellectual property rights,39 the EU needs to take firmer action to enforce the “Turkey clause”.40 Despite that provision, many countries that have concluded or are negotiating free trade Agreements (FTAs) with the EU have refrained from concluding similar agreements with Turkey, as called for by the clause.41 Moreover, the US should encourage the EU and Turkey to quickly define a multi-year roadmap that outlines both the implementation of a “readmission agreement”, under which Turkey would take charge of illegal immigrants crossing into the EU from its borders, and the eventual lifting of visa requirements for Turkish citizens in the EU.42 Both initiatives should move in parallel, but as a first move the EU should consider liberalizing visa practices for Turks doing business in Europe as a boost for trade.

5. Promote Turkish-Armenian reconciliation, particularly at the civil society level: Despite Turkey and Armenia’s failure to ratify the October 2009 Zurich protocols, which involved an agreement to establish diplomatic relations and open their shared border, the EU and the US can work in tandem to push forward the Turkish-Armenian normalization process.

At the government level, the EU and the US can encourage Ankara and Yerevan to cooperate on matters of common interest, such as emergency preparedness and heritage preservation,43 and to experiment with special openings of their shared border for cultural or educational exchanges. The trans-Atlantic partners will also need to plan ahead for the potential political minefield of the 100th anniversary of the Armenian genocide in 2015. Helpful measures to navigate that tense commemoration could include: avoiding any parliamentary legislations in the US or Europe pertaining to the genocide; supporting the establishment of joint Turkish-Armenian historical

commissions; and encouraging Ankara to show contrition in a similar vein to Erdogan’s apology in 2011 for the mass killing of Kurds in the 1930s. At the grassroots level, the US and the EU could provide support and funding for local civil society groups, NGOs and business ventures in Armenia and Turkey that are working towards reconciliation.44 6. Create a favorable environment to facilitate a Turkish-Israeli rapprochement: The rising instability in the Middle East and the continuing civil war in Syria create a pragmatic opportunity for Turkey and Israel to put aside their differences. Both countries share a clear interest in preventing the Syrian conflict from spilling over to their territory, and share the desire not to see Assad’s chemical weapons arsenal falling into the wrong hands. The consequences of a rapprochement between Ankara and Tel Aviv would be significant not only for the region, but also for the EU and the US. It would allow Turkey to revert to its position of regional broker and mediate between the Israelis and Palestinians—a role that was taken up by Mohamed Morsi’s government in Egypt during the recent bombing of Gaza;45 the rapprochement could bring some stability to the Middle East and help create broader diplomatic coalitions over Iran and Syria; and it would improve Turkey’s image in the US. Thus, the US and the EU need to take all possible steps to create favorable terrain for a TurkishIsraeli normalization process. Important measures could include holding backchannel talks with both states on Syria’s future, encouraging Israel to involve Turkey in the development of offshore gas fields in the eastern Mediterranean, promoting joint Turkish-Israeli business projects, advocating Turkey and Israel to avoid excessive rhetoric, and supporting the creation of a bilateral commission to determine reparations for the flotilla incident.46

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63

MEMO ON

RUSSIA The State of Play In President Obama’s second term, the US will encounter a Russia that is a far cry from the boastful, confident and assertive country that in early 2008 seemed destined to become a major global player again. For much of the first decade of the 21st century, Russia experienced explosive economic growth thanks to its abundant supply of hydrocarbons and the rapid rise of oil and gas prices. Between 2000 and 2007 alone, Russia’s real GDP per capita grew an average of 7 percent a year, with nominal GDP increasing fivefold since 2002.1 In early 2008, Russia held nearly $162 billion in reserve and national welfare funds as well as nearly $600 billion in hard currency and gold reserves, an amount exceeded only by Japan and China.2 This economic rise coincided with a forceful return of traditional Russian realpolitik. Successive rounds of NATO and EU enlargement were viewed as threats to Russian national security, while perceived Western involvement in the “color revolutions” in former Soviet states played on fears of Russian weakness. A more confident Moscow flexed its muscle against the West, using the state-owned gas company Gazprom’s dominance in the European energy market as an effective foreign policy weapon. Energy disputes with Belarus (2007) and Ukraine (2009) over prices and unpaid gas bills resulted in Russia cutting off gas to both countries—and, in turn, to much of the European continent.

Moscow showed a willingness to use energy to gain leverage over EU member states, some of which are almost entirely dependent on Russian exports to meet their energy needs. Russia’s actions coincided with a growing consensus that the US was no longer the sole global

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Russia

In President Obama’s second term, the US will encounter a Russia that is a far cry from the boastful, confident and assertive country that in early 2008 seemed destined to become a major global player again. superpower. This decline paralleled the rise of Russia in a new multipolar order along with the rest of the so-called BRIC countries (Brazil, India and China).

The 2008 global financial crisis has since fundamentally altered Russia’s view of itself in that international order.

The tightening of the global credit markets caused the country’s total gross capital inflows to decline by nearly 40% between 2007 and 2008.3 A sharp drop in commodity prices, particularly for hydrocarbons, shook an economy that relied on oil and gas for more than twothirds of its export receipts. Russia’s GDP actually declined by 10 percent between 2008 and 2009, while unemployment and inflation increased considerably.4 Russia’s fading fortunes prompted thenpresident Dmitry Medvedev to seek to modernize and diversify the Russian economy. However, the failure of the Medvedev administration to achieve any substantial economic reform and the return of Vladimir Putin to the presidency in March 2012 raises doubts about Russia’s willingness to continue the modernization agenda.

The Obama administration should expect a Russian state that is a status quo power with rollback tendencies. Russia’s three sinews of power—its pivotal vote on the UN Security Council, it naturals resources, and its nuclear arsenal— will guarantee a seat at the table on major global issues. But in almost all other measures, Russia is regressing.

Economically, endemic corruption, a

poor investment climate (capital flight totaled nearly $80 billion in 20115) and weak state institutions throw cold water on Moscow’s modernization agenda.

Domestically, the return of Putin to the presidency prompted protests throughout Russia whose size and scope shocked the ruling apparatus. These protests, and the Kremlin’s political crackdown in response, have thrown domestic stability into question.

Internationally, Russia will continue to struggle to keep pace with more dynamic economies and find its influence diminishing in many areas of the world, despite its accession to the World Trade Organization in 2012. China’s rise in the east will undoubtedly become a greater concern as its global profile increases and its thirst for energy resources leads to an increasing presence in the former Soviet space in Central Asia.

The Arab uprising has seen Moscow lose traditional partners in the region, while its support of the Bashar al-Assad regime in Syria continues to isolate it regionally and internationally. As new governments emerge in the Middle East, few countries, if any, will look to Moscow as a model to emulate.

European Perspectives A reconciliation of sorts between Europe and Russia has taken place, the foundation of which was in many ways laid by the bilateral US-Russia “reset”.

EU member states and Moscow have taken small but important steps to ease tensions and solve lingering bilateral

disagreements. In Poland, traditional hostility towards Russia has partially given way to a more nuanced pragmatism and a slow, but steady reconciliation with Moscow. Under the auspices of its modernization agenda, the Medvedev administration moved to solve problems such as the Exclusive Economic Zone border dispute with Norway and address the Nordic countries’ environmental concerns over the Nordstream gas pipeline running through the Baltic Sea.6 Yet overall, bilateral and regional relationships remain mostly unchanged.

Russia is still an important geopolitical concern in Europe, and the Russia-EU energy relationship necessitates active engagement with Moscow. But EU states remain split between those that have traditionally taken a nuanced position towards Russia (i.e. Cyprus, France, Germany, Italy) and those states that continue to view it as a threat to European security (i.e. the Baltic states and much of Central Europe). Little movement has been made on negotiations towards replacing the Partnership Cooperation Agreement that have been ongoing since 2008, and the EU’s Partnership for Modernization Agreement (signed with Russia at the 2010 EU-Russia Summit) has thus far failed to lead to any largescale political or economic reforms.

Among Europe’s major players, cooperation with Moscow has continued to vary between suspicion and strategic engagement.

Politically, relations between the UK and Russia have been frosty since former KGB agent Alexander Litvinenko died of radiation poisoning in London in 2006, the victim of a presumed assassination. When Putin visited London for the 2012 Summer Olympics, both he and British Prime Minister David Cameron expressed a willingness to improve the bilateral relationship.7 However, London’s critical line toward Moscow’s handling of the Syrian crisis will ensure that political reconciliation remains far off. Instead, both countries will continue to engage each other mainly through the economic sphere.

2011 EU Natural Gas Imports by Country

1% 1%1%

9%

4%

33%

11%

13% 27% Russia

Norway

Algeria

Trinidad & Tobago

Egypt

Qatar Libya

Nigeria Other

Source: Eurostat

France, meanwhile, has maintained a traditional pragmatism toward Russia.

Despite the cautionary line taken by Paris towards Russian actions in the 2008 conflict with Georgia and then-president Nicolas Sarkozy’s efforts to negotiate a cease-fire, Franco-Russian relations have since returned to the interestbased cooperation that has traditionally characterized the relationship. This was particularly evident with the sale of French military assault ships to the Russian government in 2010.8 Paris continues to recognize the reality of Russia as a major European power, and this views seem should not change with new President François Hollande.

Under Chancellor Angela Merkel, Germany has articulated a Russia policy that seeks constructive engagement and a place at the EU table for Moscow, while balancing German business interests with concerns about human rights in Russia. Russia remains a

critical market for Germany; from 2010 to 2011 alone, trade between the two countries increased by 30 percent (to €75 billion) while German FDI jumped to €8.2 billion.9 Merkel’s support for a partnership with Moscow on modernization efforts had the support of German businesses and aimed to establish a stronger rule-of-law-based investment climate. Berlin has also sought close political cooperation with Moscow. Merkel and Medvedev agreed to a joint communiqué calling for the creation of a “new EU-Russia Security Community” in exchange for cooperation in solving the Transnistrian conflict with Moldova during the Meseberg Process in June 2010.10 But since that communiqué, the Merkel government’s attempts to win Russian cooperation have hit a wall.

Little headway has been made either in solving the deadlocked conflict in Transnistria or the creation of an

Russia

65

EU-Russia security apparatus. The modernization partnership has suffered from diverging visions, as Germany has viewed it as a vehicle for domestic and economic reform while Russia has been more interested in knowledge and technology transfers to stateowned industries.11 Merkel is also facing increasing pressure from civil society groups, the German Green Party, and even members of her own party to take a more vocal stance against the Kremlin’s crackdown on political opponents.

Merkel’s trip to Russia for the annual bilateral St. Petersburg Dialogue in November 2012 was overshadowed by a Bundestag resolution put forward by the CDU’s Andreas Schockenhoff, one of the Bundestag’s leading Russia experts, which raised alarm over the country’s worsening human rights record.

The EU has shown active interest in several alternative energy interests, such as the Nabucco gas pipeline from the Caspian region and the emerging shale gas and liquefied natural gas (LNG) markets in Poland and the US. The EU’s Third Energy Package, adopted by the European Commission in 2009, bars the ownership of sales and transmission operations by non-member states, a move which may force Gazprom to sell its transmission assets and give up some of its dominance of the European energy market just as other competitors, particularly LNG from Qatar, are emerging on a spot market. That the Commission is now investigating Gazprom for anti-competitive market practices has only added to the tension between Brussels and Moscow.14

The EU relationship with Russia continues to be dominated by energy and trade. It is Moscow’s largest trade partner, with exports from Russia totaling nearly $200 billion in 2011.12 In 2011, 33 percent of the EU’s natural gas imports originated from Russia (see chart). On the other side of the equation, the EU is the destination of nearly 70 percent of Russia’s gas exports.13 Energy security concerns have led Brussels to take a number of steps towards lessening European dependence on Russian energy imports to hedge against Russian business and political practices in the energy sector.

Formal engagement between the two countries will not begin in earnest after President Obama is inaugurated for his second term. However, with a September visit to St. Petersburg for a Group of 20 Summit meeting on the horizon and with a post-election invitation by Vladimir Putin for a bi-lateral visit to Moscow on the table, the topic of US-Russia relations will likely find itself near the forefront of the administration’s 2013 foreign policy agenda. Therefore, it will be incumbent upon the new administration to quickly articulate a policy that will

balance cooperative engagement with addressing concerns on human rights and democracy in Russia. It can do so by considering a number of steps: 1. Graduate from the “reset”: Despite some ups and downs, the Obama administration’s policy reset was a relative success. Its overtures helped soften views among Russian leadership that the US is actively seeking to weaken Moscow, and both sides can point to several areas in which agreement has been reached: counterterrorism efforts, Russia’s allowing NATO supplies to cross its territory on their way into Afghanistan, the 123 Agreement and mutual ratification of the New START Treaty. The new administration should build on the successes of the reset and move relations to the next level. It should continue to find issues where interests are compatible. Russia has previously shown a willingness to cooperate with the US and EU on missile defense and Iran, and while the sides remain far apart, continued engagement can produce positive results. To that end, the US should pursue frequent dialogue in forums that build stronger working relationships and cooperation. The US Presidential Bilateral Commission jointly agreed to in 2009 has led to frequent contact between officials, and the next administration should seek to make that a permanent aspect of the bilateral relationship.

Recommendations for 2013

Vladimir Putin Approval Ratings (2011-2012) 74 72

in percent

70 68 66 64 62 60 58

Jan

Feb Mar Apr May Jun

Jul

Aug

Sep

Oct Nov Dec

2011

Russia

Feb Mar Apr May Jun 2012

Source: The Levada Center

66

Jan

Jul

2. Prepare to grapple with Putin: The return of Putin to the Russian presidency and the crackdowns on dissent raise immediate questions over how relations will progress. To his domestic audience, Putin has often portrayed the US as a belligerent hegemon that acts counter to Russian interests, sometimes using the US and NATO as scapegoats useful for whipping up nationalist fervor. The recent passage of legislation clamping down on political protests, Internet freedom, and the funding of Russian NGOs by foreign donors is an attempt to eliminate political opposition and reduce Western engagement with Russian civil society, as seen in the recent eviction of USAID staff from the country.

Yet Putin is also aware that Moscow cannot afford to ignore Europe and the US. Russia has benefitted from Western cooperation on many issues, such as counterterrorism, and this is unlikely to change under Putin. As international forces begin to draw down in Afghanistan post-2014, Russia will be eager to work with the US and Europe to ensure stability in northern Afghanistan and the Southern Caucasus region. The Obama administration must work with Europe to create a common understanding with Moscow, one that takes the national interests of both sides into account.

Disagreements on global issues have often arisen because Russia felt its national interests were being ignored.

In the Libya conflict, Putin’s contention that NATO overstepped the parameters of UN Security Council Resolution 1973 spoke as much to Moscow’s concern over its economic interests in Libya as it did to concern over political sovereignty.

On Syria, Putin has been steadfast in his support of the Assad regime, in part because the Russian naval base at Tartus is one of its last remaining warmwater access ports. Recent comments by Russian officials suggest, however, that the Kremlin is preparing for the realities of a post-Assad Syria.15 If the Obama administration can show that addressing these issues is not a zero-sum game and at least try to accommodate

Russian concerns, it should find a more cooperative partner in Moscow in general and Putin in particular. Europe and the US can entice Moscow into changing its stance by guaranteeing Russia an important role in any postAssad discussions.

3. Understand today’s internal dissent: While considering Moscow’s core interests is important, the US must also take great strides towards understanding and accommodating the new generation of Russian activists. The protests that followed the parliamentary elections in December 2011 and the presidential election in March 2012 demonstrated a widening chasm between the government and the populace. Today’s activists are no longer marginalized liberal intelligentsia, but members of the young, urban middle class. The middle class represents nearly 20 percent of the population and is expected to reach 40 percent by 2020.16 At the same time, a generation is coming of age that has grown up largely in the post-Soviet era.

Of those who took part in the massive protest along Moscow’s Prospekt Sakharov on Dec. 24, 2011, 25 percent were between the ages of 18 and 24, and more than 50 percent were under 40.17

Today’s activists are no longer marginalized liberal intelligentsia, but members of the young, urban middle class. The middle class represents nearly 20 percent of the population and is expected to reach 40 percent by 2020.

Having accumulated wealth during the boom years from 2000 to 2008, Russia’s middle class increasingly demands more political participation and greater accountability and transparency from government institutions. Exposure to Western countries through travel and business, and widespread use of the Internet as a tool for communication

and knowledge, have fostered a growing discontent with the status quo.18 Even the rural working class, one of Putin’s main bases of support, is increasingly doubtful of the state’s ability to provide health care and education and maintain infrastructure.19 If Russia’s economic struggles continue, the domestic situation will be prone to further fragmentation.

The Obama administration, along with its European partners, should therefore work together to articulate a common position that takes the Kremlin’s foreign policy interests into account while being assertive on political and human rights issues inside Russia. Both sides have explored legislation (the so-called Magnitsky bills) that would bar the officials allegedly involved in the death of Russian lawyer Sergei Magnitsky from entry into either the EU or US, with the US Congress recently approving such legislation along with Permanent Normal Trade Relation status (PNTR) for Russia. The US should encourage European governments to pass similar legislation in order to send a message to Kremlin officials and as a show of support to Russia’s growing activist movement.

4. Build upon the passage of PNTR by pursuing a broader modernization agenda with Moscow: The recent passage of PNTR status for Russia by the US Congress highlights the potential growth of bilateral trade but also its current shortcomings. While Europe and Russia maintain a large and robust trade relationship, economic trade and investment between the US and Russia has been relatively small, with Russia accounting for just 1.6% of US exports in 2011.20 The passage of PNTR is expected to change that, bringing innumerable benefits to US businesses while bringing US. companies into compliance with WTO rules mandating PNTR between members. US exports to Russia are forecast by some to double from $9 billion in 2010 to nearly $19 billion as WTO-mandated reductions on Russian tariffs are expected to create

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The US and Russia have previously pledged to work together on Prime Minister Medvedev’s Modernization Initiative, as evidenced by the “Joint Statement on a Strategic Partnership in Innovation” released during the USRussia Business Summit in 2010. The focal point of US support has been the “Skolkovo Innovation Center” intended to serve as a Silicon Valley-like community just outside Moscow. The Center is promising, and several US companies have already pledged to invest in the project, but the venture represents a top-down approach to modernization that does not address the broader need to reduce corruption, strengthen rule of law, and protect intellectual property.23

68

Russia

40,000 35,000 30,000 in millions of USD

Therefore, in lockstep with PNTR, the new administration should consider pursuing a broader modernization partnership with Russia in conjunction with the European Union that emphasizes Western business norms and works towards strengthening the rule of law in Russia. Many Russia critics point out that Putin has shown little, if any interest in pursuing genuine widespread economic reforms. However, events may dictate a more concerted effort towards modernization and economic diversification.

Russia’s failure to modernize means it will fall increasingly farther behind the US, Europe and China.

Additionally, Russia’s heavy reliance on hydrocarbons means that the Russian economy will continue to be susceptible to fluctuations in oil and gas prices. Given Russia’s dependency on the European market, an exacerbation of the eurozone crisis or a precipitous drop of oil and gas prices could impact the economy in a way similar to the 2008 global economic crisis.

US-Russia Bilateral Trade & Investment Relationship

25,000 20,000 15,000 10,000 5,000 0 2004

2005

2006

2007

2008

2009

2010

US exports to Russia

US FDI in Russia

Russian exports to US

Russian FDI in US

2011

Sources: US Census Bureau; Foreign Trade; BEA: Foreign Direct Investment

EU-Russia Bilateral Trade & Investment Relationship 300,000

250,000

in millions of USD

greater market access for US businesses and more opportunities for US FDI in the Russian market.21 Nonetheless, the Russian market remains a legitimate source of concern. Rampant corruption, poor business practices, and the lack of a rule of law continue to hamper economic development. Recent controversies, particularly the case of murdered lawyer Sergei Magnitsky demonstrate that significant pitfalls to doing business in Russia remain.22

200,000

150,000

100,000

50,000

0 2004

2005

2006

2007

2008

2009

2010

EU exports to Russia

EU FDI in Russia

Russian exports to EU

Russian FDI in EU

Sources: Eurostat, International Trade; Eurostat, Balance of Payments *2011 Eu-Russia FDI data not yet published as this went to print

2011

The US should instead focus on efforts that seek to broaden the scope of modernization and move cooperation away from the political level and towards a bottom-up, grassroots approach.

It can also utilize the knowledge and experiences gained through the EU’s ‘Partnership for Modernization’ including those countries with vested business interests inside Russia. Trilateral cooperation can work towards strengthening Western business norms and creating a vibrant market economy in Russia. But perhaps more importantly, an improved investment climate and expanded US economic trade with Russia could lead to economic growth in sectors outside of the extractive industries affiliated with or controlled by the Russian government. This in turn would strengthen the growing middle class of moderates and reformers that constitute the most significant constituency for long-term change in Russia.

5. Expect Russia to make a “pivot” of its own to Asia: The clear message from the recent APEC Summit in Vladivostok is that Russia increasingly sees its future in Asia. Moscow’s need to reduce its susceptibility to a major economic crisis in Europe and the growing role of the US and China in the region will necessitate a move eastward. The Obama administration should therefore prepare for a Russian “pivot” of its own to Asia that will bring challenges in the Asia/Pacific region and along the postSoviet periphery.

Since Putin’s return to office, the Russian government has placed expanding economic ties in the region at the top of its agenda. A major priority at the APEC Summit was touting the development of the Eurasian Customs Union, which Putin declared would “play an active part in shaping the regional and international agenda”.24 The union, based largely on the EU model, creates a common customs market for three states (Russia, Kazakhstan and Belarus) with hopes of eventually bringing most of the former Soviet Union into the fold.

The ECU will be especially important as Russia increasingly faces stiff competition in the Central Asia region.

The EU’s pursuit of the so-called Southern Gas Corridor has turned its gaze increasingly towards Central Asia, while the US and NATO continue to maintain an active interest in the region thanks to operations in Afghanistan. China is also taking a more active interest in the region. Central Asia currently supplies 10 percent of China’s energy needs, and trade with the five Central Asian states totaled $23 billion in 2010.25 Navigating relations with Beijing is tricky. On one hand, China has replaced Germany as Russia’s top bilateral trade partner, totaling $80 billion in 2011, and Russia is eager to build the infrastructure necessary to export its hydrocarbons eastward.26 Yet both countries are increasingly in competition for resources and influence in Central Asia. Russia’s economic struggles have weakened its influence in Central Asia, and the financing of oil and gas fields and infrastructure in Turkmenistan, Kazakhstan and Uzbekistan threatens to upset Moscow’s dominance of the region’s energy transport network and reduce Russian leverage.27 6. Forge a common trans-Atlantic position on Europe’s periphery: Both the US and European states will want to continue bilateral engagements with Russia, but the Obama administration should also strongly consider pursuing a common transAtlantic position on Europe’s eastern periphery, particularly with countries such as Ukraine and Georgia. The EU has pushed its Eastern Partnership towards these states and other countries on the European periphery with the aim of acculturating them to EU norms and standards.

of harming relations with Russia. While Ukraine has professed that its destiny lies in Europe, its weak institutions, widespread corruption, and President Viktor Yanukovych’s more pro-Russian foreign policy has make it difficult to meet EU standards. Georgia’s prospects have likewise dimmed considerably following the 2008 war with Russia. The longer the Association Agreement and Deep and Comprehensive Free Trade Agreement (DCFTA) negotiations drag on, the more difficult it may be for these governments (particularly Ukraine’s) to build the political support necessary to ratify them. And apprehension in some European capitals, particularly Berlin, has stalled Georgia’s efforts to join NATO. The stalling of negotiations presents an opportunity for Russia and the ECU, into which Moscow has campaigned heavily for Ukraine’s inclusion. While a DCFTA with Europe would force Ukraine to adopt EU rules without having a say in them, the ECU would offer Ukraine full membership rights and allow it to maintain access to the Russian market.28 Georgia has maintained a strident proWest attitude, but it also has a sizable trade relationship with Russia. The other factor is that while the ECU is so far relatively weak, further development could see it end the EU’s role as the “only game in town”. Therefore, the US and Europe must together to find a common position on the region that maintains the attractiveness of EuroAtlantic institutions and pushes for democratic reforms.

But Europe’s efforts to integrate Ukraine and Georgia have been slow and uncoordinated, as EU member states are split between those seeking inclusion in Euro-Atlantic institutions and those reluctant to do so due to issues such as visa liberalization or fear

Russia

69

MEMO ON

CHINA The State of Play In 2013, the US and China will go through a deep transition in political leadership and Europe a protracted transition in political structure. Amid this uncertainty, the US pivot to Asia provides some organizing logic for Europe’s own engagement with the region. The US pivot is a recalibration with both strategic and economic dimensions, with the launch of the TransPacific Partnership (TPP), US rotational deployment of 2,500 Marines at the Darwin base in Australia, the presence of four littoral combat ships in Singapore and the declaration that freedom of navigation in the South China Sea is in the US national interest. Coupled with Washington’s five treaty alliances in the Asia Pacific and central role in security and potential geopolitical flashpoints (Taiwan, North Korea, and the South and East China Seas), the US presence aims to stabilize the region in a way that accommodates China’s continued rise in the existing global order.

The US and Europe have shared a similar ambivalence in recent years about China’s evolving place in the international system. Beijing’s rocky leadership transition has focused attention on the country’s increasing bellicosity in territorial disputes, which has led to high-profile dust-ups with its neighbors, particularly Japan. While the potential of China as an area of economic opportunity and a global partner is unparalleled, there is a growing sense of buyer’s remorse in the US and Europe over the belief that China’s integration into global markets and the institutions underpinning them would change Beijing’s economic and political behavior. Increasingly, discussions of “reciprocity” in Europe and “a level playing field” in the US are

70

China

While the potential of China as an area of economic opportunity and a global partner is unparalleled, there is a growing sense of buyer’s remorse in the US and Europe over the belief that China’s integration into global markets and the institutions underpinning them would change Beijing’s economic and political behavior. dominating bilateral narratives vis-àvis China, particularly around elections.

Chinese national champions emerging on the global stage are subject to innuendo and outright accusations that they have benefited unjustly from pilfered intellectual property, that their competitiveness is artificially enhanced by generous state subsidies, and that they are loose proxies for Chinese geopolitical interests. While policymakers in the US and Europe work to build a constructive relationship with the Middle Kingdom, there is a growing sense that it will be incumbent to work with the China “we have” within the framework of global governance.

2005 represented a high water mark in sino-European relations. After a honeymoon period accentuated by trans-Atlantic tensions caused by the Iraq war, China saw the EU as a potential balancing force to unchecked US power.

But the subsequent events left Chinese policymakers with the sense that bilateral relationships with individual EU member states are the most effective way to achieve desirable outcomes at the EU level.1 Strategically, this has meant a stronger relationship with Germany, which China sees as the preponderant arbiter of European power. Tactically, it has meant flirtations with smaller European states, particularly in Central Europe and those most stricken by the effects of the eurozone crisis.

China has taken a cautious banker’s approach to the eurozone crisis. It could have used its vast currency reserves in fall 2011 to purchase bonds through the European Financial Stability Facility (EFSF) and sovereign debt of the distressed eurozone south. The effect might have been similar to its politically minded currency intervention in the 1997 Asia crisis, an effective public diplomacy tool that would have transformed its image in Europe. Perhaps the Chinese decision not to pursue this course was the result of European fears about the abdication of authority to an authoritarian Beijing, or the political risk posed by arduous and messy public negotiations on eurozone governance is too problematic. On the Chinese side, the image of the country using its financial assets to preserve the high European standard of living, when hundreds of millions in China still live in poverty, would prove politically difficult.

These factors led China to consider the eurozone crisis not as a geopolitical matter but as a largely financial and domestically political one.

Beijing has, however, voiced its public support for the German approach of constraint through austerity in the eurozone south. And while China has moved approximately one-third of its foreign reserves into euro-denominated sovereign assets—partially accounting for the currency’s buoyant value during

the crisis—this debt is primarily from the northern core rather than the south.

European Perception of the US Pivot to Asia

The size of the US, EU and Chinese economies and their systemic importance to global security has led some prominent analysts, particularly in Europe, to call for a G3 caucus within the G20. They believe it could cut through the cacophony of the larger group to make global governance more effective. The structural allure of the G3 constellation is undeniable—for the next 30 years the three powers will jockey for the top spots in the global economy.

Strategic Pivot

But while the push for greater trilateral collaboration is clear, most evidence suggests that the strategic triangle has not yet reached maturity. China and the US appear disinclined to establish a G2 or G3 format that would elevate their status above other members of the G20, potentially sharpening their differences.

And the EU itself is not yet a coherent actor that could operate at such a level.

An analysis of EU-statements on China over the last decade demonstrates both a conspicuously low number of defined common interests with the Middle Kingdom and an overwhelming preponderance of economic issues, in particular a “trade bias”.2 One example is the successful settlement of the USEU-Mexico dispute in the WTO against China’s export restrictions on raw materials. Many see this as a model for similar cooperation between the US, EU and Japan to settle the dispute over rare earths, a panel ruling on which is expected in early 2013.3 The EU has sought to expand beyond the trade-centric nature of its engagement with China in recent years. The November 2012 Asia-Europe Meeting (ASEM) in Laos confirmed this trend. In July 2012, the EU and US released a joint document calling for a shared strategic vision for the Asia-Pacific region and providing insight into how the two powers are looking to coordinate in Asia.

The EU has supported the role of ASEAN in regional territorial conflict resolution and that could be built upon, particularly at the member state level.4

Supportive

Economic Pivot

Germany United Kingdom European Commission Poland

United Kingdom Germany Poland

European Commission

Czech Republic

Ambivalent

European Perspectives European engagement in China has two key characteristics: it is predominantly driven by bilateral relations with individual member states, and it is overwhelmingly economic in nature.

The eurozone crisis and its aftermath have exacerbated this trend. The EU’s winnowed soft power on the continent could prompt a mad dash by various countries to build stronger bilateral relations with China at the expense of fellow European member states.

These bilateral ties will be one of the primary forces in the centrifugal drift of Europe as each state strives to set its own terms of engagement with the Middle Kingdom.

Germany’s economic growth is increasingly tethered to that of China, even as the latter is a direct competitor to

other economies in Europe, particularly in the south. With a $160.1 billion bilateral trade relationship, China is set to surpass France as Germany’s largest trading partner by 2014.5 Once willing to yield to the EU to shape Europe’s China policy, Germany has now demonstrated that it is willing to pursue an overtly bilateral relationship. As the world’s largest trade surplus countries, with similar export-led growth models, high-skilled labor competitiveness, and technological leadership, Germany and China have cooperated on questions related to global economic imbalances, debt-targeting and, in the G20, most notably in debates over demand-driven growth in 2009 and current account balances around the 2010 Seoul Summit.

Subsequently, think tank and ministerial dialogues on Berlin-Beijing cooperation have mushroomed.

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71

But China’s competitive meridian with Europe is slowly moving northward.

Whereas for most of the past decade, China’s direct competition was with the light industry of the south (textiles in Italy and Greece), movement into automobiles, brand development in computers and machinery, and green technology posit China directly against Germany. In some ways, this is similar to the movement of US-China manufacturing competition from light industry to heavy industry and services.

This trend is expected to continue.

European engagement in China has two key characteristics: it is predominantly driven by bilateral relations with individual member states, and it is overwhelmingly economic in nature.

France, which was the driver of the Sino-European relationship at its zenith, has somewhat lost its footing with China in recent years, beginning with the diplomatic battle in 2008 over President Nicolas Sarkozy’s willingness to informally meet with the Dalai Lama, which led to the cancellation of the EU-China Summit. This continued with Sarkozy’s high-profile and unsuccessful attempt to galvanize Chinese financial support for EFSF bonds in fall 2011. Since France’s most recent elections, relations with China have largely remained static.

François Hollande’s government has yet to articulate a strategic relationship, a fact that perplexes senior European officials, particularly from Germany.

The US pivot to Asia rates high on the agenda of European policymakers. There is concern among some Europeans that they will be neglected as the US shifts focus. The small and mediumsized Central and Eastern European countries, whose exposure to potential security risks from Russia is more immediate, are more alarmed by the realigned emphasis on Asia and will require the greatest assurance from Washington. Yet these governments

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China

realize the budget constraints on the US military and, unwilling to increase their own defense budgets, recognize that too much pressure on Washington will be unseemly and unlikely to change policy.6 There are others that welcome greater US engagement in the Asia Pacific. It is in Europe’s, and particularly Germany’s, interest that the strategic pivot to Asia go ahead. As Europe’s largest trade partner with Asia, Germany can free-ride on US military presence in the region to stabilize sea trade routes and other global commons. The British share this view and expect to be the quiet beneficiaries of US force posture readjustment. That said, the UK, Germany and the European Commission are more ambivalent about the potential consequences of the Asia pivot’s economic aspects. The Europeans are aware however that the US expects them to play a bigger role in their immediate neighborhood as a result of the pivot.

The EU retains a grander vision for its China relationship. 57 percent of European foreign policy elites are not satisfied with the EU’s role in the Asia Pacific, and 96 percent believe it should be doing more.7 Accordingly it is beginning to play catch-up to member states on China and the Asia Pacific region more broadly. The publication of the June 2012 Guidelines on the EU’s Foreign and Security Policy in East Asia and recent high-profile dialogues on security and economic issues indicates an expansion of thought on the topic.8 But there is no policy area today in which Europe and China see each other as main strategic partners. Negotiations on a Partnership and Cooperation Agreement (PCA), to codify a new strategic relationship between the EU and China, have slowed to a standstill since 2007. The European External Action Service (EEAS) still sees China as one of six global strategic partners, as was identified in the 2003 European Security Strategy (ESS). But it has not released an updated communication on China in six years, a conspicuous indication that Brussels’ China policy, once seen as promising, remains somewhat underdeveloped.

Recommendations for 2013 The US and Europe have numerous areas in which cooperation on China and the Asia-Pacific more broadly are ripe for development in 2013. These are primarily in, but not limited to, the economic sphere, based on the many areas where economic and strategic thinking intersect. The US must maintain a modular approach to Europe in its approach to cooperation on China. Both the EU and individual member states, at varying levels, have unique assets and political considerations that can advance US interests in the region.

1. Aim for policy alignment at all levels on regional strategic geopolitical issues: Europe will not represent a traditional security power in its own right in East Asia. Limited expeditionary capabilities and bases, weak security alliance networks and anemic domestic political interest are among the reasons that Europeans will have a lesser role in major security questions. As such, Europe remains a limited player in security on the Pacific Rim and has not shown aspirations to change this.

However, the US and EU can work together for strategic clarity on joint interests in the region. The joint USEU ASEAN Regional Forum statement is a positive start. In it, both powers supported multilateral moves to resolve longstanding territorial disputes. This was a turning point, representing a willingness to forge common positions.

But it was countered in numerous subsequent communiqués, including the Sino-German communiqué in Beijing (August 2012) and the EU-China Summit Communiqué in Brussels (September 2012), which, in territorial disputes were not mentioned.9 Still, the EU has openly recognized the importance of regional security architecture and the key US role in it.10 The EU has expressed interest in acceding to ASEAN’s Treaty of Amnity and Cooperation (TAC) and enhanced cooperation in the Asia-Europe Meeting (ASEM) process. Greater political representation in the regional security architecture, while modest, should be

welcomed. But true credibility will come through consistency at all levels. Two areas in particular are key to moving this cooperation forward: a) Consult on developments in the transAtlantic defense industry in Asia: Long seen as the cornerstone of the US-EU dialogue on China, the EU weapons embargo seems likely to remain in place for the next four years. The most stalwart opponents to lifting the embargo against China—the Scandinavian members of the EU and the post-Lisbon European Parliament—have gained strength since 2005, and given the appreciation of the enhanced security role of the US in the Asia Pacific, a lifting of the embargo is highly unlikely without marked political changes in Beijing.

But the embargo’s points have been whittled away in the two decades since it was imposed, and implementation at the national level has led to a narrow interpretation of its applicability.

European states have a key interest in the growing defense market that a rising Asia, and particularly China, represents.

As a result of the financial downturn, European states have pushed through significant cuts in domestic defense spending (8 percent in both Germany and the UK).11 Many European States have a substantial and globally competitive defense industrial base, with blue-chip companies in France, Italy and the UK and a strong base of specialized Mittelstand defense companies in Germany (which surpassed France and the UK over the last decade to become the country with Europe’s largest defense sector). Starved for domestic sales, these companies and their home states’ governments will more aggressively seek foreign markets.

Given these trends and the growing US security role in the Asia Pacific, it will be important for both the US and Europe to consult regularly on the potential impact of defense procurement contracts on the region’s threat assessment. The partners should also look at how their cooperation will affect rising defense and dual-technology industries such as space and cybersecurity technology [see page 44].

b) Pursue greater complementarity in the Asian periphery: The EU and its constituent states have greater leverage and are able to act with greater resolve and unity in the high-growth small states of Southeast Asia. The EU is pursuing bilateral FTAs with Singapore and Malaysia, negotiating a wideranging Framework Agreement with New Zealand, and exploring ambitious trade agreements with ASEAN, India and Japan. The EU has also been involved in conflict resolution and post-conflict reconstruction programs in Aceh, Indonesia; East Timor; and Mindanao in the Philippines, while undertaking development efforts on water rights and usage along the Mekong River in Cambodia. The EU, along with Australia and New Zealand, is a significant development donor to Pacific island states. A strong ground game in the small and medium states on the Pacific Rim is perhaps the greatest asset to a tandem approach to Asia. The US and Europe should harmonize development efforts on political system reform, capacity building, judiciary reform, rule of law and media. They should also work together on people-to-people exchanges, particularly relating to business and law.

A tandem strategy— pursuing TPP and a trans-Atlantic compact simultaneously—is ambitious but could produce the best bargaining position for the US with [Europe and the Asia Pacific].

2. Work on an intra-Atlantic reaffirmation of global economic governance: While most of Europe’s largest economies are sanguine about the military aspect of the US pivot to Asia, some leaders, particularly in Germany and the European Commission, are concerned that the TPP will drain all of

the US administration’s political capital for market liberalization, leaving little left for a similarly ambitious economic compact with the EU. They fear that this could 1) leave the US and Europe untethered as they engage Asia or 2) pit them against each other as competitors in the region. As a result, both the US and Europe would be in a weaker negotiating position in the Asia Pacific.

A tandem strategy—pursuing TPP and a trans-Atlantic compact simultaneously— is ambitious but could produce the best bargaining position for the US with both regions. As counterintuitive as it may sound, one of the most effective joint Asia strategies would be for the US and Europe to commit fully to talks with each other. The implicit effect of a transAtlantic compact [discussed at length on p. 11] will be a recommitment to the rules-based liberal order that has been the basis for US and European economic success. This commitment could have a signaling effect to China and other major emerging economies in the region. Such discussions should fall along two lines: a) Initiate a frank, depoliticized discussion about investment and procurement markets: The US and Europe should work together informally to create coordinated norms in their economic interaction with China. Some of the most dynamic and fruitful exchanges between the US and EU in recent years have been on this topic, and they have yielded positive results on joint policy alternatives for exploration, recycling and substitution of rare earth minerals and concerns around intellectual property rights (IPR), particularly in the IT sector. Two areas ripe for intensified US-EU consultation are investment and procurement policy. Chinese FDI represents an opportunity for which both the US and EU should prepare.

Despite representing a low stock in the US and EU (approximately 0.2 percent of total FDI), Chinese investment power in the coming years will reach a degree matching its status as a trade power today.12 First, the US should closely monitor EUChina Bilateral Investment Treaty (BIT)

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US-China Bilateral Trade & Investment Relationship 450,000 400,000

in millions of USD

350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 US imports from China

US FDI in China

Chinese imports from US

Chinese FDI in US

Sources: US Census Bureau: Foreign Trade; BEA: Foreign Direct Investment

EU-China Bilateral Trade & Investment Relationship 400,000 350,000

in millions of USD

300,000

200,000 150,000

50,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 EU imports from China

EU FDI in China

EU exports to China

Chinese FDI in EU

Sources: Eurostat, International Trade; Eurostat, Balance of Payments *2011 EU-China FDI data was not yet published as this went to print

China

Second, while most Chinese FDI is economically beneficial and politically neutral, the US and EU should consult on its nature in sensitive and strategic sectors.13 The two sides could undertake a frank and open dialogue on the procedures and decision-making approval of the Committee on Foreign Investment in the US (CFIUS) and other bodies regulating inbound FDI into the US. Openness has been the guiding light in European investment strategy, with only three countries having limits on investment for national security in strategic sectors. The eurozone crisis and privatization conditions championed by the lending troika have augmented the potential role of Chinese investment in Europe. For instance, the Chinese seem poised to enter into global banking primarily through M&A with undervalued European banks. Investments in sensitive national security areas might require consideration in light of the US’s on-the-ground role in NATO. Third, the trans-Atlantic partners should consider the potential implications of asymmetric market access and disclosure requirements in China. This has already begun and should be broadened. The two should jointly encourage China to clarify the opaque management structure of Chinese state-owned enterprises, some of which are seeking to expand their activities in the US and EU.

250,000

100,000

74

negotiations for an indication of the conditions a post-Lisbon EU will require and what sort of investment relationship the Chinese will accept. China already has BITs with 26 of the 27 EU member states, and the market for Chinese FDI in Europe is already relatively open.

A pan-European BIT could tidy up the legal climate for Chinese investors in Europe and perhaps extend to cover large individual investors.

This dialogue should include a joint assessment on conditions for an open and reciprocal procurement market in China, a potential jewel for US and European industries but one to which access is limited and subject to heavy political intervention. Access itself has

pitfalls, given the sometimes cavalier Chinese attitude toward ownership and licensing of intellectual property (for example in renewables technology and automobile parts). China has demonstrated its willingness to use its procurement market—and market access more broadly—as a political weapon and retaliatory tool. In this vein, the US and Europe should compare access and competiveness asymmetries in their own procurement markets. b) Narrow US-EU focus on realist arguments for enhanced multilateralism on governance and enforcement: In recent years, China has become a more assertive political actor in multilateral settings, particularly the UN Security Council. It played a key role in blocking action on Syria, changing from its traditional track of hiding behind Russia in veto decisions or expressing disapproval through abstention. Rather, it has jointly pursued a veto strategy with Moscow, demonstrating a willingness to speak or even play a spoiler role. Beijing’s increased assertiveness, matched in its regional relationships, is rooted in part in the principle of non-interference, which plays an important role in Chinese understanding of global governance and is reflected other emerging powers, both democratic and non-democratic.

Another factor is the specter of domestic instability, including slower economic growth, a protracted and fragile political transition and the potential aftershocks of the Arab uprising.14 Institutions of global governance lack the degree of legitimacy in China that they have in Europe and, to a lesser extent, in the US. They are seen through the realist lens of power relationships as the mechanisms for achieving desired ends. But there are cases in which China sees its long-term national interests best served by compliance with multilateral rules and norms, even going so far as to contribute to the maintenance of public goods it sees as necessary for stable international commerce. The willingness of China to adhere to WTO rulings is one case, and its willingness to cooperate with the US and Europe on counter piracy is another.

Germany, China’s no. 1 trade partner in the EU, had the only trade surplus with China of any country in Europe in 2011—$12.97 billion.

In those areas and others, the US and Europe should work together to expand the realist case for multilateral cooperation with China. This should focus first on the readjustment of global imbalances, the area in which the G20 has been stymied since 2010. The ability to frame the economic crisis in terms of unsustainable global current account imbalances will depend on China’s acknowledgement of the problem in global forums.15 There is also a realist case for Beijing’s growing openness to binding emissions targets and other initiatives aimed at increasing the use of renewables. As China continues on its massive campaign to develop global competitive advantage in solar and wind, its use of the UN’s Clean Development Mechanism, the greater pragmatism shown at the climate conferences in Cancun and particularly Durban can begin to integrate China into an active stakeholder role on climate change policy.

Both Germany and the US have complex political and economic relationships with China, defined by dense trade between the two and convergence on IPR protection, investment and procurement as well as concerns related to human rights, the rule of law, civil society development, environmental conditions and the role of the media.

Given the overlap of interests, the two should consider launching a US-German Dialogue to discuss and coordinate China policy. Such a dialogue should cover six areas in which both sides have signaled policy interest: trade, IP and investment; global economic governance; environment and climate change; energy and natural resources; human rights; and media and Internet freedom. Such a dialogue could be an important element in establishing joint US-German positions both on a bilateral basis and in multilateral forums such as the WTO and the G20.

3. Explore the potential of a US-German dialogue on China: The Sino-German bilateral relationship is by far the most dynamic between Europe and Asia. Germany is perceived by the Chinese as the political keystone to Europe, and its SME niche manufacturing competitiveness has been a boon in the Chinese market, which seeks to emulate it. Germany, China’s no. 1 trade partner in the EU, had the only trade surplus with China of any country in Europe in 2011—at $12.97 billion.16 But prominent German politicians from the Bundestag, particularly from Chancellor Angela Merkel’s CDU, have been vociferous critics of China’s human rights record, highlighting systemic abuses in Tibet and Xinjiang, media restrictions and the rising issue of Internet freedom.

China

75

76

Acknowledgements

ACKNOWLEDGEMENTS At the culmination of a year-long effort, the Bertelsmann Foundation wishes to acknowledge the contributions and efforts of the countless individuals who helped make the Field Manual to Europe a reality. Tyson Barker, director of the trans-Atlantic Relations Project, was the key architect of the Field Manual, shepherding its development and successful completion. Without his vision and strong leadership, this publication would not have been possible. Working closely with him on the drafting and organization of the Field Manual’s memos were Rebecca Bertram, Meghan Kelly, Garret Martin, Joshua Stanton and Kara Sutton. Their extensive support, thorough research and tireless dedication to the project were essential to the success of this publication.

The Foundation is grateful for the support, insights, and contributions provided by our colleagues at the Bertelsmann Stiftung in Brussels and Gütersloh, Germany. Their assistance on the project, years of expertise and unique European perspective proved invaluable to the project. In particular, the Foundation wishes to acknowledge the efforts of Thomas Fischer, Joachim Fritz-Vannahme, Stefani Weiss, Ting Xu, Cornelius Ochmann, Christian-Peter Hanelt, Christal Morehouse and Helmut Hauschild.

Our appreciation also goes to those who helped edit and produce the Field Manual, in particular the Bertelsmann Foundation’s Andrew Cohen as well as Donna Brutkoski. Additional support was provided by the rest of the Foundation’s Washington, DC team, including Faith Gray, Alison Nordin, Samuel George, Peter Kimball, Anneliese Guess and Jonathan Stevens.

Over the course of 2011–2012, the Bertelsmann Foundation hosted a series of off-the-record dinner discussions, each based on a different topic addressed in the Field Manual, that brought together leading authorities in European-US policy, as well as young, wellplaced thinkers on the brink of taking key positions shaping policy in the future. The expertise they shared and the discussions that emerged from these dinners formed a powerful foundation for each memo and helped shape the policy recommendations made to the incoming administration. We are sincerely grateful for their participation and support.

Finally, the Bertelsmann Foundation wishes to thank the numerous other individuals from government offices, think tanks, academia, and the private sector who took the time to sit down with Bertelsmann staff and share their views on key issues. In particular, several people volunteered their time and expertise in providing peer reviews for each memo. These individuals, all distinguished practitioners in their respective fields, contributed reviews that were vital to crafting a final product and ensuring that the Field Manual kept a firm pulse on the many elements affecting particular issues in the contemporary trans-Atlantic relationship.

With sincere gratitude, Annette Heuser Executive Director Bertelsmann Foundation Washington, DC, January 2013

Acknowledgements

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CITATIONS INTRODUCTION See “Confidence in the U.S. President: How much confidence do you have in the U.S. President (Bush ‘03-’08, Obama ‘09-)?” Retrieved from http:// www.pewglobal.org/database/?indicator=6&survey=14&response=Confidence&mode=chart 1

See 2010 United States National Security Strategy. Retrieved from: http://www.whitehouse.gov/sites/default/files/rss_viewer/national_security_ strategy.pdf 2

TRANS-ATLANTIC ECONOMY Hamilton, D., & Quinlan, J. (2012). The Transatlantic Economy 2012: Annual survey of jobs, trade, and investment between the United States and Europe. (p. v).

Washington, DC: Center for Transatlantic Relations.

1

2

Fritz-Vannahme, J. (2012). Für die Vereinigten Staaten von Europa. Spotlight Europe, (13), p. 3.

Testimony of James Quigley (29 February, 2012). Panel on the Future of US Trade Negotiations: Hearing before the US House Committee on Ways and Means, 112th Congress, p. 4.

3

EU-US High Level Working Group on Jobs and Growth. (2012). Interim Report to Leaders from the Co-Chairs: EU-US High Level Working Group on Jobs and Growth. Retrieved from: http://trade.ec.europa.eu/doclib/docs/2012/june/tradoc_149557.pdf 4

Committee on International Trade. (15 October, 2012). Report on trade and economic relations with the United States (report no. 2012/2149[INI]).

European Parliament. http://www.europarl.europa.eu/sides/getDoc.do?type=REPORT&reference=A7-2012-0321&language=EN 5

Chase, P. (July 2011) The United States, European Union and International Investment. (GMF Paper Series). The German Marshall Fund of the United States. Retrieved from: http://www.gmfus.org/wp-content/blogs.dir/1/files_mf/chase_us_eu_intlinvestment_jul111.pdf 6

There are certain asymmetries developing in the investment relationship. Whereas Europe still directed 72 percent of its outbound FDI to the US in 2010, the share of US’s FDI to Europe fell to 55.2 percent. There have been some confounding trends in European investment. European banks in urgent need of shoring up their balance sheets have deleveraged international investments. Even as the crisis compels European firms to repatriate capital, some companies have poured investment into the US. Airbus announced in summer 2012 the opening of a $600 million facility in Alabama, its first US plant. See Hamilton, D. and Quinlan, J. (2012). The Transatlantic Economy 2012: Vol 1. Headline Trends, Center for Transatlantic Relations, (pp. vi-ix).

7

German Marshall Fund of the United States (February. 2012). A New Era for Transatlantic Trade Relationship: A Report from the Transatlantic Task Force on Trade and Investment. p. 23. Retrieved from: http://www.gmfus.org/wp-content/blogs.dir/1/files_mf/tatf_report_2012.pdf.

8

International Monetary Fund. (April 2012). World Economic Outlook Database (data file and code book). Retrieved from: http://www.imf.org/ external/pubs/ft/weo/2012/01/weodata/index.aspx 9

Erixson, F. and Bauer, M. (April 2012). A Transatlantic Zero Agreement: Estimating the Gains from Transatlantic Trade in Goods, ECIPE, p. 2. (pp.

1-18).

10

US Chamber of Commerce (2012). Transatlantic Economic and Trade Pact: An Opportunity to Bolster Growth and Job Creation in the United States and the European Union. Retrieved from: http://www.uschamber.com/sites/default/files/international/files/17566_TransEconomic_TradePact_OPT.pdf 11

Deutscher Industrie- und Handelskammer (DIHK). (11 April, 2012). Contribution to the Public Consultation of the European Commission on the EU-US High Level Working Group on Jobs and Growth. Retrieved from: http://www.rgit-usa.com/fileadmin/ahk_rgitusa/media/pdf/2012/DIHK_COM_Consultation_on_ EU-US_Working_Group_on_Jobs_and_Growth.pdf 12

European Commission (accessed 17 December, 2012). International Affairs: EU-US High Level Working Group on Jobs and Growth. Retrieved from: http://ec.europa.eu/enterprise/policies/international/cooperating-governments/usa/jobs-growth/index_en.htm 13

14

See the Leahy-Smith America Invents Act 2011 at: http://www.gpo.gov/fdsys/pkg/BILLS-112hr1249enr/pdf/BILLS-112hr1249enr.pdf

15

Schwab, S. (2011). After Doha: Why the Negotiations Are Doomed and What We Should Do About It. Foreign Affairs p. 105. ( p.104-117).

Business Roundtable and the TransAtlantic Business Dialogue. (February 2012). Joint Statement: Forging a Transatlantic Partnership in the 21st Century. Retrieved from: http://businessroundtable.org/news-center/forging-a-transatlantic-partnership-for-the-21st-century 16

Only the agriculture sector has expressed its preference for a single undertaking in its most extreme form. Other organizations, including TABD, have called for a single undertaking as well but recognize the need to be open to other options.

17

78

Citations

Offices of Sens. John Kerry and Rob Portman et al. (22 February, 2012) “Letter to President Obama supporting an Ambitious Trade Agenda with Europe” [Press Release]. Retrieved at: http://portman.senate.gov/public/index.cfm/press-releases?ID=3b3f67e0-a74a-44e5-97f3-efeef0004410 18

Transatlantic Legislators Dialogue. (11 June, 2012). TLD Joint Statement. Retrieved at: http://www.europarl.europa.eu/document/activities/cont/201206 /20120612ATT46685/20120612ATT46685EN.pdf 19

The TLD’s recent move to restructure its biannual meetings based on specific, discrete issues is a move in the right direction. The administration should encourage the TLD to appoint a committee-based roster of membership that mirrors the trans-Atlantic partnership agenda. Selection should be designated by membership on committees salient to the partnership, such as Ways and Means, Financial Services and Agriculture. It should also look for ways to include Senate representation. This membership should also assign relevant committee staff that can serve as liaisons for TLD activities. Such an approach could serve as a way station for coordinating the passage of agreements established within the trans-Atlantic partnership.

20

21

See the Anti-Counterfeit Trade Agreement at: http://register.consilium.europa.eu/pdf/en/11/st12/st12196.en11.pdf

The manner in which ACTA was signed has been a source of some controversy in the US. Senator Ron Wyden (D-Ore.), in particular, has questioned the administration’s assertion that the agreement will not alter existing US law. See Office of Senator Ron Wyden (2011). “Wyden to President: Isn’t Congress Supposed to Approve International Trade Agreements?”(press release). Retrieved at: http://www.wyden.senate.gov/news/press-releases/ wyden-to-president-isnt-congress-supposed-to-approve-international-trade-agreements 22

EUROZONE CRISIS Gurria, A. and Padoan, P.C.(27 November, 2012). Economic Outlook No. 92. (press conference). OECD. Retrieved from: http://www.oecd.org/eco/ economicoutlookanalysisandforecasts/Handout%20EO92%20-%20English.pdf 1

Elliot, L., Smith, H. and Kollewe, J. (16 June, 2012). World Bank Warns that Euro Collapse Could Spark Global Crisis. The Guardian. Retrieved from: http://www.guardian.co.uk/business/2012/jun/16/world-bank-euro-collapse-crisis 2

International Monetary Foundation. (4-5 November, 2012). Global Prospects and Policy Challenges: Meeting of G-20 Finance Ministers and Central Bank Governors. p. 18 (special report). Retrieved from: http://www.imf.org/external/np/g20/pdf/110512.pdf 3

4

Ibid. p.3.

5

Ibid.

See Joint Statement of the Ministers of Finance of Germany, the Netherlands, and Finland. Retrieved from: http://www.vm.fi/vm/en/03_press_releases_and_ speeches/01_press_releases/20120925JointS/name.jsp 6

See Rede Von Bundeskanzerlin Merkel Anlaesslich der Eroeffnung des 61. Akademischen Jahres Des Europakollegs Bruegge. Retrieved from: http://www. coleurope.eu/sites/default/files/speech-files/rede_merkel_europakolleg_bruegge.pdf 7

Bledowski, K (6 November, 2012). “Political Risk Moves to the Forefront in the European Crisis” (issue brief) MAPI. Retrieved from: http://www.mapi. net/political-risk-moves-forefront-european-crisis 8

See “Speech from German Chancellor Angela Merkel in European Parliament “(7 November, 2012). Retrieved from: http://www.bundeskanzlerin.de/ Content/DE/Rede/2012/11/2012-11-07-merkel-eu.html;jsessionid=E0A3525A0CF7EB8650CAADAB08AF9870.s1t2?nn=74420 9

Bureau of Economic Analysis. (18 September, 2012). BEA International Transactions. (Database). US Department of Commerce. Retrieved from: http:// bea.gov/iTable/index_ita.cfm 10

11

Hamilton, D. & Quinlan, J. (2012). Pg ix.

12

Hamilton, D. & Quinlan, J. (2012. Pg v.

Petersen, T. and Böhmer, M. (2012). Economic Impact of Southern European Member states exiting the Eurozone. (policy brief 2012/06). Pg. 5-6. Die Bertelsmann Stiftung. Retrived from: http://www.bertelsmann-stiftung.de/cps/rde/xbcr/SID-8466B5BD-06382534/bst_engl/xcms_bst_dms_36656__2.pdf 13

Odion-Esene, B. (9 November, 2012). Phil Fed Survey: Q4 GDP Outlook Revised Down, Payrolls Raised. Deutsche Boerse Group. Retrieved from: https:// mninews.marketnews.com/index.php/phil-fed-survey-q4-gdp-outlook-revised-down-payrolls-raised?q=content/phil-fed-survey-q4-gdp-outlookrevised-down-payrolls-raised 14

Miles, D. (7 May, 2012). “Force Changes in Europe to Preserve Strategic Edge.” American Forces Press Service. Retrieved from: http://www.defense.gov/ news/newsarticle.aspx?id=116221 15

16

See IMF Members’ Quotas and Voting Power, and IMF Board of Governors. Retrieved from: http://www.imf.org/external/np/sec/memdir/members.aspx

Mayer, C. (24, September, 2012). Germany After the Poll: A World Leader? Time. Retrieved from: http://www.time.com/time/world/ article/0,8599,1925849,00.html 17

See Speech by Mario Draghi, President of the European Central Bank at the Global Investment Conference in London, 26, July 2012. Retrieved from: http://www.ecb. int/press/key/date/2012/html/sp120726.en.html 18

Mason, J. (11 May, 2010). Obama Presses Spain’s Zapatero over Economic Reform. Reuters. Retrieved from: http://www.reuters.com/ article/2010/05/11/eurozone-spain-obama-idUSN1166321220100511 19

Citations

79

Castle, S. (17 September, 2011). Meetings on European Debt Crisis End in Debate, but Little Progress. The New York Times. Retrieved from: http:// www.nytimes.com/2011/09/18/business/global/meetings-on-european-debt-crisis-end-in-debate-but-little-progress.html

20

Chon, J. (2012). US Lessons for the Eurozone: Restoring Confidence through Transparency.(issue brief). The Bertelsmann Foundation. Retrieved from: http://www.bfna.org/publication/us-lessons-for-the-eurozone-restoring-confidence-through-transparency 21

Cave, T. (2 September, 2012). EU Mulls European Jobs Act to Ease Capital Access. Marketwatch. Retrieved from: http://www.marketwatch.com/story/ eu-mulls-european-jobs-act-to-ease-capital-access-2012-09-02 22

Kollatz-Ahnen, M. (September 2012). A Growth Programme for Europe. (policy analysis). p. 13. Friedrich Ebert Stiftung. Retrieved from: http://library. fes.de/pdf-files/id/ipa/09306.pdf 23

MEMO ON POST-AFGHANISTAN NATO 1

See Chicago Summit Declaration. (20 May, 2012). Retrieved from: http://www.nato.int/cps/en/natolive/official_texts_87593.htm

As of 8 October 2012, ISAF still has 104,905 troops in Afghanistan, representing fifty different countries. For the exact breakdown by country, see International Security Assistance Force (ISAF): Key Facts and Figures. Retrieved from: http://www.nato.int/isaf/docu/epub/pdf/placemat.pdf 2

Current plans see a force of 228,500 for the ANSF, with an estimated annual budget of $4.1 billion. Fact Sheet. (21 May, 2012). See White House Office of the Press Secretary (21 May, 2012). Fact Sheet: Chicago Summit- Sufficient and Sustainable ANSF. (press release). Retrieved from: http:// www.whitehouse.gov/the-press-office/2012/05/21/fact-sheet-chicago-summit-sufficient-and-sustainable-ansf 3

NATO’s toppling of the Gaddafi regime proved controversial since the UN resolution 1973 (2011), retrieved from http://www.un.org/News/Press/ docs/2011/sc10200.doc.htm, adopted by the Security Council on 17th March 2011, had only authorized the use of force to protect civilians.

4

The Future of NATO: Bad Timing. (31 March 2012). The Economist. Retrieved from: http://www.economist.com/node/21551491; NATO’s Sea of Troubles.

(31 March 2012). The Economist. Retrieved from: http://www.economist.com/node/21551464 5

“Green-on-blue” attacks (using the military code in which blue refers to friendly forces and green to neutral forces) by ANSF troops against ISAF soldiers have significantly increased in the last two years, leading to the suspension of certain joint ISAF-ANSF training missions and combat operations. Starr B. (17 September 2012). US restricts Afghan operations after ‘green-on-blue’ killings. CNN. Retrieved from: http://www.cnn. com/2012/09/17/world/meast/us-afghanistan-attacks/index.html 6

7

Sperling, J. and Webber, M. (2009). NATO: From Kosovo to Kabul. International Affairs, 85(3), p.508.

Sheridan, M. B. and Wilson, S. (19 March 2011). US actions in Libya may speak louder than words. Washington Post. Retrieved from: http://www. washingtonpost.com/world/us-actions-may-speak-louder-than words/2011/03/19/ABVWsZx_story.html 8

Labbot, E. (18 May 2012). NATO’s post-Afghanistan future unclear. CNN. Retrieved from: http://security.blogs.cnn.com/2012/05/18/natos-postafghanistan-future-unclear/ 9

US Department of Defense. (5 January, 2012). Sustaining US Global Leadership: Priorities for 21st Century Defense. Retrieved from: http://www. defense.gov/news/Defense_Strategic_Guidance.pdf 10

NATO’s Sea of Troubles. The Economist; see Grissom, A. (July 2012), The United States, in The Implications of Military Spending Cuts for NATO’s Largest Members. (Analysis Paper). Ed. by Clara Marina O’Donnell, Brookings Institution. Retrieved from: http://www.brookings.edu/~/media/research/files/ papers/2012/7/military%20spending%20nato%20odonnell/military%20spending%20nato%20odonnell%20pdf, p.25. Even after the withdrawal of forces from Germany, about half of American troops stationed abroad will be located in Europe.

11

Gienger, V. (4 February, 2012). Panetta Pledges Troops for NATO Response Force to Assure Europe. Bloomberg. Retrieved from: http://www. bloomberg.com/news/2012-02-04/panetta-pledges-troops-for-nato-response-force-to-assure-europe.html 12

13

See Krepinevich Jr., A. (2012). Strategy in a Time of Austerity. Foreign Affairs, 91(6), pp. 58-69.

O’Donnell, C. M. (6 July, 2012). Are Europeans a Better Transatlantic Security Partner than Meets the Eye? Brookings Institution (Opinion). Retrieved from: http://www.brookings.edu/research/opinions/2012/07/06-security-partner-odonnell 14

Gates, R. (10 June, 2011). The Security and Defense Agenda (Future of NATO). (speech). Retrieved from: http://www.defense.gov/speeches/speech. aspx?speechid=1581 15

Murphy, J. (10 November, 2011). A future for UK and NATO defense. NATO Source (weblog post). Retrieved from: http://www.acus.org/natosource/ future-uk-and-nato-defense

16

Molling, C. (July 2012). Trends within the European Union, in The Implications of Military Spending Cuts for NATO’s Largest Members. (Analysis Paper).

Ed. by Clara Marina O’Donnell, Brookings Institution. Retrieved from: http://www.brookings.edu/~/media/research/files/papers/2012/7/military%20 spending%20nato%20odonnell/military%20spending%20nato%20odonnell%20pdf, pp.6-7 17

Burns N., Lightfoot, J. and Wilson, D. (14 May, 2012). Anchoring the Alliance. Atlantic Council. Retrieved from: http://www.acus.org/files/publication_ pdfs/403/051412_ACUS_Burns_AnchoringAlliance.pdf 18

Dorman, A. (July 2012). The United Kingdom. in The Implications of Military Spending Cuts for NATO’s Largest Members. (Analysis Paper). Ed. by Clara Marina O’Donnell, Brookings Institution. Retrieved from: http://www.brookings.edu/~/media/research/files/papers/2012/7/military%20spending%20 nato%20odonnell/military%20spending%20nato%20odonnell%20pdf, pp.10-12. The UK’s October 2010 Strategic Defense Review decided to scrap with immediate effect its existing aircraft carrier. Two new vessels will be built, but the first one will not be fully operational before 2020 at the very least.

19

80

Citations

See Giegerich, B. (July 2012). Germany. in The Implications of Military Spending Cuts for NATO’s Largest Members. (Analysis Paper). Ed. by Clara Marina O’Donnell, Brookings Institution. Retrieved from: http://www.brookings.edu/~/media/research/files/papers/2012/7/military%20spending%20nato%20 odonnell/military%20spending%20nato%20odonnell%20pdf, pp.15-18.

20

21

See Keller, P. (2012). Germany in NATO: the Status Quo Ally. Survival, 54(3). pp.95-110.

Germany plans Afghan-Mediterranean AWACS shuffle. (23 March, 2011). Reuters. Retrieved from: http://www.reuters.com/article/2011/03/23/germanylibya-awacs-idAFLDE72M07E20110323 22

Schockenhoff, A. and Kiesewetter, R. (30 May, 2012). Strengthening Europe’s ability to act in the area of security policy. German Bundestag. Retrieved from: http://www.kas.de/wf/doc/kas_7120-1442-1-30.pdf?120709233549 23

Future of Europe Group. (17 September, 2012). Final Report of the Future of Europe Group of the Foreign Ministers of Austria, Belgium, Denmark, France, Italy, Germany, Luxembourg, the Netherlands, Poland, Portugal, and Spain. Retrieved from: http://www.auswaertiges-amt.de/cae/servlet/ contentblob/626338/publicationFile/171844/120918-Abschlussbericht-Zukunftsgruppe.pdf;jsessionid=71BFAE417B998C52A15B480A78298BE3 24

France ended its combat mission in Afghanistan on 20 November. See France ends Afghan combat mission early. (20 November 2012). BBC News.

Retrieved from: http://www.bbc.co.uk/news/world-asia-20417134.

25

Financial and Economic Data Relating to NATO Defence. (13 April, 2012). NATO Press Release (PR/CP, 047-REV1). Retrieved from: http://www.nato.int/ nato_static/assets/pdf/pdf_2012_04/20120413_PR_CP_2012_047_rev1.pdf 26

Pawlak, P. and O’Donnell, C. (9 July, 2012). Are Europeans a better transatlantic security partner than meets the eye? (weblog post). Centre for European Reform. Retrieved from: http://centreforeuropeanreform.blogspot.fr/2012/07/are-europeans-better-transatlantic.html 27

Faleg, G. and Giovannini, A. (May 2012). The EU between Pooling & Sharing and Smart Defence: Making a virtue of necessity? Pp.11-20. Centre for European Policy Studies (special report number 61). Retrieved from: http://www.ceps.eu/book/eu-between-pooling-sharing-and-smart-defence-makingvirtue-necessity 28

O’Donnell, C. M. (12 July, 2012). Integrating the EU Defence Market: An Easy Way to Soften the Impact of Military Spending Cuts? Brookings Institution. Retrieved from: http://www.brookings.edu/research/opinions/2012/07/12-eu-defense-odonnell 29

Rettman, A. (16 November, 2012). Five EU countries call for new military ‘structure’. EU Observer. Retrieved from: http://euobserver.com/ defence/118226 30

For more, see Buckley, E. and Volker, K. (February 2010). NATO Reform and decision-making. Atlantic Council (Strategic Advisors Group issue brief).

Retrieved from: http://www.acus.org/publication/nato-reform-and-decision-making 31

Michel, L. (2003). NATO Decision-making: Au Revoir to the Consensus Rule? Institute for National Strategic Studies/National Defense University (Strategic Forum number 202). Retrieved from: http://www.au.af.mil/au/awc/awcgate/ndu/sf202.pdf 32

33 See The Washington NATO Project. Alliance Reborn; Valasek, T. (July 2011). What Libya says about the future of the transatlantic alliance. Centre for European Reform (essay). Retrieved from: http://www.cer.org.uk/publications/archive/essay/2011/what-libya-says-about-future-transatlantic-alliance

See Kupchan, C. (10 May, 2012). NATO: Chicago and Beyond. Senate Committee on Foreign Relations, United States Senate, 2nd Session, 112th Congress (prepared statement). Retrieved from: http://www.cfr.org/nato/nato-chicago-beyond/p28204 34

See Valasek, T. and Korski, D. (December 2009). Closer NATO-EU Ties: Ideas for the Strategic Concept. Retrieved from: http://transatlantic.sais-jhu. edu/transatlantic-topics/Articles/nato/Closer_NATO-EU_Ties_Valasek_Korski.pdf; Lindley-French, J. (13 November 2008). The Future of NATO-EU Relations. New Atlanticist (weblog post). Retrieved from: http://www.acus.org/new_atlanticist/future-nato-eu-relations 35

36

See the Field Manual Chapter on Russia for more details.

See Kupchan, R. (10 May, 2012). NATO: Chicago and Beyond. Prepared Statement before the U.S. Senate Committee on Foreign Relations. United States Senate, 2nd Session, 112th Congress (testimony). Retrieved from: http://www.foreign.senate.gov/imo/media/doc/Charles_Kupchan_Testimony1.pdf; and Slaughter, A.-M. (5 June, 2012). Two NATOs in One. WE-NATO (weblog post). Retrieved from: http://we-nato.org/2012/06/05/two-natos-in-one/ 37

38

See the Field Manual chapter on cybersecurity for more details.

Sorel, M. (14 May, 2012). NATO’s Cyber Security Strategy: A Good Start, But Much to Do. Chicago Council on Global Affairs (commentary). Retrieved from: http://2012summits.org/commentaries/detail/sorel_2 39

40

Idem.

McGee, J. (8 July, 2011). NATO and Cyber Defense: A Brief Overview and Recent Events. CSIS (weblog post). Retrieved from: http://csis.org/blog/ nato-and-cyber-defense-brief-overview-and-recent-events. Article 4 states that “the parties will consult together whenever, in the opinion of any of them, the territorial integrity, political independence or security of any of the Parties is threatened”.

41

Kramer, F. (March 2012). Transatlantic Nations and Global Security: Pivoting and Partnerships. Atlantic Council. Retrieved from: http://www.acus.org/ files/publication_pdfs/403/031912_ACUS_Kramer_TransatlanticNations.PDF 42

Shea, J. (April 2012). Keeping NATO Relevant. Carnegie Endowment for International Peace (policy outlook). Retrieved from: http://carnegieendowment. org/2012/04/19/keeping-nato-relevant/acl9#.

43

Ruhle, M. (5 June, 2012). NATO and Energy Security. Atlantic Council (transcript) Retrieved from: http://www.acus.org/event/nato-and-energy-securityreadout-chicago/transcript 44

Citations

81

ARAB UPRISING Koch, C. (summer 2011). The Arab Spring is a real opportunity for Europe. Europe’s World. Retrieved from: http://www.europesworld.org/NewEnglish/ Home_old/Article/tabid/191/ArticleType/articleview/ArticleID/21837/language/en-US/Default.aspx.

1

2

Witney, N., and Dworkin, A. (September 2012). A Power Audit of EU-North Africa Relations. London: European Council on Foreign Relations. p.6.

Errard, G. (11 September 2011). Le G8 promet 40 milliards de dollars aux pays arabes. Le Figaro. Retrieved from: http://www.lefigaro.fr/ conjoncture/2011/09/10/04016-20110910ARTFIG00491-le-g8-promet-40-milliards-de-dollars-aux-pays-arabes.php; Irish, J. and Baker, L. (27 May 2011).

G8 pledges $20 billion to foster Arab Spring. Reuters. Retrieved from: http://www.reuters.com/article/2011/05/27/us-g-idUSTRE74P00320110527.

3

4

Koch.C. (Summer 2011). The Arab spring is a real opportunity for Europe.

Hamdan, S. (11 October, 2012). Arab Countries Waiting for Promised Aid. New York Times. Retrieved from: http://www.nytimes.com/2012/10/12/ business/global/arab-countries-waiting-for-promised-aid.html?pagewanted=all&_r=0.

5

Taspinar, O. and Laurence, J. (20 December, 2011). Will Europe Shrink from the Arab Spring? World Politics Review (feature report). Retrieved from: http://www.jonathanlaurence.net/wp-content/uploads/2011/12/LaurenceTaspinar-WPR_Arab_Spring_12202011.pdf .

6

7

Libya unrest: UK envoy’s convoy attacked in Benghazi. (11 June 2012). BBC News. Retrieved from: http://www.bbc.co.uk/news/world-africa-18401792.

8

Witney, N. and Dworkin, A. (September 2012). pp.16-17 and p.22.

French Foreign Minister Alliot-Marie quits over Tunisia. (27 February, 2011). BBC News. Retrieved from: http://www.bbc.co.uk/news/worldeurope-12591452.

9

Juppé, A. (16 April, 2011). Arab spring symposium – Closing speech in Paris. Retrieved from: http://www.ambafrance-uk.org/Alain-Juppe-s-speechat-the-Arab.html.

10

Fabius, L. (27 June, 2012). Speech in Paris at the International Conference “Le monde arabe à l’âge des revolutions”. Retrieved from: http://www. franceonu.org/la-france-a-l-onu/espace-presse/declarations-presse/interventions-publiques/article/27-juin-2012-colloque.

11

Crumley, B. (14 November, 2012). France Recognizes Syria’s Opposition—Will the West Follow Suit? Time World. Retrieved from: http://world.time. com/2012/11/14/france-recognizes-syrias-opposition-will-the-west-follow-suit/.

12

13

Witney, N. and Dworkin, A. (September 2012). p.44; figure refers to the total aid provided by France to Algeria, Egypt, Libya, Morocco and Tunisia.

Kundnani, H. (9 July, 2011). Germany’s contribution to the Arab spring: arms sales. The Guardian. Retrieved from: http://www.guardian.co.uk/ commentisfree/2011/jul/09/germany-arms-sale-saudi-arabia.

14

15

German support for new North Africa underlined. (10 January, 2012). The Local. Retrieved from: http://www.thelocal.de/politics/20120110-40015.html.

Westerwelle, G. (8 November, 2011). Speech to the 2011 CFSP Review Conference: “Democratic and Economic Transformation in North Africa and the Middle East. Retrieved from: http://www.auswaertiges-amt.de/EN/Infoservice/Presse/Reden/2011/111108-BM_SWP.html?nn=605326; on the rising arms sales to Algeria, see Tanks in the Desert Germany Plans Extensive Arms Deal with Algeria. (12 November, 2012), Der Spiegel. Retrieved from: http://www.spiegel.de/international/germany/german-arms-sales-to-algeria-have-increased-dramatically-a-866690.html.

16

See Netherlands, Germany may send missiles to Turkey: report. (18 November, 2012) Reuters. Retrieved from: http://www.reuters.com/ article/2012/11/18/us-syria-crisis-turkey-idUSBRE8AH0JL20121118.

17

See Norton-Taylor, R. (12 July, 2012). Arab spring took British intelligence by surprise, report says. The Guardian. Retrieved from: http://www. guardian.co.uk/uk/2012/jul/12/arab-spring-british-intelligence-report; See also House of Commons Foreign Affairs Committee. (3 July 2012).

British foreign policy and the ‘Arab Spring’. (Second Report of Session 2012-2013), p.20. Retrieved from: http://www.publications.parliament.uk/pa/ cm201213/cmselect/cmfaff/80/80.pdf.

18

See Porter, A. and Spillius, A. (27 May, 2011). Arab Spring will add to extremism if we do not help, says David Cameron. The Telegraph. Retrieved from: http://www.telegraph.co.uk/news/politics/david-cameron/8539420/Arab-Spring-will-add-to-extremism-if-we-do-not-help-says-David-Cameron. html; and Cameron, D. (26 September, 2012). Speech to the United Nations General Assembly Retrieved from: http://www.number10.gov.uk/news/ david-camerons-address-to-the-united-nations-general-assembly/.

19

Syria conflict: UK to give extra £5m to opposition groups. (10 August, 2012). BBC News. Retrieved from: http://www.bbc.co.uk/news/uk-19205204; German spies ‘active on rebel side in Syria’. (19 August 2012). The Local. Retrieved from: http://www.thelocal.de/national/20120819-44445.html.

20

Abbas, M. (6 November, 2012). Assad’s safe exit “could be arranged”: Britain’s PM Cameron. Reuters. Retrieved from: http://www.reuters.com/ article/2012/11/06/us-syria-crisis-cameron-idUSBRE8A50O320121106.

21

The European Commission and the High Representative of the Union for Foreign Affairs and Security Policy. (8 March 2011). A Partnership for Democracy and Shared Prosperity with the Southern Mediterranean. Joint Communication to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. Retrieved from: http://ec.europa.eu/europeaid/where/neighbourhood/ documents/communication_conjointe_mars_2011_en.pdf.

22

23

82

Witney, N. and Dworkin, A. (September 2012). p.27.

Citations

The European Commission and the High Representative of the Union for Foreign Affairs and Security Policy. (25 May, 2011). A new response to a changing Neighbourhood. Joint Communication to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. Retrieved from: http://ec.europa.eu/europeaid/where/neighbourhood/documents/communication_conjointe_mai_2011_ en.pdf.

24

25

Witney, N. and Dworkin, A. (September 2012). p.28.

See European Neighbourhood and Partnership Instrument website for the 2014-2020 figures at http://www.enpi-info.eu/main.php?id_ type=2&id=402#Funding.

26

Santini, R. (9 June, 2011). The Transatlantic Relationship After the Arab Uprisings: Stronger in North Africa, Shakier in the Middle East? Brookings Institution (paper). Retrieved from: http://www.brookings.edu/research/papers/2011/06/09-arab-uprisings-santini.

27

Hanelt, C.-P.. (12-16 November 2012). Europe, Turkey and the Arabellion after the US elections. Bertelsmann Stiftung (Panel Discussions). p.11.

Retrieved from: http://www.bertelsmann-stiftung.de/cps/rde/xbcr/SID-626BE397-463D3063/bst/xcms_bst_dms_36867__2.pdf. For more, see Witney, N. and Dworkin, A. (September 2012), pp.60-65.

28

See Bertelsmann Stiftung. (May 2011). Establishing a European-Mediterranean Community (discussion paper for the 13th Kronberg Talks).

Retrieved from: http://www.bertelsmann-stiftung.de/cps/rde/xbcr/SID-4C729351-2CFC7980/bst/xcms_bst_dms_33961_33962_2.pdf.

29

Eralp, N. A. (12-16 November 2012). Europe, Turkey and the Arabellion after the US elections. Bertelsmann Stiftung (panel discussions). p.11.

Retrieved from: http://www.bertelsmann-stiftung.de/cps/rde/xbcr/SID-626BE397-463D3063/bst/xcms_bst_dms_36867__2.pdf.

30

31

Santini, R. (9 June, 2011). The Transatlantic Relationship After the Arab Uprisings.

32

Ibid.; see also Bertelsmann Stiftung. (May 2011). Establishing a European-Mediterranean Community.

Mneimneh, H. (25 October, 2012). Why Democratic Transitions in the Arab World Will Be Harder than in Post-Communist Europe. German Marshall Fund of the US (blog post). Retrieved from: http://blog.gmfus.org/2012/10/25/why-democratic-transitions-in-the-arab-world-will-be-harder-than-inpost-communist-europe/.

33

Mirow, T. (15 March, 2012). Speech to the London School of Economics and Political Science, London: “Where next for the Arab Spring? Learning from EBRD engagement in Eastern Europe”. Retrieved from: http://www.ebrd.com/pages/news/speeches/mirow_120315.shtml.

34

EU response to the Arab Spring: the SPRING Programme. (27 September, 2011). European Union (EU MEMO/11/636). Retrieved from: http://europa. eu/rapid/press-release_MEMO-11-636_en.htm?locale=en; Rogin, J. (18 May, 2012). State Department’s new Middle East fund in trouble on Capitol Hill. Foreign Policy (the Cable). Retrieved from: http://thecable.foreignpolicy.com/posts/2012/05/18/state_department_s_new_middle_east_fund_in_ trouble_on_capitol_hill.

35

Meyersson, E., Olofsgård, A. and Roine, J. (December 2011). Transition All Over? Lessons from the Experience of the Post-Communist Countries for the Countries of the Arab Spring. European Institute of the Mediterranean (papers IEMed). Retrieved from: http://www.iemed.org/publicacions-en/historicde-publicacions/papersiemed/10.-transition-all-over-lessons-from-the-experience-of-the-post-commuist-countries-for-the-countries-of-the-arabspring-en.

36

Tocci, N. (24 May, 2012). One Year On: A Balance Sheet of the EU’s Response to the Arab Spring. German Marshall Fund of the US (op-ed). Retrieved from: http://www.gmfus.org/archives/one-year-on-a-balance-sheet-of-the-eus-response-to-the-arab-spring/.

37

Muasher, M. and Wilkens, K. (29 November, 2012). Awakening to a New Arab World. Carnegie Endowment for International Peace (Global Ten article).

Retrieved from: http://carnegieendowment.org/globalten/?fa=50146.

38

39

Witney, N. and Dworkin, A. (September 2012). pp.56-57.

For more see Hamid, S. (20 June, 2012). Prioritizing Democracy: How the Next President Should Re-Orient US Policy in the Middle East. Brookings Institution (campaign 2012 papers Number 11). Retrieved from: http://www.brookings.edu/research/papers/2012/06/20-middle-east-hamid.

40

41

Idem.

For more on the outreach to underserved communities, see Martin, G. (April 2011). In Smart-Power Shift, US Now Actively Cultivating Muslim Minorities In The EU. European Institute (European Affairs Article). Retrieved from: http://www.europeaninstitute.org/EA-April-2011/in-smart-powershift-us-now-actively-cultivating-muslim-minorities-in-the-eu.html.

42

43

Tocci, N. (24 May, 2012). One Year On.

See more at Hassan, O. (undated). The Arab Spring: US Policy and Lessons for Europe. Warwick University (knowledge centre policy brief). Retrieved from: http://www2.warwick.ac.uk/knowledge/culture/europeanpolicybrief/.

44

For more, see Wagner, B. (July 2012). After the Arab Spring: New Paths for Human Rights and the Internet in European Foreign Policy. European Parliament (policy department briefing paper). Retrieved from: http://www.europarl.europa.eu/committees/en/studiesdownload.html?languageDocum ent=EN&file=75431.

45

Citations

83

COUNTERTERRORISM & HOMELAND SECURITY With 60 percent of cargo being transported on passenger airplanes, cargo security is directly tied to passenger security, which is why the US has been active in promoting the 100-percent mandate.

1

European Commission. (1 June, 2012). EU-US Security Agreement Allows Cheaper and Faster Air Cargo Operations. (press release). Retrieved from: http:// europa.eu/rapid/pressReleasesAction.do?reference=IP/12/544&format=HTML&aged=0&language=EN&guiLanguage=en.

2

Agreements include Europol, Extradition, Mutual Legal Assistance, Container Security Initiative, Eurojust, TFTP and PNR. See: http://www. statewatch.org/Targeted-issues/EU-USA-dp-agreement/eu-usa-dp-info-exchange-agreement.htm 3

U.S. Travel Association. (August 2012). Economic Impact of Travel and Tourism. Retrieved from: http://www.ustravel.org/sites/default/files/ page/2009/09/EconomicImpactofTravelandTourism2012Updates.pdf 4

U.S. Travel Association. (accessed 17 December, 2012). World Tourism: US Datasheet. (datasheet). Retrieved from: http://www.ustravel.org/sites/ default/files/page/2009/09/World_US_Datasheet_09a.pdf 5

Marketwire. (11 October, 2010). US Citizens Cancel Travel Plans to Europe Following Govt. Safety Warnings. (press release). Retrieved from: http:// www.marketwire.com/press-release/US-Citizens-Cancel-Travel-Plans-to-Europe-Following-Govt-Safety-Warnings-1332565.htm 6

International Trade Administration. (accessed 17 December, 2010). Top 10 International Markets: 2009 Visitation and Spending. US Department of Commerce. Retrieved from: http://tinet.ita.doc.gov/pdf/2010-Top-10-Markets.pdf 7

International Trade Administration. (2011). 2011 Market Profiled: Europe. International Trade Administration. (datasheet). US Department of Commerce.

Retrieved from: http://tinet.ita.doc.gov/outreachpages/download_data_table/2011_Europe_Market_Profile.pdf 8

9

Pawluk, P. (Ed.). (2011). The EU-US Security and Justice Agenda in Action. Paris: European Union Institute for Security Studies. p. 38.

Wetzling, T. (2011) What Role for What Rule of Law in EU-US Counterterrorism Cooperation? in Pawlak, P. (Ed.), The EU-US Security and Justice Agenda in Action (p. 36). Paris: European Union Institute for Security Studies.

10

European Parliament. (11 September, 2012). European Parliament Resolution of 11 September 2012 on Alleged Transportation and Illegal Detention of Prisoners of European Countries by the CIA: Follow Up of the European Parliament TDIP Committee Report. (report no. 2012/2033 INI).

Retrieved from: http://www.europarl.europa.eu/sides/getDoc.do?type=TA&language=EN&reference=P7-TA-2012-309 11

May, T. (15 October, 2012). Home Secretary Oral Statement on European Justice and Home Affairs powers. Retrieved from: http://www.homeoffice. gov.uk/media-centre/speeches/home-sec-eu-justice-statement 12

The Lisbon Treaty annex provides opt-outs for the UK and Ireland from freedom, security and justice agreements. Retrieved from: http://eur-lex. europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2010:083:0201:0328:EN:PDF 13

“It’s better for Europe to have a common position because it makes no sense for European passengers to travel from London to Madrid and back and have different controls,” Spanish Transport Minister Jose Blanco Lopez (7 January, 2010), in “Spain Calls for Common EU Stance on Airport Body Scanners.” Deutsche Welle. Retrieved from: http://www.dw-world.de/dw/article/0,,5098288,00.html 14

Fulton, S.M. (20 March, 2012). EU Commissioner: US Should Catch Up with Europe on Data Privacy. Retrieved from: http://www.readwriteweb.com/ cloud/2012/03/eu-commissioner-us-should-catc.php 15

Cañas, G. (1 October, 2012). “El imperio de la informacióHLCG) rthe Crtment of Justices Athe flight carrying a person of concern?n,” El Pais.

Retrieved from: http://sociedad.elpais.com/sociedad/2012/09/30/actualidad/1349026374_446501.html

16

17

The EU welcomed US District Court Judge Katherine Forrest’s determination on May 15, 2012, that section 1021 was unconstitutional.

De Kerchove, G., Emmerson, B., and Søvndal, V. (19 March, 2012). Counter-Terrorism and Human Rights. European Voice. Retrieved from: http://www. europeanvoice.com/article/2012/march/counter-terrorism-and-human-rights/73907.aspx 18

The Visa Waiver Program, introduced in 1986 as a pilot program, was made permanent by Congress in 2000 and changed in 2007 to give countries who are partners with the US on the war on terrorism the ability to allow their citizens to travel to the United States without a visa for up to 90 days.

Even though Congress, through the 9/11 Commission Act of 2007, expressed a sense that it would like to further extend visa-free travel to allied nations, VWP has become enmeshed in a matrix of conditions and benchmarks that make it difficult if not impossible to gain entry. That is because a country’s eligibility is measured not only by good relations with the United States, but also by its nationals’ overstay rate, according to the act. The current rate of overstay for maintenance of VWP is 3 percent. According to State Department statistics, Poland has reduced its refusal rate from 13.5 percent to 9.8 percent between 2009 and 2010. This would be low enough to enter VWP under the relaxed guidelines for DHS, but not low enough under the current 3 percent threshold. Attached to VWP is the Electronic System for Travel Authorization (ESTA), which Congress created to enhance the security of VWP. 19

De Kerchove, G. (2011). Preface. In Pawlak, P. (Ed.), The EU-US Security and Justice Agenda in Action (p. 38). Paris: European Union Institute for Security Studies European Union.

20

The HLCG had previously agreed on common language emphasizing the need to make redress available to aggrieved passengers, but disagreement still exists over the necessary scope of judicial redress.

21

European Council. (23 November, 2009). Reports by the High Level Contact Group (HLCG) on Information Sharing and Privacy and Personal Data Protection. (Report No. 15851/09). Retrieved from: http://www.europarl.europa.eu/meetdocs/2009_2014/documents/libe/dv/01_st15851_09_ hlcgnov2009_/01_st15851_09_hlcgnov2009_en.pdf 22

84

Citations

European Parliament Committee on Civil Liberties, Justice and Home Affairs. (2010). Future European Union (EU)- United States of America International Agreement on the Protection of Personal Data When Transferred and Processed for the Purpose of Preventing, Investigating, Detecting, or Prosecuting Criminal Offences, including Terrorism, in the Framework of Police and Judicial Cooperation in Criminal Matters. (working document 2). Retrieved from: http://www.europarl.europa.eu/meetdocs/2009_2014/documents/libe/dt/830/830120/830120en.pdf 23

24

Ibid.

Most recently, as demonstrated by the PNR case, Germany and Austria abstained from the council vote, and many members of the European Parliament, including rapporteur Sophie in ‘t Veld (Netherlands – ALDE), did not support final passage due to privacy concerns.

25

26

Or longer if the ESTA application is part of an active investigation.

CYBER SECURITY Center for Strategic and International Studies (4 May, 2012). Significant Cyber Incidents Since 2006. Retrieved from: http://csis.org/files/ publication/120504_Significant_Cyber_Incidents_Since_2006.pdf 1

Office of the National Counterintelligence Executive. (October 2011). Foreign Spies Stealing US Economic Secrets in Cyberspace. Report to Congress. p. i, pp. 1-11.

2

Klimburg, A. & Mrtl, P. (September 2011). Cyberspace and Governance—A Primer. (special issue). p. 5. Retrieved from Österreichisches Institut für Internationale Politik website: http://www.oiip.ac.at/de/publikationen/policy-paper/publikationen-detail/browse/1/article/93/cyberspace-andgovernance-a-primer-1.html 3

4

Nye, J. (personal communication, 6 February, 2012).

United States Government Accountability Office. (July 2011). Defense Department Cyber Efforts: DOD Faces Challenges In Its Cyber Activities. (GAO publication No. 11-75). Retrieved from: http://www.gao.gov/new.items/d1175.pdf 5

Klimburg, A. & Tirmaa-Klaar, H. (April 2011). Cybersecurity and Cyberpower: Concepts, Conditions and Capabilities for Cooperation for Action within the EU (report). Brussels: EU Directorate General for External Policies Policy Department. p. 3 6

7

See 2010 NATO Strategic Concept. Retrieved from: http://www.nato.int/cps/en/natolive/official_texts_68580.htm#cyber.

8

See Cyber Atlantic. Retrieved at: http://www.enisa.europa.eu/activities/Resilience-and-CIIP/cyber-crisis-cooperation/cyber-atlantic.

European Network and Information Security Agency. (3 November, 2011). First Joint EU-US Cyber Security Exercise Conducted Today, 3rd. Nov. 2011 (press release). Retrieved from: http://www.enisa.europa.eu/media/press-releases/first-joint-eu-us-cyber-security-exercise-conducted-today-3rdnov.-2011.

9

Fahey, E. et al. & Pawlak, P. (Ed.).(December 2011). The EU-US Security and Justice Agenda in Action. (Chaillot papers). European Institute for International Security Studies. Retrieved from: http://www.iss.europa.eu/uploads/media/cp127_EU-US_security_justice_agenda.pdf 10

11

Klimburg & Tirmaa-Klaar (April 2011), p. 4.

Government of the United Kingdom. (2010). A Strong Britain in an Age of Uncertainty: The National Security Strategy. Retrieved from: http://www. direct.gov.uk/prod_consum_dg/groups/dg_digitalassets/@dg/@en/documents/digitalasset/dg_191639.pdf?CID=PDF&PLA=furl&CRE=nationalsecurity strategy.

12

Palmer, M. (3 November, 2011). EU and US Conduct First Cybersecurity Test. The Financial Times. Retrieved from http://www.ft.com/intl/cms/ s/2/18ef64b6-063a-11e1-a079-00144feabdc0.html#axzz22jZxsvBe 13

14

Klimburg & Tirmaa-Klaar (April 2011), p. 37.

A IP-Forsa poll taken in June 2012 showed that based on party leanings, pluralities or majorities of members of the SPD (47 percent to 45 percent), Greens (52 percent to 32 percent) and the Linke (70 percent to 16 percent) where opposed to the use of cyberweapons. Only a majority of the CDU/ CSU were in favor (54 percent to 38 percent). Interestingly, a plurality of members of the Pirate Party were also supportive (45 percent to 42 percent).

See Deutsche Gesellschaft fuer Auswaertige Politik e.V. (July/August 2012). Cyber War. Internationale Politik(4). p. 4.

15

Sees Speech by Uri Rosenthal, Minister of Foreign Affairs of the Netherlands, at the session on Economic Growth and Development of the London Conference on Cyberspace (1 November, 2011). Retrieved from: 16

17

See 2010 NATO Strategic Concept. Retrieved from: http://www.nato.int/cps/en/natolive/official_texts_68580.htm#cyber

Government of the United States of America. (2003). National Strategy to Secure Cyberspace.. Retrieved from: http://www.us-cert.gov/reading_ room/cyberspace_strategy.pdf 18

Council of the European Union. (Dec. 8, 2008). Council Directive 2008/114/EC of 8 December 2008 on the identification and designation of European critical infrastructures and the need to improve their protection. (council directive 2008/114/EC). Retrieved from: http://eur-lex.europa.eu/ LexUriServ/LexUriServ.do?uri=OJ:L:2008:345:0075:0082:EN:PDF 19

Kalfin, I. (February 2012). Draft Report on critical information infrastructure protection—achievements and next steps: toward global cyber security. (report no. 2011/2284 INI). Brussels: Committee on Industry, Research and Energy. p. 4. Retrieved from: http://www.europarl.europa.eu/sides/getDoc. do?type=COMPARL&reference=PE-474.017&format=PDF&language=EN&secondRef=01 20

Citations

85

Healey, J. (January 2012). Beyond Attribution: Seeking National Responsibility for Cyber Attacks (issue brief).. pp. 2-3. Retrieved from: https://www.fbiic.gov/ public/2012/mar/National_Responsibility_for_CyberAttacks,_2012.pdf

21

22

Ibid.

23

Mackinnon, R. (2012). Consent of the Networked: The Worldwide Struggle for Internet Freedom. New York: Basic Books.

In the 2007 attack on Estonia, information sharing between national CERTs of Germany, Finland, Slovenia and Estonia was key to monitoring sources of distributed denial-of-service attacks and was able to provide information on the sourcing of attacks even when systems in Estonia were compromised.

24

Organisation for Economic Co-Operation and Development. (June 2008). Malicious Software (Malware): A Security Threat to the Internet Economy.

Background paper presented at the OECD Ministerial Meeting on the Future of the Internet Economy, Seoul.

25

26

Klimburg & Tirmaa-Klaar (April 2011), p. 9.

Europol. (28 March, 2012). European Cybercrime Center to be Established at Europol (press release). Retrieved from: https://www.europol.europa. eu/content/press/european-cybercrime-centre-be-established-europol-1417.

27

See Federal Trade Commission. (March 2012). Protecting Consumer Privacy in an Era of Rapid Change: Recommendations for Businesses and Policymakers (FTC report). Retrieved from: http://www.ftc.gov/os/2012/03/120326privacyreport.pdf.

28

Council of Europe. (2 March, 2012). Global Project on Cybercrime (Phase 3) (report). Retrieved from: http://www.coe.int/t/DGHL/cooperation/ economiccrime/cybercrime/cy_project_Phase3_2571/2571_Phase3_summary_V6_Mar2012.pdf.

29

Archick, K. (21 May, 2012). US-EU Cooperation Against Terrorism (Congressional Research Service Report No. 7-5700). p. 7. Retrieved from: http:// www.fas.org/sgp/crs/row/RS22030.pdf.

30

Obama, B. (20 July, 2012). Taking the Cyberattack Threat Seriously. The Wall Street Journal. Retrieved at: http://online.wsj.com/article/SB100008723963 90444330904577535492693044650.html?mod=WSJ_Opinion_LEADTop. 31

See Department of Justice (21 June, 2012). Joint Statement on the Negotiation of a EU-US Data Privacy and Protection Agreement by Attorney General Eric Holder and European Commission Vice-President Viviane Reding (press release). Retrieved from: http://www.justice.gov/opa/pr/2012/ June/12-ag-783.html.

32

European Commission (30 November, 2011). Horizon 2020: The Framework Programme for Research and Innovation (report). Retrieved from: http://ec.europa.eu/research/horizon2020/pdf/proposals/communication_from_the_commission_-_horizon_2020_-_the_framework_programme_for_ research_and_innovation.pdf#view=fit&pagemode=none.

33

ENERGY & CLIMATE CHANGE 1

International Energy Agency (12 November 2012). World Energy Outlook 2012. (annual report).

2

Ibid.

3

Ibid.

4

Ibid.

US Energy Information Administration. (July 2011). Review of Emerging Resources: US Shale Gas and Shale Oil Plays. (report). Retrieved from: ftp:// ftp.eia.doe.gov/natgas/usshaleplays.pdf.

5

Ernst & Young. (2012). Shale Gas Report – Poland. (report). Retrieved from: http://www.ey.com/Publication/vwLUAssets/Shale_gas_report_-_ Poland/$FILE/Shale_gas_report%E2%80%94Poland.pdf 6

US Energy Information Administration. (September 2011). International Energy Outlook 2011. (DOE/EIA Report No. 0484/2011). Retrieved from: http:// www.eia.gov/forecasts/ieo/pdf/0484(2011).pdf 7

National Energy Technology Laboratory. (24 October, 2011). Life Cycle Greenhouse Gas Inventory of Natural Gas Extraction, Delivery and Electricity Production.

(DOE/NETL report-2011/1511). Retrieved from: http://www.netl.doe.gov/energy-analyses/pubs/NG-GHG-LCI.pdf 8

Geden, O. (23 November, 2011). Auslaufmodell Erdgas. SĂźddeutsche Zeitung. Retrieved from: http://www.swp-berlin.org/fileadmin/contents/ products/medienbeitraege/Auslaufmodell_Erdgas_SZ_KS.pdf 9

World Resources Institute (2012). Developed Country Fast-Start Climate Finance Pledges: A Summary of Self-Reported Information. Retrieved from: http://pdf.wri.org/climate_finance_pledges_2012-11-26.pdf 10

Purvis, N. & Stevenson, A. (March 2010). Rethinking Climate Diplomacy. (paper series). The German Marshall Fund of the United States. Retrieved from: http://www.gmfus.org/brusselsforum/2010/docs/BF2010-Paper-Purvis-Stevenson.pdf 11

Soest , J.P.V. (2011). Klompen in de machinerie: Bewuste en onbewuste sabotage van de transitive naar een duurzame energiehuisbouding. (essay). De Gemeynt.

Retreived from: http://www.rli.nl/sites/default/files/essay_van_soest_-_klompen_in_de_machinerie_1.pdf 12

86

Citations

In fall 2012 the EU agreed on a new Energy Efficiency Directive, which sets a new momentum in the EU’s efficiency efforts. Key measures require energy companies to reduce energy sales by 1.5 percent per annum and the public sector to retrofit and renovate 3 percent of public buildings according to the latest efficiency standards.

13

14

Interview with Thomas Enders, CEO of Airbus.(2012).

15

EU Commission (2012). EU Transport in Figures – Statistical Pocketbook. Luxembourg: Publications Office of the European Union.

See 2009 US-EU Summit Declaration. (3 November, 2009). Retrieved from: http://ec.europa.eu/transport/facts-fundings/statistics/doc/2012/ pocketbook2012.pdf 16

President Obama: “In recent years, a full 25 percent of high-tech start-ups in the United States were founded by immigrants, leading to more than 200,000 jobs in America”. The White House Office of the Press Secretary. (10 May, 2011). Remarks by the President on Comprehensive Immigration Reform in El Paso, Texas. (press release). Retrieved from: http://www.whitehouse.gov/the-press-office/2011/05/10/remarks-president-comprehensiveimmigration-reform-el-paso-texas 17

TURKEY Between 2002 and 2011, the country’s GDP grew on average by 5.2% per annum (despite the global recession of 2008–09) and per capita income has nearly doubled from $ 5500 to $10,500. For more information, see Sidar, C. (20 September, 2012). Turkey’s Fragile Success. Foreign Policy. Retrieved from: http://www.foreignpolicy.com/articles/2012/09/20/turkeys_fragile_success; and Taşpinar, Ö. (2011). The Rise of Turkish Gaullism: Getting TurkishAmerican Relations Right. Insight Turkey, Vol.13(1). Retrieved from: http://file.insightturkey.com/Files/Pdf/insight-turkey_vol_13_no_1_2011_taspinar. pdf;.

1

Dombey, D. and Guler, F. (10 September, 2012). Turkey’s Economy Runs Out of Steam. The Financial Times. Retrieved from: http://www.ft.com/intl/ cms/s/0/9b49abc0-fb61-11e1-b5d0-00144feabdc0.html#axzz2DX9C9TMC 2

3

Sidar, C., Turkey’s Fragile Success.

Watson, I. and Comert, Y. (18 September, 2012). Report says Turkey’s Kurdish Conflict Has Turned More Violent. CNN. Retrieved from: http://www. cnn.com/2012/09/18/world/europe/turkey-war-within/index.html 4

Human Rights Watch. (January 2012.) Country Summary: Turkey. (issue brief). p.503-509, Retrieved from: http://www.hrw.org/sites/default/files/ reports/wr2012.pdf; as of 1 August 2012, 76 journalists are supposedly in prison in Turkey, see Committee to Protect Journalists. (October 2012).

Turkey’s Press Freedom Crisis: The Dark Days of Jailing Journalists and Criminalizing Dissent. (special report). p.6. Retrieved from: http://www.cpj.org/ reports/Turkey2012.English.pdf.

5

6

Committee to Protect Journalists. Turkey’s Press Freedom Crisis. p.16.

Paul, A. (19 October, 2012). Turkey-EU Relations: Time to Rebuild Trust. European Policy Centre. Retrieved from: http://www.epc.eu/pub_details?cat_ id=4&pub_id=3021 7

European Commission. (10 October, 2012). Turkey: 2012 Progress Report. Retrieved from: http://ec.europa.eu/enlargement/pdf/key_documents/2012/ package/tr_rapport_2012_en.pdf 8

Paul, A. (12 August, 2012).Turkey and Iran: an unraveling relationship. Al Arabiya News. Retrieved from: http://english.alarabiya.net/ views/2012/08/12/231743.html.

9

Larrabee, F.S. (11 July, 2012). The Turkish-Iranian Alliance That Wasn’t. Foreign Affairs. http://www.foreignaffairs.com/articles/137773/f-stephenlarrabee/the-turkish-iranian-alliance-that-wasnt?page=show 10

Alcaro, R. (July 2012). A Tale of Wasted Opportunities: The EU, Turkey and Iran’s Nuclear Issue. Istanbul Policy Center (issue brief). Retrieved from: http://www.iai.it/pdf/GTE/GTE_C_01.pdf.

11

12

Turkey’s Foreign Policy: Growing less Mild. (14 April, 2012). The Economist. Retrieved from: www.economist.com/node/21552602.

In June 2012, 57 percent of Turks in an opinion poll believed that the country should stay out of Syria, 32 percent supported intervention, and 11 percent did not know. See German Marshall Fund of the United States. (12 September 2012). Transatlantic Trends 2012. p.77. Retrieved from: http:// trends.gmfus.org/files/2012/09/TT-2012-Topline-Data.pdf.

13

House of Commons Foreign Affairs Committee. (20 March 2012). UK-Turkey Relations and Turkey’s Regional Role. (twelfth report of session 20102012). p. 66. Retrieved from: http://www.publications.parliament.uk/pa/cm201012/cmselect/cmfaff/1567/1567.pdf 14

Glaze, B. (3 October, 2012). Nick Clegg Leads Trade Mission to Turkey. The Independent. Retrieved from: http://www.independent.co.uk/news/uk/ politics/nick-clegg-leads-trade-mission-to-turkey-8195183.html 15

House of Commons (2012). p. 68. The UK-Turkey CEO Forum aims to “improve perceptions among the UK business community about doing business in Turkey”.

16

17

See Strategic Partnership. Retrieved from: http://ukinturkey.fco.gov.uk/en/about-us/working-with-turkey/bilateral-relation/strategic-partnership.

Cameron ‘Anger’ At Slow Pace of Turkish EU Negotiations. (27 July, 2010). BBC News. Retrieved from: http://www.bbc.co.uk/news/ukpolitics-10767768 18

Chrisafis, A. and Hipkins, N. (22 December, 2011). Turkey Freezes All Political Relations with France over Genocide Row. The Guardian. Retrieved from: http://www.guardian.co.uk/world/2011/dec/22/turkey-france-freeze-relations-over-genocide 19

Citations

87

Berlemont, I. (25 July, 2012). France-Turkish Relations: Expectations from François Hollande’s Presidential Term. Wise Men Center for Strategic Studies.

Retrieved from: http://www.bilgesam.org/en/index.php?option=com_content&view=article&id=524:french-turkish-relations-expectations-fromfrancois-hollandes-presidential-term&catid=70:ab-analizler&Itemid=131

20

German-Turkish Trade Relations are Gaining Momentum. (2 April, 2012). Deutschwelle. Retrieved from: http://www.dw.de/german-turkish-traderelations-are-gaining-momentum/a-15853653-1 21

Gezer, O. and Reimann, A. (28 February, 2011). “You are Part of Germany, But Also Part of Great Turkey”. Der Spiegel. Retrieved from: http://www. spiegel.de/international/europe/erdogan-urges-turks-not-to-assimilate-you-are-part-of-germany-but-also-part-of-our-great-turkey-a-748070.html 22

23

House of Commons. (2012). p.77.

Coskun, O. (30 October, 2012). EU Will Lose Turkey If It Hasn’t Joined By 2023: Erdogan. Reuters. Retrieved from: http://www.reuters.com/ article/2012/10/30/us-germany-turkey-idUSBRE89T1TG20121030 24

The EU and Turkey: Steering a Safer Path Through the Storms. (1 December 2011). EU Observer. Retrieved from: http://euobsever.com/ opinion/114473 25

Those eight chapters are: company law; right of establishment and freedom to provide services; information society and media; statistics; judiciary and fundamental rights; justice, freedom and security; consumer and health protection; and financial control.

26

Benitez, J. (19 November, 2012). German Defense Minister Expects Request Today to Deploy Patriot Missiles to Turkey. NATO Source (Weblog post).

Retrieved from: http://www.acus.org/natosource/german-defense-minister-expects-request-today-deploy-patriot-missiles-turkey 27

Crawford, D., Peker, E. and Fidler, S. (26 November, 2012). Germany, Turkey Spar Over Patriots. The Wall Street Journal. Retrieved from: http://online. wsj.com/article/SB10001424127887324784404578143271316436766.html?mod=googlenews_wsj 28

As mentioned previously, of the 76 journalists currently imprisoned in Turkey, more than 70 percent are of Kurdish ethnicity. See Committee to Protect Journalists (October 2012). p.20.

29

International Crisis Group. (2 April, 2012). Aphrodite’s Gift: Can Cypriot Gas Power A New Dialogue? (issue brief). Retrieved from: http://www. crisisgroup.org/en/publication-type/media-releases/2012/europe/cyprus-aphrodites-gift-can-cypriot-gas-power-a-new-dialogue.aspx 30

31

Ibid.

Turkey’s Foreign Ministry has announced that any oil and gas companies cooperating with Nicosia would be banned from energy projects inside Turkey. See Turkey Warns Oil Firms Eyeing Cyprus Shelf. (5 November, 2012). UPI. Retrieved from: http://www.upi.com/Business_News/EnergyResources/2012/11/05/Turkey-warns-oil-firms-eyeing-Cyprus-shelf/UPI-99481352091840/ 32

33

International Crisis Group (2 April, 2012). Aphrodite’s Gift: Can Cypriot Gas Power a New Dialogue?

34

See OSCE Guide on Non-military Confidence-Building Measures (CBMs). Retrieved from: http://www.osce.org/cpc/91082

See European Commission (21 June, 2012). Statement by EU Commissioner Cecelia Malstroem on the Initialling of the EU-Turkey Readmission Agreement. (memo/14/477). Retrieved from: http://europa.eu/rapid/press-release_MEMO-12-477_en.htm 35

In its 2011 Human Rights Report, the US State Department cited Turkey for “deficiencies in effective access to justice”, including “broad laws against terrorism and threats against the state” as well as “close connections between prosecutors and judges [that] gave the appearance of impropriety and unfairness in criminal cases…”. In US State Department (2011). Country Report on Human Rights Practices for 2011: Turkey.

Retrieved from: http://www.state.gov/documents/organization/186624.pdf.

36

During a two-day trip to Turkey, O’Connor met with members of the High Council of Jurors and Prosecutors, the Justice Academy, and Constitutional Court. See US State Department (5 October 2011). Justice O’Connor: Keep It Short, Keep It Simple (press release). Retrieved from: http://turkey.usembassy.gov/justice_oconnor.html 37

For more on this topic, see Sidar Global Advisors, US Chamber of Commerce, and Turkish Industry and Business Association. (March 2012).

US-Turkish Economic Relations in a New Era: Analysis and Recommendations for a Stronger Strategic Partnership. Retrieved from: http://www. uschamber.com/sites/default/files/reports/20120312-USCC-Report.pdf.

38

See European Commission (10 October 2012). Turkey: 2012 Progress Report. Retrieved from: http://ec.europa.eu/enlargement/pdf/key_ documents/2012/package/tr_rapport_2012_en.pdf 39

Because of the EU-Turkey Customs Union, a third country that signs an FTA with the EU can get access, without customs duties, to both the EU market and the Turkish market. Turkey, however, cannot benefit from the same access to the FTA partner market, since it is not technically part of the accord. The EU has attached a “Turkey clause” to its FTAs with third parties, whereby it asks the latter to conclude a similar agreement with Turkey.

But these are non-binding clauses, and the EU has not really tried to enforce them.

40

Togan, S. (March 2012). The EU-Turkey Customs Union: A Model for Future Euro-Med Integration. The Center for European Policy Studies. (MEDPRO technical report No. 9). Retrieved from: http://www.ceps.eu/book/eu-turkey-customs-union-model-future-euro-med-integration 41

EU, Turkey Attempt Immigration Give-and-Take. (22 June, 2012). EurActiv. Retrieved from: http://www.euractiv.com/justice/eu-turkey-attemptimmigration-gi-news-513498 42

See Phillips, D. de Waal, T. and Lemmon, H.E.M. (17 April, 2012). Diplomatic History: The Turkey-Armenia Protocols. Carnegie Endowment for International Peace. Retrieved from: http://carnegieendowment.org/2012/04/17/diplomatic-history-turkey-armenia-protocols and International Crisis Group. (14 April, 2009). Turkey and Armenia: Opening Minds, Opening Borders (Europe report no. 199). Retrieved from: http://www.crisisgroup.org/~/ media/Files/europe/199_turkey_and_armenia___opening_minds_opening_borders_1.pdf 43

88

Citations

Güsten, S. (24 October 2012). Using Cheese to Bridge the Turkey-Armenia Gap. The New York Times. Retrieved from: http://www.nytimes. com/2012/10/25/world/middleeast/25iht-m25-turk-armenia.html?pagewanted=all 44

Huber, D. (September 2012). Turkish-Israeli Relations in a Changing Strategic Environment. Istanbul Policy Center (issue brief). Retrieved from: http://www.iai.it/pdf/GTE/GTE_C_05.pdf.

45

Koplow, M.J. and Sasley, B.E. (27 June, 2012). Time to End the ‘Cold War’ between Turkey and Israel. The Christian Science Monitor. Retrieved from: http://www.csmonitor.com/Commentary/Opinion/2012/0627/Time-to-end-the-cold-war-between-Turkey-and-Israel.

46

RUSSIA 1

Sharma, S. (2011). Not an Exceptional Country: Russia and the Global Financial Crisis of 2008-2009. Mediterranean Quarterly, 22(4), p. 35.

2

Ibid., p. 36.

3

Ibid., p. 37.

4

Ibid.

Belton, C. (5 July, 2012). Big Drop in Capital Flight from Russia-But No Change in Trend. The Financial Times. Retrieved from: http://blogs.ft.com/ beyond-brics/2012/07/05/big-drop-in-capital-flight-from-russia-but-no-change-in-trend/ 5

Trenin, D. (2011). Russian Policies towards the Nordic-Baltic Region. in Nurick, R. and Nordenman, M. (Eds.), Nordic-Baltic Security in the 21st Century: the Regional Agenda and the Global Role (special report). The Atlantic Council.

6

7 “Putin and Cameron Emphasize Trade Ties” (2 August, 2012). Financial Times. Retrieved from www.ft.com/intl/cms/s/0/5627e6b0-dc1-11e1bbdc00144feab49.a.html#26MWkl85J 8

The Cruel Sea. (11 February, 2010). The Economist. Retrieved from: http://www.economist.com/node/15514914

Ost-Ausschuss der Deutschen Wirtschaft. (2012). Russische Foederation. (Economic Trade Summary). Retrieved from: http://www.ost-ausschuss.de/ russland#wibeziehungen 9

Timmins, G. (June 2011). German-Russia Bilateral Relations and EU Policy on Russia: Normalization and the “Multilateral Reflex”. Journal of Contemporary European Studies, 19(2). p. 197.

10

Meister, S. (9 May, 2012). An Alienated Partnership: German-Russian Relations After Putin’s Return. (FIIA briefing paper no. 105). The Finnish Institute of International Affairs. p. 6.

11

European Commission. (2012). Directorate General for Trade Country Profile: Russia. Retrieved from: www.ec.europa.eu/trade/creatingopportunities/bilateral-relations/countries/russia/ 12

European Commission (2011). EU-Russia Energy Dialogue 12th Progress Report. Retrieved from: http://ec.europa.eu/energy/international/russia/ doc/20111201_eu_russia_report.pdf 13

EU Probe into Gazprom Adds to Energy Tensions. (4 September, 2010). Reuters. Retrieved from: http://in.reuters.com/article/2012/09/04/gazprom-euidINL6E8K4GJU20120904 14

On July 20, 2012, the Russian Ambassador to France Aleksandr Orlov stated that,”it will be difficult for him (Assad) to stay in office given everything that happened”. in Park, S. (1 August, 2012). “Russia’s Diplomacy During the Syria Crisis (Web log post). Center for Strategic and International Studies.

Retrieved from: http://csis.org/blog/russias-diplomacy-during-syria-crisis 15

Bryanski, G. (9 December, 2011). Russia’s Middle Class: A Growing Problem for Putin. Reuters. Retrieved from: http://www.reuters.com/ article/2011/12/09/us-russia-protests-middleclass-idUSTRE7B80QU20111209 16

Quoted in Aron, L. (2012). Russia’s Protesters: The People, Ideals, and Prospects (issue brief). The American Enterprise Institute for Public Policy Research. p. 3.

17

18

Ibid.

Dmitriev, M. and Treisman, D. (September/October 2012). The Other Russia: Discontent Grows in the Hinterland. Foreign Affairs. Retrieved from: http://www.foreignaffairs.com/articles/137836/mikhail-dmitriev-and-daniel-treisman/the-other-russia 19

20

Cooper, W.H. (2012). PNTR for Russia and US-Russian Economic Ties. (report no. 7-5700). Congressional Research Service Report for Congress. p. 3.

Asland, A. and Hufbauer, G.C. (November 2011). The United States Should Establish PNTR With Russia. (issue brief) Peterson Institute for International Economics.

21

Russian Lawyer Sergei Magnitsky was imprisoned and eventually found dead in a Russian jail cell after uncovering a $230 million tax evasion scheme by Russian government officials while working on behalf of Hermitage Capital Management. For more information, see: Thornhill, J. and Dyer, G. (27 July, 2012). The Magnitsky Law. The Financial Times. Retrieved from: http://www.ft.com/intl/cms/s/2/7efe34d6-d5f0-11e1-a5f3-00144feabdc0. html#axzz2EJ8qkUjL 22

23

Epatko, L. (24 June, 2010). “Q and A: Medvedev Meets with Obama on Modernization Plan, Arms Control”. PBS Newshour.

Citations

89

24

Putin, V. (6 September, 2012). An Asia-Pacific Growth Agenda. Wall Street Journal. Retrieved from: www.online.wsj.com

25

Judah, B., Kobzova, J., and Popescu, N. (2011). p. 26.

26

Pilling, D. (13 September, 2012). Russia Begins Its Slow and Reluctant Pivot to Asia. The Financial Times. p. 11.

27

Judah, B., Kobzova, J., and Popescu, N. (2011). p. 26.

28

Dragneva, R. and Wolczuk, K. (August 2012). p.10.

CHINA Kundnani, H. and Parello-Plesner, J. (May 2012). China and Germany: Why the Emerging Special Relationship Matters for Europe. (ECFR Policy Brief). European Council on Foreign Relations. p. 5.

1

2

Holslag, J. (2011). The Elusive Axis: Assessing the EU-China Strategic Partnership. Journal of Common Market Studies, (2), pp. 297-298.

Geitner, P. (27 June, 2012). US, Europe, and Japan Escalate Rare Earth Dispute with China. New York Times. Retrieved from: http://www.nytimes. com/2012/06/28/business/global/us-europe-and-japan-escalate-rare-earth-dispute-with-china.html 3

4

See US-EU Statement on the Asia-Pacific Region. Retrieved from: http://www.state.gov/r/pa/prs/ps/2012/07/194896.htm

Statisches Bundesamt. (2012). Germany’s major trading partners, 2011. Retrieved from: https://www.destatis.de/EN/FactsFigures/ NationalEconomyEnvironment/ForeignTrade/_Graphic/TradingPartners.png;jsessionid=0D1CEEE3D51AB28787C1EC4028B4AEC5.cae4?__ blob=poster 5

Colby, E. (2012). “US-Central European Relations after the “Pivot”. In: Navigating Uncertainty: US-Central European Relations. Center for European Policy Analysis. p. 85.

6

Pawlak, P. and Ekmektsioglou, E. (June 2012). Transatlantic strategies in the Asia Pacific. (analysis) p. 2. European Union Institute for Security Studies.

Retrieved from: http://www.iss.europa.eu/uploads/media/analysis_asia_pacific.pdf 7

8

See EEAS Key Documents. Retrieved from: http://eeas.europa.eu/asia/docs/

For example, see 15th EU-China Summit Joint Press Communique: Towards a Stronger EU-China Comprehensive Strategy Partnership. Retrieved from: http://www. consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec8/132507.pdf 9

See Guidelines on the EU’s Foreign and Security Policy in Asia. Retrieved from: http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressdata/en/ misc/97842.pdf 10

Mölling, C. (July 2012). “Trends Within the European Union”. in O’Donnell, C. (Ed.) The Implications of Military Spending Cuts for NATO’s Largest Members.

The Brookings Institution. p. 7.

11

US and European FDI has led to benefits to the Chinese economy greater than the raw stock of FDI (only 1 of global transatlantic FDI). TransAtlantic FDI is tied to 45 million jobs, 56 percent of total exports, and a majority of the technology transfer to Chinese companies. See Xu, T., Petersen, T. and Wang, T. (2012), Cash in Hand: Chinese Foreign Direct Investment in the US and Germany, p. 4. Bertelsmann Stiftung and CCIEE. Retrieved from: http://www.bfna.org/sites/default/files/publications/Cash%20in%20Hand%20Second%20Edition%20final.pdf 12

The Chinese themselves have explicitly identified 11 strategic sectors, such as banking and construction, in which outside actors are heavily restricted or must do business via joint ventures with Chinese firms.

13

90

14

Grant, C. (2012). Russia, China, and Global Governance. London: Centre for European Reform. p. 57.

15

Ibid., p. 54

16

OECD. (2012). Germany International Trade Statistics (database). Retrieved from: http://stats.oecd.org/index.aspx?datasetcode=MEI_TRD

Citations

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Bertelsmann Foundation 1101 New York Avenue, NW, Suite 901 Washington, DC 20005 USA main phone +1.202.384.1980 main fax +1.202.384.1984 92

www.bfna.org