United Kingdom | Council on Foreign Relations

Israel

Prince Charles and Israeli Funerals

Prince Charles attended the funeral of Shimon Peres last week, in Jerusalem. This was not his first visit: he also attended the Yitzhak Rabin funeral in 1995. In the 21 years since then he has visited Arab countries repeatedly, but Israel has remained on the blacklist. No official visit, no tourism, sum total of visits there = two visits to Mount Herzl Cemetery. Why? Is it his own prejudice against the Jewish State, or is the Foreign Office telling him to stay away? (The Queen has never set foot in Israel.) There is actually a very good reason for him to visit another cemetery in Jerusalem, at the Mount of Olives: his grandmother is buried in a convent there. That woman is Princess Alice of Battenberg, the mother of Prince Philip. Philip actually did visit there, in 1994, in a trip the Foreign Office insisted was entirely private. Princess Alice was an extraordinary woman. She was the great-granddaughter of Queen Victoria and was born at Windsor Castle in 1885. Earl Mountbatten of Burma was her younger brother. Congenitally deaf, she nevertheless learned to speak English and German. She led a most difficult life, in and out of exile from Greece (she had married Prince Andrew of Greece in 1903). During the Second World War she lived in Athens and sheltered Jewish refugees there, for which was recognized by Yad Vashem as one of the "Righteous Among the Nations." That ceremony at Yad Vashem was in fact the occasion for Prince Philip’s visit. She lived the final years of her life in Buckingham Palace and died there in 1988, after which in accordance with her request her remains were interred on the Mount of Olives. Her spirit is nicely suggested by this story: during the Second World War the Nazis occupied Athens. When a German general asked her "Is there anything I can do for you?" she replied "You can take your troops out of my country." I suppose it is far too much, diplomatically, to expect Israel to disinvite someone like the heir to the British throne from a funeral. But the Prince’s attendance was an act of hypocrisy. If he wants to honor Shimon Peres, a better way is simply to schedule a visit to the country to which Peres devoted his life. And he can see his grandmother’s grave while at it. UPDATE ON OCTOBER 5: It turns out that Prince Charles secretly visited his grandmother’s grave while in Jerusalem, according to a story in The Times of Israel. The headline and subhead of the story are: "Prince Charles secretly visited grandmother’s grave while in Jerusalem; British royal took advantage of his attendance at Peres funeral to stop by burial site of Princess Alice of Battenberg, on Mount of Olives." Note the difference between what he did and what his father did. Prince Philip made a "private visit" to Israel in 1994 to be present at Yad Vashem when his mother was honored, and to visit her grave. Prince Charles, who would not visit Israel under any circumstances except a state funeral, visited there before leaving the country. My point still stands: no British royal, not one, has made any sort of official visit to Israel despite dozens of visits to Arab countries. That’s indefensible.

Blog Post by Elliott Abrams October 2, 2016 Pressure Points
Brexit

Global Economics Monthly: August 2016

Bottom Line: Markets have absorbed the initial economic shock from Brexit, but navigating the new landscape will remain a challenge. Two months after the vote, the politics of Brexit is producing a lengthy and uncertain renegotiation of Britain’s place in Europe and the world. Such extended uncertainty is likely to produce a long-lasting drag on both UK and European economies, which could ultimately threaten the viability of the European Union (EU). Brexit at Two Months The June 23 Brexit vote was not a “Lehman moment,” as some analysts had feared. That it did not cause a financial market freeze similar to what followed the fall of Lehman Brothers in August 2008 is a result of the strong central bank action to calm markets and subsequent monetary easing from the Bank of England. Markets have stabilized and the recent economic data has been solid, leading many market analysts to declare the crisis over. Such optimism is premature. For the United Kingdom, which before the vote was expected to grow at 2 percent annually, the damage to growth still could be severe, perhaps on the order of 2 to 3 percent of gross domestic product over the next eighteen months. This contraction reflects the substantial political and economic uncertainty created by Brexit and its likely effect on investment and consumer demand. The exchange rate depreciation and easy monetary policy will provide a powerful offsetting boost, but it will take time to be felt. The United Kingdom remains on the front line of this event. The more difficult question is the extent of contagion to the rest of the world and in particular Europe, given the EU’s weak economy and its population’s increasing frustration with its economic prospects. As in the United Kingdom, uncertainty about post-Brexit relations is likely to weigh powerfully on investment throughout Europe. Financial stability is also an issue: European bank stocks continue to underperform and the continental banking system is struggling with the legacy of the crisis and weak profitability. Lower interest rates will not help on that latter score. The European Central Bank can ensure adequate liquidity to troubled banks, but it cannot make them lend. If Europe wants above-trend growth in this environment, fiscal policy will need to do more. Looking ahead, I see two systemic market risks coming out of Brexit. The first is the potential for lengthy negotiations to extend the exit process at a significant economic cost for markets that crave certainty. This tension is the result of a disconnect between economic and political timelines. The second risk is that it will distort decision-making by European policymakers on critical economic questions. Although many of Europe’s challenges would have presented thorny problems absent Brexit, the UK vote creates a low-growth, populist environment in which decision-making will be even more difficult. Consider each of these drivers in turn. A Disconnect Between Political and Economic Timelines Immediately after forming her government, UK Prime Minister Theresa May announced her intention to trigger Article 50 at the end of 2016, beginning the formal process of Britain exiting the EU. Now, there are reports that invoking Article 50 may be delayed until the end of 2017 and a formal exit delayed until the end of 2019. In one respect, this delay simply reflects the reality of the difficult environment facing the UK government in negotiating a favorable deal with Europe. Upcoming elections in 2017 in France (May) and Germany (likely October) mean that Britain does not know who its principal negotiating partners will be, and it is hard to imagine either of those countries making significant concessions ahead of their votes and risking domestic backlash. The UK government itself is far from ready as it launches a come-from-behind effort to put in place the right people, gather the necessary information, and prepare positions before negotiations. Until recently, the UK government had less than ten people with substantial trade negotiation experience, far short of what will be required to negotiate the thousands of new rules and conditions determining the United Kingdom’s future relationship with the European Union. One response to this monumental task would be for the UK government to seek an off-the-shelf solution, mirroring the agreements that countries such as Norway or Switzerland have. Putting aside questions of whether Europe would be prepared to offer such a deal, substantial questions have been raised about whether these countries’ relationships with the EU represent appropriate models for the UK economy, which is larger and more complex. Further, such an agreement would require the United Kingdom to accept freedom-of-movement rules, an anathema to pro-Brexit voters. Another approach would be to exit the EU without a new arrangement in place, which would mean that tariffs default back to World Trade Organization levels, and then later the United Kingdom could seek to negotiate a bilateral trade agreement with Europe. But this option, though easier to implement, would sacrifice a close link with Europe that many British—especially those participating in the financial markets—believe is needed for the United Kingdom to restore strong growth and protect its preeminent status as a major financial center. These considerations suggest that the United Kingdom needs a bespoke deal, customized and negotiated to meet the specific conditions facing the United Kingdom and Europe. Such a deal could take years to negotiate. Note that, although the terms of exit are to be agreed in two years and can be approved by a qualified majority of the EU members, the new trade agreement will be far more complex and requires unanimity among EU members. It could be several years before there is clarity about the economic relationship that guides the United Kingdom and Europe. Tremendous economic uncertainty is likely to persist as long the United Kingdom’s future relationship with Europe is unknown, damaging business and consumer confidence and producing a substantial drag on investment as firms wait for greater clarity on the new economic model. Still, at some point, jobs are likely to begin to shift to the continent in anticipation of London’s reduced access to European markets. (Such shifts will be perhaps most visible in finance given London’s role as a leading financial center.) This tension between the market’s desire for certainty and the new, extended timeline for exit will not resolve easily. So far, markets have remained relatively calm, supported by strong central bank action. But that could change, and quickly, if signs of a substantial economic downturn or a flight of capital from London reach damaging levels. In that case, pressure on both the UK government and its negotiating partners on the continent to seek a quick agreement could increase. More or Less Europe European policymakers face a parallel change in how best to respond to Brexit. Six years after the start of the eurozone debt crisis, Europe remains trapped in a tepid economic recovery characterized by low growth, high unemployment, and high public and private debt. Unemployment in the eurozone remains above 10 percent. Youth unemployment rates are often more than 20 percent, undermining a generation of Europeans’ hopes for a brighter economic future. Against this backdrop, Brexit marks the realization of a significant downside risk for the European (and global) economy. The euro area, which had started the year with stronger than expected growth momentum, now faces a potentially sizeable demand shock and increased concern about financial stability. It would have been difficult in the best of circumstances to deal with the range of economic challenges confronting European policymakers in the fall, including the recapitalization of Italian banks, financing additional migration related expenditures, and fiscal slippages that violate EU rules in several countries. Brexit makes navigating the political and economic minefields surrounding these issues all the more daunting. Addressing these challenges requires a comprehensive approach of macroeconomic and structural measures. On the demand side, more support is needed. The region’s creditor countries have resisted calls for fiscal stimulus, forcing monetary policy to carry the burden of support for recovery, and the resulting negative interest rates are punishing savers, damaging the balance sheets of banks, and raising concerns about financial stability. Notwithstanding legitimate concerns in Germany and elsewhere about financial discipline and responsibility for periphery debt, fiscal authorities now need to take more responsibility for supporting demand and sustaining popular support for Europe. But short-term economic stimulus measures cannot, on their own, restore Europe’s promise. Disappointingly, structural reforms of labor and product markets also appear to have stalled. Incomplete economic union continues to cast a shadow over the economy, but a divided Europe seems less likely than ever to move forward with the measures needed to make economic unity viable. The tension between European monetary union and national fiscal policies contributes to an imbalance in policymaking and a weakened capacity to respond to crises. Although some policymakers see Brexit as an opportunity to accelerate economic and financial integration, for others, the vote and the rise in anti-EU sentiment across the region illustrate the need to set aside ambitions of greater economic unity and focus on a narrower set of security, labor, and immigration concerns. The latter approach, however, risks condemning Europe to a low-growth future that almost certainly will undermine popular support for the European project. Nowhere is the dilemma starker than in the current debate over how best to resolve the problems of the Italian banking system. It is hard to imagine the eurozone financial system thriving in the absence of comprehensive banking union, and that requires strong regulation of banks, coupled with firm market discipline and limits on state support for inadequately capitalized institutions. In Italy, these considerations all pointed to the need for a comprehensive restructuring and reform effort, and, where state support was needed, for bailing in creditors. Yet, following the Brexit vote, a weaker outlook coupled with rising populist pressures against austerity have led Prime Minister Matteo Renzi to seek an exception to the bail-in requirements ahead of the upcoming referendum on constitutional reform. Although a sensible compromise on the bail-in requirement looks possible, it would be unfortunate for the future of Europe if it delayed a serious bank restructuring. Sadly, that scenario now appears the most likely. Not surprisingly, calls for populist economic policies and less union have found fertile ground across Europe. The growing political and economic constraints on policy challenge the conventional wisdom that eurozone policymakers will make tough decisions on rescue packages if and when a crisis materializes. Conclusion Brexit is a shock, but one that plays out slowly, constrained by the complexity of the process, the high degree of unknowns, and the political constraints on decision-making in the United Kingdom and in Europe. The shock acts as a drag on growth and intensifies the risk that an incomplete European economic union will return to crisis. That may be the greater threat. If policymakers respond effectively to Brexit, the benefits could be substantial: a stronger global economy and an ebbing of the political and economic forces now pressuring UK and European policymakers. Conversely, failure to address the growth risks could cause broader and deeper global economic contagion. Looking Ahead: Kahn's take on the news on the horizon Japan Prime Minister Abe announced a 28.1 trillion yen ($276 billion) stimulus package, but much of the package consists of loans, and fresh government spending is 7.5 trillion yen. Is it the start of a shift in major economies’ industrial country fiscal policy? Group of Twenty (G20) and China G20 leaders’ summit will be held in Hangzhou September 4 through 5. In their July meeting, G20 finance ministers and central bank governors expressed their concerns about heightened global risks due to Brexit. The upcoming leaders’ summit will test China’s leadership role in ensuring that G20 takes a more coordinated approach to fiscal policy and other critical issues including infrastructure investment. Venezuela Venezuela’s economic crisis is deepening, and default seems a question of when rather than if. The government has debt repayments of $1.8 billion due in October and $2.9 billion in November, and is looking to a debt swap operation between the state oil company PDVSA and creditors to get through the year without default.

Report by Robert Kahn August 22, 2016
United Kingdom

Scotland After Brexit

As a result of the Brexit vote to leave the European Union, the United Kingdom is likely to see another Scottish independence referendum in its future.

Interview with Alexandra Abell and Richard G. Whitman August 9, 2016

Israeli-Palestinian Conflict

Suing Lord Balfour

The unseriousness of the PLO’s desire for peace with Israel was demonstrated in a comic manner this week. Here’s the news item from the AP: The Palestinian president says he will sue Great Britain over the 1917 Balfour Declaration and its support for a Jewish national home in the Holy Land. Palestinian Foreign Minister Riad Malki made the announcement on behalf of Mahmoud Abbas at Monday’s opening of the Arab League summit in the Mauritanian capital of Nouakchott. Malki said the suit would be filed in an international court. He didn’t elaborate. Perhaps Mr. Malki "didn’t elaborate" because he recognizes, at some level, the lunacy of this approach. Is it to be the International Criminal Court, where perhaps they could seek a warrant to arrest Lord Balfour? Problem: he died in 1930. Perhaps he has heirs whose property might be attached. In fact, he never married and had no children. Or perhaps the PLO might try to attach all the streets named for Balfour throughout Israel, or the community there called Balfouria after him. And this PLO approach might become a model: perhaps Germans still unhappy with the Versailles Treaty might sue England and France. Like the Balfour Declaration, that was only a century ago--and Versailles was an actual treaty, not a mere "declaration." If declarations are actionable in international courts, there will be a bonanza for lawyers. Every country in Latin America might sue the United States over the Monroe Doctrine, or perhaps every European country the Monroe Doctrine prohibited from intervening in this Hemisphere might sue us. Lawyers could ponder the difference between a "doctrine" and a "declaration." But there is something more serious to ponder: that the Palestinian leadership is wasting its time and energy on this nonsense instead of trying in practical ways to improve the lives of Palestinians. Suing Lord Balfour, or to be more exact suing the United Kingdom over the Balfour Declaration of 1917, is a substitute for decent governance and the evasion of even an effort to provide it. I imagine that Palestinians are fully aware of this and understand that this initiative is a form of bread and circuses. It’s likely that they will not find this whole episode as ridiculous and amusing as we in the West do.

Blog Post by Elliott Abrams July 26, 2016 Pressure Points
Iraq

Failing Iraq

The United Kingdom's Chilcot report, the final report of the British government's Iraq Inquiry, represents a thorough examination of the record from which hopefully the British (and American) governments can learn.

Blog Post by Steven A. Cook July 11, 2016 From the Potomac to the Euphrates
NATO (North Atlantic Treaty Organization)

Brexit, Pursued by a Bear: NATO’s Enduring Relevance

The British public’s momentous decision two weeks ago to quit the European Union (EU) continues to reverberate globally. But its geopolitical implications should not be exaggerated. Brexit poses an institutional crisis for the European Union. But it hardly indicates the impending “collapse of the liberal world order,” as some pundits fret. This weekend’s Warsaw summit will remind the world—and Vladimir Putin—that the North Atlantic Treaty Organization (NATO) remains the real anchor of Western defense, and that the solidarity of the transatlantic alliance need not depend on the fortunes of the European project. Americans have long associated the Atlantic alliance with European unity—and for good reason. It was the U.S. security guarantee—formalized in the North Atlantic Treaty (NAT) signed in Washington in 1949—that provided Western Europeans the confidence they needed to take the first, difficult postwar steps toward continental integration, beginning with Franco-German reconciliation. Secretary of State Dean Acheson, who supported the emergence of NATO’s integrated command structure, was also a vocal cheerleader for a “United States of Europe” (as was his Republican successor John Foster Dulles). As a condition for Marshall Plan aid, for instance, the United States insisted that European recipients take steps toward unity. This pressure helped spur France’s proposal for a European Coal and Steel Community—the forerunner of today’s EU. Looking back, it all seems remarkable. For the first time in history, a dominant power (the United States) promoted unity rather than division in an area under its influence. Under the U.S. nuclear umbrella, Western Europe enjoyed an unprecedented period of peace, prosperity, and integration. The West’s triumph in the Cold War was thus a vindication for both NATO and European unity. In the wake of the Soviet Union’s collapse, both the alliance and the EU expanded into the former Soviet space, to the very borders of Russia itself. Given this parallel history, it is understandable that observers would regard the EU’s current crisis as a threat to NATO. That would be a mistake. If anything, the EU’s travails reinforce the alliance’s centrality as the foundation of Western liberal order. The Brexit calamity—like the eurozone and refugee crises before it—is not fundamentally about Western solidarity, security, or even cooperation. It is about the degree to which Europe’s market democracies are willing to pool sovereignty, including by accepting common regulatory standards and supranational oversight in spheres (like migration) that have traditionally been left to competent national authorities. The debate over Brexit had ugly, xenophobic, and nativist overtones, to be sure. But the referendum’s outcome also reflected populist distrust of an EU perceived to lack democratic accountability and to be trapped in a vague no man’s land between confederation and political union. Brexit, in other words, is a constitutional crisis for Europe. But it is not a crisis for NATO, which remains as it always has been: an alliance of sovereign, democratic states. NATO forces report to a Supreme Allied Commander, who is responsible for setting strategy and doctrine, as well as conducting joint operations. But it is sovereign governments that are represented on the North Atlantic Council, and they have ultimate authority over the deployment of their national contingents. Nothing about Brexit, moreover, undermines the fundamental commitment contained in Article 5 of the NAT, which obliges each member state to take prompt measures to defend any other party in the event of an armed attack. Indeed, Brexit—however lamentable for the EU—may ultimately strengthen NATO by slowing the development of stand-alone EU military capabilities. Over the past quarter century, the EU has taken fitful steps toward deepening its collective defense capacity, which London had long opposed. With British obstruction removed, some now speculate that Brexit could pave the way for Germany and France to advance European military integration. In reality, however, such efforts are fraught with political and logistical challenges. In the meantime, Europe faces immediate challenges—not least from an assertive Russia—that demand an urgent response, and which a well-oiled NATO is already prepared to address. Early in NATO’s founding cycle, Lord Ismay famously defined its role as keeping “the Americans in, the Germans down, and the Russians out.” The end of the Cold War thus posed an identity crisis for the alliance. With Germany peacefully reunited and the Soviet Union gone, why should the United States (or any others, for that matter) stay in? Having lost an enemy, NATO had to find new roles. The first was consolidating a Europe “whole and free.” The second was going “out of area,” including in Afghanistan. The third was confronting “new threats,” from cyberwar to energy insecurity. But it is Vladimir Putin who has brought NATO back to basics. Russia’s seizure of Crimea, proxy intervention in eastern Ukraine, and ongoing efforts to intimidate the Baltics have revived NATO’s core purpose as a bulwark of Western collective defense. Last month, the alliance held the largest military exercises in its post-Cold War history, involving some 31,000 troops from twenty-four nations. This weekend in Warsaw, its leaders will formally endorse a plan to deploy four multinational battalions in Poland and the three Baltic states. The British decision to command one of these units (the others will be under U.S., Canadian, and German command) sends a powerful sign that active NATO membership is compatible with being outside the EU—just as it was between 1949 and 1973 (the year Britain joined the European Economic Community). NATO Secretary-General Jens Stoltenberg has reassured rattled allies that Brexit will not undercut Britain’s long-term commitment to NATO. To be sure, talk is cheap, and UK Prime Minister David Cameron will soon depart the scene, leaving others to clean up the mess. Although some “Leave” supporters have affirmed that Brexit does not mark Britain’s “retreat into splendid isolation” but an opportunity to “find our voice in the world again,” skeptics worry that the post-Brexit UK will be both poorer and inward-looking, unwilling to support the ambitious defense spending increases that Cameron proposed last year. Will British citizens, confronting the potential economic blowback of Brexit, embrace the internationalist role that Boris Johnson touted as the future of an “independent” Britain? Others observers worry that Scotland will bolt the UK, depriving once-Great Britain of its only suitable base for its nuclear-armed submarines. These are real, practical problems. But they can be managed without calling into question either the credibility of the alliance or the British commitment to meet its NATO obligations. Nor should the EU’s current difficulties blind us to the tremendous structural weaknesses—demographic, economic, technological, and institutional—confronting Putin’s Russia, which for all the Kremlin’s bluster remains a declining rather than emerging power. In Warsaw, President Obama, Prime Minister Cameron, and their fellow leaders should drive home the basic reality: NATO faces Russia from a position of strength. The Russian bear may have pursued Brexit to the extent that it weakened an already limping Europe, but NATO is another animal altogether.

Blog Post by Stewart M. Patrick July 6, 2016 The Internationalist

Global

The World Next Week: June 30, 2016

The British government faces challenges resulting from the Brexit vote, Poland hosts a NATO summit, and Juno peers through Jupiter.

Podcast with James M. Lindsay , Elizabeth N. Saunders and Robert McMahon June 30, 2016 The World Next Week
United Kingdom

What Brexit Reveals About Rising Populism

The United Kingdom’s vote to leave the EU demonstrates that rising populism in Europe and the United States are both driven by voters who feel alienated from the benefits of globalization, says CFR’s Edward Alden.

Interview with Edward Alden and James McBride June 29, 2016 Greenberg Center for Geoeconomic Studies
European Union

Post-Brexit

A few thoughts, focusing on narrow issues of macroeconomic management rather than the bigger political issues. The United Kingdom has been running a sizeable current account deficit for some time now, thanks to an unusually low national savings rate. That means, on net, it has been supplying the rest of Europe with demand—something other European countries need. This isn’t likely to provide Britain the negotiating leverage the Brexiters claimed (the other European countries fear the precedent more than the loss of demand) but it will shape the economic fallout. The fall in the pound is a necessary part of the United Kingdom’s adjustment. It will spread the pain from a downturn in British demand to the eurozone. Brexit uncertainty is thus a sizable negative shock to growth in Britian’s eurozone trading partners not just to Britain itself: relative to the pre-Brexit referendum baseline, I would guess that Brexit uncertainty will knock a cumulative half a percentage point off eurozone growth over the next two years.* Of course, the eurozone, which runs a significant current account surplus and can borrow at low nominal rates, has the fiscal capacity to counteract this shock. Germany is being paid to borrow for ten years, and the average ten-year rate for the eurozone as a whole is around 1 percent. The eurozone could provide a fiscal offset, whether jointly, through new eurozone investment funds or simply through a shift in say German policy on public investment and other adjustments to national policy. I say this knowing full-well the political constraints to fiscal action. The Germans do not want to run a deficit. The Dutch are committed to bringing an already low deficit down further. France, Italy, and especially Spain face pressure from the commission to tighten policy. The Juncker plan never really created the capacity for shared funding of investment. The eurozone’s aggregate fiscal stance is, more or less, the sum of national fiscal policies of the biggest eurozone economies. If I had to bet, I would bet that the eurozone’s aggregate fiscal impulse will be negative in 2017—exactly the opposite of what it should be when a surplus region is faced with a shock to external demand. A lot depends on the fiscal path Spain negotiates once it forms a new government, given that is running the largest fiscal deficit of the eurozone’s big five economies. Economically, the eurozone would also benefit from additional focus on the enduring overhang of private debt, and the nonperforming loans (NPLs) that continue to clog the arteries of credit. Debt overhangs in the private sector—Dutch mortgage debt, Portuguese corporate debt, Italian small-business loans—are one reason why eurozone demand growth has lagged. Eurozone banks should have been recapitalized years ago, with public money if needed, to allow more scope for the write down of private debt. But in critical countries they were not, even with the impetus from various stress tests and the move toward (limited) banking union. And Europe’s new banking rules are now creating additional incentives for delay. The banking rules require bail-ins, which are typically better politics than outright bailouts. But countries such as Italy are caught in a bind: • Clearing away legacy NPLs takes capital—capital many of its banks do not have; • National governments cannot provide public capital without bailing in a portion of the banks’ liabilities structure; • And in Spain, Portugal and Italy, many of the banks that need capital now have raised capital in the past by selling preferred equity and subordinated debt to their own depositors, so bail-ins in effect mean hitting small investors who took on a set of risks they didn’t understand (and often made investments before the banking rules were tightened). The consensus VoXEU document alluded to this problem, but didn’t quite spell out how the current banking rules could be “credibly modified.” Putting public funds into the banks does not address popular concerns about the way the global economy works. Forcing retail investors to take losses in the name of new European rules does not obviously build public support for “more” Europe. Keeping bad loans at inflated marks on the balance sheet of weak banks undermines new lending, and makes it hard for private demand growth to offset the impact of fiscal consolidation. There is no cost-free option, economically or politically. The eurozone’s ongoing banking issues highlight the broader tensions created by a conception of the eurozone that focuses on the application of common rules with only modest sharing of fiscal risks—and by a political process that has often designed those rules a bit too restrictively, with too much deference to Germany’s desire to avoid being stuck with other countries’ bills and too little recognition of the need to allow the member countries to use their own national balance sheets to spur growth. Something will need to give, eventually. * My back-of-the envelope estimate is close to Draghi’s estimate, and similar to that of Goldman. The OECD’s estimate actually suggests a slightly bigger impact on the eurozone from a similar to slighter larger fall in British output. In their model, the eurozone is facing a two-year drag on growth of about a percentage point; see p. 22.

Blog Post by Brad W. Setser June 29, 2016 Follow the Money
United Kingdom

The World Next Week: Brexit

In this special edition, CFR’s Director of Studies Jim Lindsay, Steven A. Tananbaum Senior Fellow Robert Kahn, and Paul A. Volcker Senior Fellow Sebastian Mallaby examine the implications of the Brexit vote.

Podcast with James M. Lindsay , Sebastian Mallaby , Robert Kahn and Robert McMahon June 27, 2016 The World Next Week
United Kingdom

A Victory for Little England—and National Sovereignty

The shocking victory of the “Leave” campaign in Thursday’s referendum was a massive repudiation of the elite-driven European project and a testament to the enduring pull of national sovereignty in an age of global anxiety. It is a momentous decision that will reverberate well beyond the British Isles. Besides posing an immediate, existential crisis for the European Union and the United Kingdom itself, the outcome will embolden skeptics of international institutions and multilateral cooperation in the United States. For the European Union, the referendum is a wake-up call that may have come too late. For decades, the EU has suffered from a dramatic deficit of democracy, as well as of loyalty. Throughout the continent, “Brussels” has long been shorthand for officious, unaccountable Eurocrats meddling in everything from fisheries to the proper shape of bananas. In an effort to close this deficit, the EU and its predecessors created several new institutions, most notably the European Parliament (EP), headquartered in Strasbourg. But the EP lacks real power, and voter turnout in its elections is dismal. The EU—too often distant, opaque, and unresponsive—commands little allegiance among its 500 million inhabitants. These dynamics have been especially corrosive in Great Britain. The UK joined the EU party late (in 1973), after centuries of splendid isolation and imperial grandeur. And it has always been the EU’s “awkward partner.” The British have enjoyed perks of the common market, as well as visa-free travel to holiday in Malaga, but their primary allegiance has and always will be to the nation. Their leaders have reinforced public cynicism, repeatedly using the EU as a scapegoat while promising, in the manner of (soon-to-be former) Prime Minister David Cameron, to “fix” it. The British vote bodes ill for the EU’s future. For decades the bloc’s leaders have seized on the crisis of the day to deepen integration, arguing that the only solution was “more Europe.” That dynamic has run its course. The EU is mired in an ungainly halfway house between a confederation of sovereign states and a federal, even supranational, union. National governments retain many of their powers but delegate others, such as immigration and human rights policies, to the center. That scenario might endure in a smaller grouping of the original Six—Germany, France, Italy, and the Benelux countries. But it is clearly unsustainable in the contemporary EU, a continent-spanning behemoth encompassing twenty-eight member states. The EU’s dramatic, post-Cold War enlargement made eminent economic and geopolitical sense. But a more heterogeneous bloc is also a far more unwieldy one, as divergent national interests and political cultures complicate agreement on common policies. These shortcomings have been on dramatic display in recent years, as the EU has flailed in formulating joint responses to the eurozone crisis and the flood of refugees to its shores. For the first time in its history, the EU faces a real prospect of unraveling. Great Britain will not be the last country to hold such a referendum, or to demand major adjustments in its relations with Brussels. (Already, Marine Le Pen of France’s National Front has insisted on a similar vote.) For the bloc to survive, the continent’s elected leaders must heed the will of the people and renegotiate political bargains among EU institutions, member states, and citizens. The most likely outcome will be a “multi-speed” Europe that allows member states and their citizens greater flexibility to opt in or opt out of particular arrangements and initiatives. For some this may mean more Europe, for others less. Regardless, the accent must be on accountability and transparency. Great Britain, meanwhile, may be in for a rude surprise of its own. In an ironic outcome, Brexit may cause the disintegration of the United Kingdom itself. The Scottish National Party (SNP), which lost a hard-fought referendum on independence for Scotland in 2014, will surely insist that another vote be held promptly on that same question. And given that Scots voted overwhelmingly to “Remain” on Thursday, their English brethren will have no grounds to deny them the exercise of their own popular sovereignty as an independent nation. Britain’s choice, finally, will reverberate in the United States. While most commentators have focused on potential global economic turmoil, given London’s prominence in financial markets, the political implications for U.S. global leadership may be profound. “Brexit” will surely reignite simmering domestic debates over how to balance the defense of U.S. national sovereignty with the imperative of international cooperation. On the one hand, we live in an era of global challenges—from climate change to transnational terrorism, from pandemic disease to financial turbulence—that no nation can manage on its own. On the other, conservative nationalists like John Bolton regularly warn us that global institutions like the United Nations, or proposed treaties like the UN Convention on the Law of the Sea, place unacceptable restrictions on our national sovereignty. Those voices will get louder in the wake of Brexit, which Donald Trump himself hailed as the wise and brave decision of Britons to “take back their independence.” Americans should resist the siren song of unilateralism—and recognize how different pragmatic U.S. engagement with multilateral institutions is from British membership in the European Union. In April, President Obama implored British voters not to quit the EU. In response, Boris Johnson, charismatic former mayor of London and champion of the Leave campaign, called Obama “hypocritical” for lecturing Brits “about giving up our sovereignty,” when Americans wouldn’t even sign up to the International Criminal Court. Johnson’s riposte was weak on decorum but strong on substance: the United States has always been determined to defend the supreme authority of the Constitution and the popular will of the American people. It has never subordinated itself to supranational structures—and it likely never will. But sovereignty has two other dimensions besides authority. The first is autonomy, or the freedom to make policy decisions independently. The second is control, notably over the nation’s destiny. The dilemma is that autonomy and control often work at cross purposes in managing globalization. To get what it wants—whether reducing carbon emissions to expanding trade—the United States must often make commitments, enter into treaties, or support multilateral organizations. These arrangements can sometimes constrain its options, but they also promise the United States greater control over outcomes that it could never achieve on its own. Britain’s Brexit reminds us of the pull of national sovereignty and the imperative of democratic accountability in institutions of governance, whether at the domestic or global level. But we should also remember that no nation, even Britain, is truly an island.

Blog Post by Stewart M. Patrick June 24, 2016 The Internationalist
United Kingdom

Brexit in Context

MILAN – I do not believe that foreigners contribute usefully by issuing strong opinions about how a country’s citizens, or those of a larger unit like the European Union, should decide when faced with an important political choice. Our insights, based on international experience, may sometimes be helpful; but there should never be any confusion about the asymmetry of roles. This is particularly true of the British referendum on whether to remain in the EU. Just days before the vote, the outcome is too close to call, and there appear to be enough undecided voters to tip it either way. But, with political and social fragmentation extending well beyond Europe, outsiders may be able to add some perspective on what is really at issue. First, it will come as no surprise that, in terms of the distribution of income, wealth, and the costs and benefits of forced structural change, growth patterns in most of the developed world have been problematic for the past 20 years. We know that globalization and some aspects of digital technology (particularly those related to automation and disintermediation) have contributed to job and income polarization, placing sustained pressure on the middle class in every country. Second, Europe’s ongoing crisis (more like a chronic condition) has kept growth far too low and unemployment – especially youth unemployment – unacceptably high. And Europe is not alone. In the United States, while the formal unemployment rate has fallen, large-scale failures in terms of inclusiveness have fueled disenchantment – on both the left and the right – at growth patterns and policies that seem to benefit those at the top disproportionately. Given the magnitude of recent economic shocks, developed countries’ citizens might be less unhappy were there evidence of a concerted effort – based on genuine burden sharing – to address these issues. In the context of Europe, that would mean a multinational effort. But, for the most part – and again throughout the developed world – effective responses have been missing. Central banks have been left largely alone with objectives that exceed the capacity of their tools and instruments, while elements of the elite wait for a chance to blame monetary policymakers for weak economic performance. In the face of non-monetary policy responses that are somewhere between deficient and non-existent relative to the magnitude of the challenges we face, the natural response in a democracy is to replace the decision-makers and try something different. After all, democracy is a system for experimentation, as well for the expression of citizens’ will. Of course, the “new” may not be better and could be worse – perhaps significantly worse. Third, the EU is confronting, in more severe form, a problem facing much of the developed world: powerful forces operating beyond the control of elected officials are shaping citizens’ lives, leaving them feeling powerless. But while all countries must deal with the challenges of globalization and technological change, important elements of governance in the EU are beyond the reach of democratic institutions, at least those that people understand and relate to. This is not to say that local governance is problem-free. It isn’t. Corruption, special interests, and sheer incompetence are common problems. But democratic governance is in principle fixable, and institutional defenses and countermeasures do exist. The situation in the eurozone is particularly unstable, owing to citizens’ growing alienation from a distant, technocratic elite; the absence of conventional economic adjustment mechanisms (exchange rates, inflation, public investment, and so on); and tight limits on fiscal transfers, which send powerful signals about the real boundaries of cohesion. Brexit is a part of this larger drama. It is primarily about governance, not economics. From a strictly economic point of view, the risks for both the United Kingdom and the rest of the EU are almost entirely on the downside. But if that was all there was to the issue, the outcome would be a foregone conclusion in favor of staying. The real issue – effective and inclusive self-governance – is not an easy one to tackle anywhere, because forces such as technological disruption do not respect national boundaries. In part, Britons are voting on whether their capacity to navigate in these turbulent waters is enhanced or diminished by continued EU membership. But a more fundamental question of political identity is also at stake – just as it was in Scotland’s independence referendum in 2014. Some Britons (perhaps even a majority), and many other EU citizens, still want future generations to think of themselves as Europeans (albeit with a proud British, German, or Spanish origin), and are prepared to take another shot at reforming Europe’s governance structures. And they are right to think that the world would be a far better place with a united, democratic Europe as a major force for both stability and change. That is my hope, though it may border on wishful thinking. Regardless of the outcome of the Brexit referendum (like many outsiders, I hope Britain votes to stay and advocates for reform from within), the British vote, along with similar strong centrifugal political trends elsewhere, should bring about a major rethink of European governance structures and institutional arrangements. The goal should be to restore a sense of control and responsibility to the electorates. That would be a good outcome in the long run. It would require inspired leadership from all corners of Europe – including government, business, organized labor, and civil society as well as a renewed commitment to integrity, inclusiveness, responsibility, and generosity. That is a tall order; but it is not an impossible one to fill. This article originally appeared on project-syndicate.org.

Blog Post by A. Michael Spence June 20, 2016 Renewing America
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The Brexit Debate and What it Means for Europe

Experts discuss the political and economic implications of a Brexit, and the next steps following a "stay" or "leave" vote on June 23.

Event with Sebastian Mallaby , Adam Posen, Constanze Stelzenmüller and Michael Leigh June 15, 2016
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Cyber Week in Review: June 10, 2016

Here is a quick round-up of this week’s technology headlines and related stories you may have missed: 1. The IANA transition is approved! The National Telecommunications and Information Administration (NTIA), an arm of the U.S. Department of Commerce, approved the proposal to transition the U.S. government’s stewardship role over the domain name system to the multistakeholder internet community. The NTIA determined that the plan meets the criteria that it set out when it announced its intent to relinquish its oversight over some of the internet’s technical infrastructure, namely that it supports the multistakeholder model, maintains the stability of the domain name system, and does not replace U.S. government oversight with UN or multilateral institution oversight. Absent any last minute Cruz missiles to blow up the plan, the multistakeholder internet community will take control of the IANA functions in September. If you want any more information on why the transition plan is important, check out Net Politics’ Rob Knake post. 2. The Federal Bureau of Investigation (FBI) defends not encrypting evidence collected in the Playpen case. The FBI‘s investigation into Playpen—a child porn website—is revealing interesting information about its use of network investigative techniques (NIT) to monitor suspects’ online activities. The FBI installed malware on the Playpen website to identify its users, and relayed that information in an unencrypted format to FBI servers. In sworn testimony, the Bureau justified the practice by emphasizing that it was the only way defendants could confirm that the data collected fell within the scope of its search warrant. Critics were not convinced. American Civil Liberties Union Principal Technologist Chris Soghoian compared the absence of encryption to the FBI collecting evidence and putting it in a ziploc bag, instead of "a signed, sealed evidence bag." This case comes at a time where some are suggesting that the FBI rely more on NITs—also known as “lawful hacking”—as a potential solution to law enforcement’s concern that greater use of encryption will hinder its ability to investigate crimes. 3. UK House of Commons passes “Snooper’s Charter” after concessions. Last Tuesday, the UK House of Commons passed the Investigative Powers Bill by a landslide 444-69. The bill would expand law enforcement and intelligence agencies’ bulk data collection and retention capacities. Dubbed the “Snooper’s Charter”, it has been criticized as a legalization of the Government Communication’s Headquarters’ (GCHQ) covert surveillance revealed by Edward Snowden in 2013. The bill earned the Labour Party’s crucial support following Home Secretary Theresa May’s concessions on the protection of journalists, surveillance of MPs, and exceptional use of bulk personal datasets. The scope of the bill has also opened the door to questions concerning encryption backdoors and the role of tech corporations in protecting privacy and assisting the government. Having passed the House of Commons, the draft bill will now go to the House of Lords for further debate. 4. Obama and Modi commit to plans for an open internet. President Obama and Indian Prime Minister Narendra Modi met at the White House on Tuesday to discuss near-term bilateral initiatives for an open and interoperable cyberspace. Their framework agreement is in line with a continued effort by the two countries to enhance cybersecurity cooperation. The new framework seeks to “promote cooperation between law enforcement agencies to combat cybercrime including through training workshops, enhancing dialogue and processes and procedures," and will rely on “Sharing information on a real time or near real time basis, when practical and consistent with existing bilateral arrangements.”

Blog Post by Adam Segal June 10, 2016 Net Politics
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Weighing the Consequences of ’Brexit’

Five experts analyze the potential impacts of a UK departure from the European Union on economic growth, financial stability, and foreign policy.

Expert Roundup by James McBride , Sebastian Mallaby , Stephen Booth, Robert Kahn, Roger Bootle and Jonathan Eyal June 10, 2016