Economics and Security

Economics and security

135 ESC 12 E

Original :English

NATO Parliamentary Assembly

SUMMARY

of the meeting of the Economics and Security Committee

Ballroom 1, Swissôtel, Tallinn, Estonia

Sunday 27 May 2012

International SecretariatJune 2012

Assembly documents are available on its website,

1

135 ESC 12 E

ATTENDANCE LIST

ChairmanPetras AUSTREVICIUS (Lithuania)

General RapporteurJohn SEWEL (United Kingdom)

Rapporteur of the Sub-Committee on East-West

Economic Co-operation and ConvergenceUwe Karl BECKMEYER (Germany)

President of the NATO PAKarl A. LAMERS (Germany)

Secretary GeneralDavid HOBBS

Member Delegations

BelgiumJurgen CEDER

Philippe MAHOUX

Luc SEVENHANS

Olga ZRIHEN

BulgariaGeorgi PIRINSKI

CanadaLawrence MacAULAY

Isabelle MORIN

Pierre Claude NOLIN

Brent RATHGEBER

CroatiaDavor BOZINOVIC

Sandra PETROVIC

Davor Ivo STIER

Czech RepublicVáclav KLUCKA

Antonin SEDA

EstoniaMarko MIHKELSON

Mati RAIDMA

FranceRené BEAUMONT

Francis HILLMEYER

GermanyWolfgang GÖTZER

Jürgen HARDT

Frank HENKEL

IcelandBirgitta JONSDOTTIR

ItalyElio LANNUTTI

Lamberto DINI

LatviaIvans KLEMENTJEVS

LithuaniaArvydas ANUSAUSKAS

LuxembourgClaude ADAM

Nancy ARENDT KEMP

Norbert HAUPERT

NetherlandsMenno KNIPP

Hendrik Jan ORMEL

Han TEN BROEKE

Arjan VLIEGENTHART

NorwayTore NORDTUN

Hans Olav SYVERSEN

PortugalJoaquim PONTE

PolandBartosz KOWNACKI

Lukasz KRUPA

Dariusz SELIGA

SpainInaki Mirena ANASAGASTI

Rafael BRUGUERA

Joan SABATE

SloveniaMelita ZUPEVC

SlovakiaBoris SUSKO

TurkeyFaik OZTRAK

Oktay VURAL

United KingdomHarriett BALDWIN

Hugh BAYLEY

Peter BOTTOMLEY

Baroness RAMSAY OF CARTVALE

United StatesGus BILIRAKIS

Associate Delegations

AzerbaijanGudrat HASANGULIYEV

AustriaPeter FICHTENBAUER

Johann HÖFINGER

FinlandMikko SAVOLA

GeorgiaGiorgi KANDELAKI

Irakli KAVTARADZE

Russian FederationVladimir BESSONOV

SerbiaIgor BECIC

SwitzerlandThomas HURTER

the former Yugoslav Republic of Macedonia*Pavle TRAJANOV

Talat XHAFERI

Ukraine Andriy SHKIL

Ivan ZAIETS

Ihor ZVARYCH

Regional Partner and Mediterranean Associate Delegations

AlgeriaMohamed BOUKHALFA

Mohamed ELOUED

Ahmed HIDAR

MoroccoSaid CHBAATOU

European ParliamentTeresa RIERA MADURELL

Parliamentary Guest

Parliamentary Assembly of the MediterraneanGilbert ROGER

SpeakersPeeter KOPPEL, Financial Expert, Estonia

Anders ASLUND, Senior Fellow, Peterson Institute for International Economics, Washington DC

* Turkey recognises the Republic of Macedonia with its constitutional name.

International SecretariatPaul COOK, Director

Andrius AVIZIUS, Director

Anne-Laure BLEUSE,Co-ordinator

Stella ATHANASOULIA, Research Assistant

Marie GRUNERT, Research Assistant

Mikko PATOKALLIO, Research Assistant

1

135 ESC 12 E

1. Opening remarks

1. The Chairman,PetrasAustrevicius (LT) opened the session and thanked hosts for their efforts. The summary of the Bucharest sessionwas adopted and the comments of the Secretary General were approved without comments. The Chairman introduced the first speaker, Peeter Koppel, a financial expert.

1. Presentation by Peeter Koppel, Financial Expert, Estonia, on The Euro crisis from the Estonian perspective

1. Peeter Koppel characterized the economic crisis as a bohemian rhapsody in which moods and intensities change frequently. He explained that the crisis has just begun and that the way out is difficult for policymakers to discern. There are several unique features to this crisis, he noted, and these include the high level of debt, an ageing population, the large and unsustainable social systems as well as a crisis of competitiveness.

1. Mr. Koppel indicated that the job market is distorted and creates high unemployment, especially among youth. Estonia’s job market is more flexible than much of Europe and this is one of the reasons why it is faring better than most of the countries.

1. The speaker suggested that since the end of the Second World War there has been an impressive rise of living standards which, however, is unlikely to continue. Austerity will engender popular discontent which will trigger increasing political instability. Populism on the right and left side of the political spectrum will invariably increase.

1. Regarding the possibility of a Greek exit of the Euro, Mr. Koopel argued that if it happens smoothly it will have limited repercussions and the Euro will remain an attractive option for other countries like Lithuania or Latvia.

1. Mr. Koppel next discussed the situation in the Baltic republics. He noted, that these small economies are very dependent on export markets and hence on the economic conditions of their export partners.

1. In the discussion, several members suggested that the presentation was very pessimistic and asked about the paradox of high youth unemployment. Peter Koppel replied that it is an issue of benefits and that if the system fails to create incentives for job creation and work, youth unemployment will emerge. He indicated that in the future, government should limit salaries and benefits.

1. One member argued that that the US had been in a worse position than Europe in 2007-8 but has managed to pull off a recovery. Peeter Koppel clarified that the US is not out of the woods and has several important structural and debt problems. The importance of the US dollar as a global currency gives the United States the capacity to print currency more freely than Europe’s central bank. Moreover, the United States has a more favourable business climate than the EU.

1. Several members were critical of the speaker’s failure to mention the role that banks (JPMorgan, Goldman Sachs) had played in the crisis. They argued that the politics ought to harness banks and crack down on unscrupulous financial practices. It was also suggested that certain transactions should be taxed. Mr. Koppel replied that he did not understand the compensation system of the financial industry. The speaker claimed that governments are now prisoners of debts and debt limit rules have been repeatedly broken. The speaker argued that the financial industry has little to do with sovereign debt crisis which is a product of government policy.

Some members pointed to the fact that inflation and wage dumping are also posing problems. Mr. Koppel suggested that inflation is preferable to deflation.

1. On the question “What did Estonia do to maintain its model student status?” Mr. Koppel indicated that austerity had been the key to success for Estonia and this was a result of the mindset of a small country with a Soviet heritage.

1. Hugh Bailey (UK) next commented briefly on a recent NATO press release which compared the national defence expenditures of NATO countries. He called for greater transparency in defence expenditure matters and in the NATO budget. He explained that figures fluctuate from year to year and from country to country and noted that there is no obvious correlation between economic tides and defence spending. He suggested that it would be worthwhile to invite an economist to discuss defence spending figures in the near future.

1. Presentation by Anders Aslund, Senior Fellow, Peterson Institute for International Economics, Washington DC, on Russia's international Economic Policy

1. Anders Aslund stated that Russia’s economic policy aims are confused and its economic policies are as well; yet, compared to the Western European countries, Russia’s macroeconomic situation is enviable. It enjoys a significant budget surplus, public debt is slightly below 10% of GDP, foreign exchange reserves are the 3rd largest in the world, and inflation and unemployment are relatively low. Russia’s weakness lies in its dependence of oil and gas revenue (65% of exports and 50% of state revenue). Mr. Aslund clarified, however, that Russia is not an extreme petro state but that it has become too reliant upon high oil prices from which it has benefitted since 2004.

1. Recent political protests have shown that Russia’s urban middle classes are demanding reforms in the field of education, infrastructure, health care and judicial system. The fiscal space for embarking upon reforms is highly dependent on the oil price and oil money as well as the political will of those in charge of the state.

1. Mr. Aslund suggested that that there are 2 alternative paths Russia might follow: state capitalism or economic liberalization. The latter course, he indicated, would result in higher growth levels. According to the World Bank, Russia would boost its annual growth significantly over the long term through the combination of reform, World Trade Organisation(WTO) membership and increased foreign investment. Yet, the government does not seem to know what it wants. It seeks a seat at each table of international organizations while maintaining a highly antagonistic position toward Western countries. President Putin, for example, did not attend the NATO Summit in Chicago and refused a têteàtête meeting with President Obama. President Putin’s Eurasia Union with Belarus and Kazakhstan is an expression of Soviet nostalgia and neither makes economic sense nor conforms to the modernization agenda the Kremlin wants to pursue.

1. Mr Aslund emphasized that what Russia needs is a combination of domestic institutional development and international economic integration. The speaker also argued that forming a Free Trade Agreement with Commonwealth of Independent States (CIS) countries and with the EU would be desirable and might help Russia’s modernization aspirations. Mr Aslund concluded by praising the responsible attitude Russia has adopted towards the euro crisis. It has expressed its readiness to support IMF loans to beleaguered EU countries.

1. Members raised the question of Russia’s relations with Ukraine and the gas crisis between the two countries. Mr. Aslund suggested that a bandit regime runs Ukraine. The speaker explained that Mr. Putin and Mr. Yanukovich have poor personal relations and that Ukrainian officials have seized Russian companies which resulted in Russia’s moves to exclude Ukraine from pipeline infrastructure projects. The speaker also noted that Ukraine pays too much for gas (450 dollars per 1000 cubic meters whereas the Germans pays only 300).

1. Mr. Aslund made clear that the North and South stream pipeline projects were political and not economic projects. On hydrocarbon exports and corruption, Mr. Aslund indicated that it is crucial to distinguish between the oil and gas sectors. The oil sector is dominated by large private companies and is generally is less prone to corruption. The situation is very different in the gas sector where corruption is massive, with Gazprom playing a central role in this regard. Mr. Aslund expressed skepticism about Gazprom’s attempts to foster international cooperation. He argues that even the Stockman gas field is not a reliable option due to the technical difficulties caused by Gazprom’s inefficiencies.

1. Members asked about the disconnect between the rhetoric and policies of the government during the Medevdev presidency. They also questioned the evolution of the judiciary system in Russia and including injustices associated with the Magnitsky case, a lawyaer whose death in police custody generated significant media attention and launched an investigation into allegations of abuse. Mr Aslund explained that the government has made significant changes recently and the main person responsible for the Magnitsky case, the minister of interior, was sacked. This could mean that Magnitsky case will remain open. Mr Aslund pointed out that criminal and economic courts need to be better distinguished. The criminal court system is very poor and little has been done to address the problem. The economic courts, however, have improved. The speaker suggested that Medvedev’s modernization agenda has been accepted publicly but not implemented.

1. Consideration of the Draft Report of the Sub-committee on Transatlantic Economic Relations Arctic Economic Opportunities, Environmental Obligations and Security Stakes [057ESCTER12E] by Sir Peter Bottomley (United Kingdom), on behalf of JeppeKofod (Denmark), Rapporteur

1. Peter Bottomley (UK) presented the general report on behalf of Mr. Kofod. He drew attention to the problem of accelerating climate change and increased access to the Arctic – natural resource extraction, opening of shipping lanes. Many Arctic and non - Arctic states (i.e. China, South Korea etc.) are engaged in a new Arctic game. The presenter warned of catastrophic and long lasting impact that accidents in the Arctic would produce and therefore called for the strengthening of search and rescue capabilities and similar measures. He indicated that the Arctic, which was greatly militarized during the Cold war, is undergoing a new wave of militarization. It is in the interest of the international community and all players to avoid heavy militarization of this highly fragile environment. The rapporteur highlighted this argument and questioned the role NATO should orcould play in the Arctic to make sure the High North remains a zone of peace.

1. Members were generally very happy with the report and praised its comprehensiveness. Only a few suggestions were made to be included in its final version. ToreNordtun(NO) disagreed with paragraph 76 arguing that the Arctic is not without a legal framework and that in Illullissat the five states bordering the Arctic have confirmed that the law of the sea applies to conflicts in the area. In addition, he mentioned the successful fishing agreement between Russia and Norway.

1. VladimirBessonov(RU) agreed that cooperation between Russia and Norway is a success. However he made clear that NATO has no role to play in the Arctic as it would foment military tension in the region. BirgittaJonsdottir(IS) warned that there have been recent developments regarding the Chinese businessman wanting to buy a large piece of land in Iceland. She explained that the businessman has close connections to the Chinese government and that it remains uncertain how the land would be developed if the sale were to go through. She recommended that in the near future a report on the Chinese investments and ambitions in Europe should be written.

1. Some members asked whether the Stockman gas fields would be developed (paragraphs 22-23) considering the problems Gazprom confronts. One member noted the importance of international cooperation due to the complexity of drilling in extreme climate conditions and risk of accidents.

1. It was also suggested that resources allocated for the Arctic ought to be focused on scientific rather than military projects.

1. Mr Bottomley will convey the comments of members to Mr Kofod.

1. Consideration of the Draft Report of the Sub-committee on East-West Economic Cooperation and Convergence The Arab spring: Economic Dimensions and Challenges [058 ESCEW 12 E] by UweKarl Beckmeyer (Germany), Rapporteur

1. Uwe Karl Beckmeyer(DE) presented his report on the economic dimensions of the Arabspring and suggested that structural problems remain a major challenge in the region. The rapporteur indicated that there is no consensus on how to deal with economic issues in the region. The region is highly diverse, and although many MENA countries are affected by corruption, slow growth, low levels of trade and rising unemployment, each country is economically unique. Job creation remains one of the greatest challenges to political security since the lack of employment has been a catalyst for political protests.

1. In the discussion, members suggested that western policies towards the MENA region should be conditioned on economic openness and reforms, arguing that trade barriers have undermined economic development in the region. The issue of environmental rights and North African drought was also raised. Here, there are genuine issues of global equity which factor into the region’s economic difficulties. The rapporteur welcomed this comment and noted how acute the problem of water insecurity has become. He characterized this as a global challenge. He followed by explaining how European success in achieving wealth and development peacefully could serve as a model for the MENA region.

1. The moral duty of developed countries towards the MENA region was also mentioned and it was suggested that a comprehensive approach incorporating security, economic and political dimension was needed. A commitment to job creation in the region should be a priority.

1. The rapporteur thanked members for their comments and recommendations.

1. Consideration of the Draft General Report The Sources and Implications of the Euro crisis [056 ESC 12 E] by John Sewel (United Kingdom), General Rapporteur

1. John Sewel(UK) presented his report on the Euro-crisis. He noted that because the situation is evolving so quickly, the report does not mention several key recent events including the French and Greek elections. The rapporteur explained that the origins of the crisis can be found in rising debt, overly cheap finance, and misleading accounting in some states. The rapporteur illustrated that the austerity remedy argument is now prevailing but that there is a rising understanding that boosting demand is essential to recover. Lord Sewel stated that as his last appearance amongst this committee he was eager to stress some further points. In particular, he indicated that the question to answer is not if public expenditure ought to be cut but rather how fast and how far. Structural reforms including efforts to put pensions on a sustainable footing will require some cutbacks. The rapporteur also argued that flexible labour markets do increase employment, and will be essential to boosting youth employment. He also indicated that he was in favour of a prudent deregulation in line with prevailing notions of social equity. The speaker concluded by signalling that the role and scope of the European Central Bank(ECB) ought to be reconsidered.

1. Several members contested the final conclusion of the report arguing that instead of blaming external actors (ie the US, Chinese speculators, etc.) more focus and responsibility should be put on internal discord within Europe and the shortcomings of the Euro system. One member asked that the conclusion be rewritten to reflect these ideas.

1. A member from Russia indicating that external support will invariably be insufficient to bail out the European economy; Europe will have to help itself. He recommended a return to Marx’ understanding of capitalism as a starting point.