Europe: In need of a lifeline

Europe: In need of a lifeline

“We should be honest with ourselves in the European Union: we have spent billions of euros in European taxpayers’ money in aid to Egypt and other neighbouring countries,” David Cameron, UK prime minister, said at the height of the Egypt uprising in February as he bemoaned a succession of Mediterranean policies and partnerships that cost a lot but delivered few tangible successes.

For Europe, the urgency to get it right this time is apparent: pilots from EU member nations are flying bombing sorties over Libya in support of a ramshackle rebellion against Muammer Gaddafi, while tens of thousands of African and Arab refugees are turning up on its shores seeking safety.

More broadly, the bloc is fighting to retain its place on a world stage increasingly crowded by the likes of China, India and Brazil – and on which the US is seeking to take less of a leadership role. In an effort to bolster its global influence, the EU has just christened a pan-European diplomatic corps, the External Action Service, that is supposed to harmonise the dissonant foreign policy voices of its 27 member states.

Lacking US-style military muscle, the EU has instead emphasised its “soft power” through trade concessions, development aid and privileged ties to what is the world’s richest consumer market. That approach paid dividends in central and eastern Europe, where sustained investment helped to shepherd former communist countries along a path to democracy. But Europe’s experience to the immediate south, in a region known as the cradle of civilisations, may have revealed its limits.

Ana Palacio, former Spanish foreign minister, is among those who believe successive EU policies have failed because they were insufficiently frank about linking development aid to democracy – unlike the policies (and the funding) directed towards the post-Soviet nations of eastern Europe. “Unless we shift our priorities in the region toward good governance, democracy and human rights, and let our funding reflect those priorities, we risk losing momentum to support regional reforms,” she wrote in a recent paper. “Now is a rare opportunity for European leadership.”

With regional uprisings still playing out, European leaders have already gone back to the policy drawingboard. In March, they announced their latest Mediterranean initiative – the Partnership for Democracy and Shared Prosperity.

They also like the idea of beefing up the role of the European Bank for Reconstruction and Development, which was founded 20 years ago to finance eastern Europe’s transition to market-based democracy. Thomas Mirow, EBRD president, says it could begin lending to Egypt next year.

Cairo or Tunis in 2011 is not the same as Warsaw or Prague in 1989, policymakers caution. Still, Mr Mirow sees similarities in a young generation that wants to share the prosperity and values of its neighbours.

Unfortunately, the EU has a long history of failed plans for the region. “There has been a traffic jam of European initiatives in the Mediterranean, but the well-being of the people has not improved,” says Bichara Khader, a consultant and professor at the Catholic University of Louvain.

The Arab revolutions today are another face of the very limited success of the European partnership with the Mediterranean countries,

What we have not been very good at is how to deal with countries in the next circle – countries that are not going to become members, or at least not for a very long time

The EU can’t get into a two-year discussion about its own bureaucratic structures when the region is changing so dramatically,

“Then, Europe did a remarkable thing and offered the perspective of entry to the Union. That is not possible in the Mediterranean, but we have to find the equivalent in our system to give the money and resources needed to ensure that the revolutions do not come to mean unemployment and more violence.”

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Greek debt hit by restructuring fears

Greek debt hit by restructuring fears



FT.com / Capital Markets - Greek debt hit by restructuring fears

• Greek debt hit by restructuring fears



• Greek borrowing costs reached a euro-era high compared with those of Germany.



• George Papaconstantinou told the Financial Times that Greece needed more time to convince international investors of its commitment to reform its finances.



• Greece’s debt levels were unsustainable, “further measures” would have to be taken.



• any involuntary restructuring before 2013, but warned that investors could face losses after that point.



• “Greek bonds are getting crushed,” said Gary Jenkins, head of fixed income at Evolution Securities.



• These comments didn’t say anything new, but they gave short sellers an excuse to get back into the market at better prices after the recent rally.”



• Yields on Greek two-year bonds jumped 0.9 of a percentage point to 17.829 per cent.



• a Greek restructuring “will inevitably cause collateral damage to Europe’s banking system and contagion across Europe’s most vulnerable sovereign borrowers.”



• Investors fled risky “peripheral” eurozone debt for the haven of Germany, where 10-year bond yields, which move inversely to prices, dropped nearly 4 basis points at one point before ending flat at 3.428 per cent.



• “Everyone thinks restructuring is going to happen at some point. Peripheral tensions had eased in recent days, but they haven’t gone away.”The cost of insurance against a Greek default, via buying credit default swaps, also hit a new high at 1,139bp, implying it costs $1.14m a year to insure $10m of debt for five years.



• Ultimately we believe that if the idea is to get the debt back to a sustainable level then the target will be the Maastricht treaty limit of debt-to-GDP of 60 per cent. In order to reach that level, bonds will have to take a haircut of some 62 per cent,” he said.



• Polls suggest Finns could elect an anti-European Union leader at the weekend. True Finns, headed by Timo Soini, has been only narrowly behind the centre-right National Coalition party and investors fear an anti-EU Finland could hamper Brussels’ negotiations for Portugal’s bail-out and further progress in creating permanent rescue mechanisms.

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Will China's Rise Lead to War? | Foreign

Will China's Rise Lead to War? | Foreign Affairs

• The rise of China will likely be the most important international relations story of the twenty-first century, but it remains unclear whether that story will have a happy ending.



• China, unlike the Soviet Union, will prove a serious economic competitor as well as a geopolitical one



• because the current international order is defined by economic and political openness, it can accommodate China's rise peacefully.



• The United States and other leading powers, this argument runs, can and will make clear that China is welcome to join the existing order and prosper within it, and China is likely to do so rather than launch a costly and dangerous struggle to overturn the system and establish an order more to its own liking.



• China's growing strength, most realists argue, will lead it to pursue its interests more assertively, which will in turn lead the United States and other countries to balance against it



• The dangers that do exist, moreover, are not the ones predicted by sweeping theories of the international system in general but instead stem from secondary disputes particular to Northeast Asia -- and the security prevalent in the international system at large should make these disputes easier for the United States and China to manage.



• Conflict is not predetermined -- and if the United States can adjust to the new international conditions, making some uncomfortable concessions and not exaggerating the dangers, a major clash might well be avoided



• The solution to the puzzle lies in the concept of the security dilemma -- a situation in which one state's efforts to increase its own security reduce the security of others.



• Current international conditions should enable both the United States and China to protect their vital interests without posing large threats to each other



• Large-scale conventional attacks by China against the U.S. homeland, meanwhile, are virtually impossible because the United States and China are separated by the vast expanse of the Pacific Ocean, across which it would be difficult to attack



• United States and China will be able to maintain high levels of security now and through any potential rise of China to superpower status



• According to neo-isolationists, in short, China's rise will not jeopardize U.S. security, but maintaining current U.S. alliances could.



• Some realist pessimists argue that in order to be highly secure, China will find itself compelled to pursue regional hegemony, fueling conflict along the way.



• However, China's size, power, location, and nuclear arsenal will make it very challenging to attack successfully.



• The prospects for avoiding intense military competition and war may be good, but growth in China's power may nevertheless require some changes in U.S. foreign policy that Washington will find disagreeable -- particularly regarding Taiwan.



• Current U.S. policy is designed to reduce the probability that Taiwan will declare independence and to make clear that the United States will not come to Taiwan's aid if it does.



• Given the different interests and perceptions of the various parties and the limited control Washington has over Taipei's behavior, a crisis could unfold in which the United States found itself following events rather than leading them.



• Not all adversaries are Hitler, and when they are not, accommodation can be an effective policy tool.



• The challenge for the United States will come in making adjustments to its policies in situations in which less-than-vital interests (such as Taiwan) might cause problems and in making sure it does not exaggerate the risks posed by China's growing power and military capabilities.

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China and the US: Access denied

In December 1997, Ren Zhengfei and his management team gathered by the fireplace in a Silicon Valley hotel to discuss their recent meetings with a clutch of US technology firms. While their American counterparts headed home for Christmas, the boss of Huawei, the Chinese telecommunications equipment maker, and his team remained at work, analysing what they had seen and heard. In Mr Ren’s vision for global expansion, the US was to be the role model.

“We must respect them, learn from them, critically carry on [their work],” he concluded in an article praising companies such as IBM and Bell Labs for their innovative power, speed of movement and scale. Ever since, his company has paid up to 3 per cent of its revenue each year to consultancies including IBM, Accenture and Hay Group to model its management systems on US multinationals. “This has helped us develop a common language with customers all over the world,” says a Huawei board member.

But 14 years on, its love affair with America is on the rocks. While the lessons from Silicon Valley have helped the Chinese company storm markets in Africa, the Middle East, Latin America and Europe – and elevated it to the global number two slot – it has hit a brick wall in the US. In spite of $28bn in global revenues, $4.4bn in operating profit and a world market share of 14.2 per cent last year, it has yet to win a single network contract with a leading telecoms carrier in the US.

Huawei’s frustrated attempts to make serious inroads in the US add up to more than just a corporate saga. They reveal deepening mutual distrust between China and America. In the US, there is growing frustration and alarm in the intelligence community and in Congress at its companies’ dependence on China for critical components in highly sensitive industries. There are also concerns that US groups are placed at a disadvantage by hidden financial support from Beijing for their rivals. China, for its part, suspects that America is seeking to contain its rise on all fronts, including economic.

The extent of Huawei’s problems became apparent last year when the company tried to raise its stake in the US market, and each attempt ended in failure. In October, it appeared close to winning a multibillion-dollar network infrastructure contract from Sprint Nextel, the third-largest carrier in the US. Though the administration of Barack Obama lacked a formal mechanism to prevent the deal, such was its concern that Gary Locke, the commerce secretary since named ambassador to Beijing, telephoned Sprint’s chief executive. In the event, Sprint chose Samsung.

Last year, Huawei also lost out to Nokia Siemens Networks in a bid for Motorola’s wireless assets, and failed to win a bid for 2wire, an internet software firm that went to Pace of the UK instead. People familiar with both failures say that concerns about the risk of regulatory delays played a role in each.

Last month, Huawei was forced to agree to unwind a $2m acquisition of patents from 3Leaf, an insolvent California-based startup, after the Committee on Foreign Investment in the United States (Cfius), which vets foreign takeovers of US assets, refused approval.

In the Sprint case, Huawei had offered external validation of its equipment through Amerilink, a company set up by William Owens, a former vice-chairman of the joint chiefs of staff, and Kevin Packingham, a former Sprint executive. But US officials never believed the group had the necessary technical capability or independence, according to people familiar with the matter. Instead, the attempt to appease government concerns was perceived as a ploy.

This is in part because of the rocky state of Sino-US relations, including reports of cyberattacks on US companies such as Google in China. Fairly or unfairly, says James Lewis of the Center for Strategic and International Studies in Washington, America will be loath to entrust a Chinese group with access to its communications network if it has reason to suspect doing so would bolster cyberwarfare capabilities.

“Awareness in the national security policy community of threats in the cyber domain has greatly increased,” says Mr Mancuso. “So if you believe that the Chinese government is engaging in cyber-intrusion, you’ll have a problem with Huawei because Huawei sits smack in the middle of the industry supplying the critical infrastructure.”

Huawei sees itself as a victim of a relationship poisoned by distrust and demonisation of China. Bill Plummer, spokesman for Huawei North America, reels off a list of other stress points, including currency disputes, disagreement over Tibet and Taiwan and China’s inclination to use information security and innovation policies to shut foreign companies out of the market. “We are always seen through this prism,” he complains.

In a recent letter to Mr Obama, senior Republican lawmakers warned about Beijing’s “extensive support” for Huawei and ZTE, another Chinese technology group, and that such financial ties “[increase] the risk that the companies feel obliged to follow its instructions”. Huawei acknowledges having several credit lines from state banks but acts only as a “bridge” between the banks and customers who need loans to buy its equipment, and says it has received no other significant government support.

In 2008, Huawei retracted a bid with Bain Capital for 3Com, a US technology company, after it became clear the deal would not pass Cfius scrutiny. People familiar with the Cfius process say US concerns about Huawei are based on classified information known to only a handful of officials.

US politicians have long-running complaints about transparency. As a private company, Huawei does not disclose details about its owners. Mr Ren’s history in the People’s Liberation Army has fed insinuations that the PLA could have either a stake in or special relations with Huawei. He was an officer in the engineering corps from 1974 to 1983, losing his position when the military was downsized. The company refutes the insinuations, saying Mr Ren holds no more than a 1.42 per cent stake and the rest of the company is owned by employees through a holding structure. But that has helped little to dispel doubts in the US.

Huawei also says the process of unwinding its patent deal with 3Leaf could have some benefits for its future in the US. The company has installed a compliance officer in charge of overseeing divestment to meet Cfius demands. “This gives us the chance for the first time to have a continuous dialogue with Cfius,” Mr Bross says.

Legal experts in the US stress that such dialogue is necessary to build trust with officials even when no deal is in the pipeline. But Huawei claims it was not given that chance in the past. “If you are Ericsson, you can have that. If you’re Huawei, you can’t,” says Mr Bross.

Huawei also intends to install product security mechanisms to address US criticism. It plans to replicate the “secure cell” structure it uses in the UK, whereby critical software code for network products is compiled by locals and put in escrow. That comes on top of a system where US customers can choose who they want to install Huawei products and who they want to support them.

But while it keeps lobbying the top-tier carriers, Huawei has started selling gear for rural networks in the US. Last month, it sold a rural broadband network to Northeast Wireless in Maine, and currently it is in talks with Sprint Rural Alliance, a group of small rural operators that have “roaming” partnerships with Sprint Nextel, for infrastructure in a few midwestern states.

Even in the relatively straightforward Maine transaction, however, the problems Huawei faces in the US remain constant. At a recent congressional hearing, a senator from the state asked law enforcement officials about the deal, and revealed that the FBI had discussed the transaction with Northeast Wireless. The deal was completed and did not in the end prove controversial. But it was one more sign of Huawei’s uphill struggle in America. Read more at www.ft.com

 

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