Chen Guangcheng

I attended a panel discussion yesterday on China.  The event was held under Chatham House rules, meaning I can’t reveal the organization or the participants.  But I can describe the issues discussed.

The event was clearly scheduled to coincide with Secretaries Clinton and Geithner’s visits to China for the annual Strategic & Economic Dialogue (S&ED), but there was very little discussion of that, given the dramatic events of the last few weeks.  The two experts were well known in the China think tank community, having spent their professional lives studying China.

If I had to characterize the overall theme, it was that the relationship between the U.S. and China is stronger than it looks and both sides are clearly trying to avoid a rift.  The evidence offered was the fact that the U.S. has not sought to exploit the Bo Xilai situation and the fairly calm way both sides have handle the case of the Chinese dissident,  Chen Guangcheng, seeking refuge in the American embassy.  While the public information suggests a fairly wild series of events, what is remarkable is the fact that the S&ED proceeded pretty much uninterrupted while Mr. Chen was being shuttled from place to place, requesting, then forgoing, then requesting again, transport to the U.S.  As of this writing, the situation remains unresolved.  But it is clear that the negotiators in the pre-scheduled talks did not allow themselves to be distracted from their mission by the strange series of events.

Bo Xilai

As to Bo Xilai, the deposed provincial leader whose wife has been accused of murdering a British citizen who was allegedly helping her move money out of China, it’s

almost too bizarre to comment on.  There has been speculation that Bo’s downfall suggests that the reformers may be in ascendancy, since he was known for his devotion to Mao and fond remembrances of the Cultural Revolution.  It was pointed out that, notwithstanding his admiration for Mao, his actually policies were pretty market-based and his province was growing economically.  So, he does not represent some alternative view of Chinese economic development.  Rather, it was suggested that he got cross-wise with the party not due to his ideology, but to his style of leadership.  As one participant said, think of him as a Chinese Huey Long.

Clearly, we would all welcome political reform in China.  It’s repression is to be deplored.  But the last thing we need is another clash of super powers, so I took comfort that there seem to be level heads on both sides of these endless negotiations.  Bodes well for the future, which is nonetheless likely to be bumpy.

One interesting chart tracks whose interests Americans think companies should serve.  As you can see from the chart below, there’s a pretty dramatic change from 2002 to today, and not in ways you might expect.

Unsurprisingly, Americans do not believe that top executives deserve much attention.  But I was surprised to see a 6% drop for employees at a time of high unemployment.    And while customers are always at or near the top, they shot up 10% from 2002 to today.   I would posit that many people answering this question are simply saying “me.”  They should put my interests first.  And most people don’t see themselves as employees, but rather as customers of companies.

I see that as a change and reflective of the erosion of the relationship between companies and their workforce.  Employees today simply don’t expect any special claim on the companies that employ them beyond basic pay and benefits.  They are just in a job and they have low expectations about any particular concern by their employers.

I’m not sure if that is good or bad.  It just is.  But I do think it is a change from a time when people worked for a company their entire lives, were loyal to it and expected some loyalty in return.   Today, people seem to recognize that it is customers that keep a company afloat.  No customers, no jobs.  It does suggest a degree of sophistication that may not have existed in an earlier, more paternalistic, era.

The ALEC controversy is a case in point.  Companies supporting ALEC presumably thought they were simply advancing business friendly policies at the state level.  No doubt, these included fewer regulations and lower taxes on business.  Clearly, ALEC does advance these sorts of policies.  However, today’s conservative movement has many facets and many ideological conservatives promote policies that, to the business community, are irrelevant, at best, and incompatible, at worst.  ALEC is composed of state legislators, many of whom were swept in by the Tea Party movement.  Their interests go beyond economic conservatism and, as a result, so do ALEC’s.

So, it may have surprised some big ALEC sponsors to find themselves dragged into the tragic death of Trayvon Martin.   PR Week has a good piece describing the connection.

Coca-Cola, Kraft, and McDonald’s recently pulled their support for ALEC after online advocacy group Color of Change called on companies to withdraw their partnerships due to its support of “voter ID” and “Stand Your Ground” state laws.

It shows how everything is connected to everything else.  And it shows how vulnerable companies can become when they get involved in ideologically driven organizations.  Politics makes strange bedfellows.  So much so, that sometimes companies need to jump out of bed very quickly.

Nick Williams

An amazing example of the differences between British and American conservatives is shown by Prime Minister David Cameron’s proposal for binding shareholder votes on executive pay.  On this side of the pond, that would get you bounced out of the Republican party.  When Democrats proposed, non-binding votes on executive pay, they were attacked as “socialists” by Republicans.

My colleague, Nick Williams, has an explanation for Cameron’s move:

Fleishman-Hillard head of public affairs Nick Williams accused Cameron of using executive pay to divert attention away from ‘dire economic predictions’ in 2012.

He said: ‘With 2012 starting off with dire economic predictions the Prime Minister is simply using populist measures to divert attention. With a near-total dearth of good news, Number 10 will have to work creatively on developing these schemes.’

Even as a diversionary tactic, such a think would be unthinkable for American conservatives.

Interesting that the increase in the deficit is the major platform on which every Republican is running.

However, the report also points to increased political controversy around China that runs counter to fairly aggressive charm offensive by high level U.S. officials, including Vice President Joe Biden, U.S. Ambassador to China Gary Locke and Under Secretary of State Robert Hormats, all of whom expressed strong support for Chinese investment in the U.S. These comments, however, were undermined to some degree by high profile resistance by the U.S. government to some investment by Chinese technology firms on national security grounds.

Similarly, on the China side, there have been some mixed messages, with public support by China generally to foreign investment, but some resistance in specific.

China added a new layer of bureaucracy for foreign investment into China. In August, the Ministry of Commerce (MOFCOM) issued the final regulations of China’s new national security screening framework, replacing the temporary regulations enacted earlier this year. While the institutional setup of this framework is very similar to the Committee on Foreign Investment in the United States (CFIUS), there are two major differences that stand out. First, the scope of national security screening is intentionally kept very broad, including “national economic security” or “social stability” as reasons to block foreign investment.

Clearly, investment flows going to and coming from China involve a complex amalgam of politics, economics and diplomacy. The stakes are very high for the globe and it will take the best minds and the best motives on both sides of the Pacific to navigate through the months and years ahead.

From Brussels:

Last night’s summit of EU Leaders ended up early in the morning with a dramatic outcome (see conclusions here) with 26 out of 27 Member States agreeing to a proposed Treaty change, leaving the UK entirely isolated and the 26 proposing to move forward on an intergovernmental basis. While further details concerning the nature of the proposed Treaty change have yet to be finalized and not expected to be signed off until March 2012, the core elements being proposed include aspects of fiscal coordination and surveillance, as well as further harmonization of rules in other areas, such as financial regulation, labour market reforms, taxation, etc.

The grounds upon which the UK walked away from the negotiations were a refusal by Sarkozy and Merkel to include a protocol in the Treaty which would have enshrined the following core principles:

• No new powers to the ESAs.
• EBA remaining in London.
• Non discriminatory access to central bank liquidity, irrespective of location in the EU.
• Permitting Vickers report style top up capital charges for banks.
• User charges by ESAs to be on the basis of unanimity not QMV (to avoid backdoor FTT introduced to fund the ESAs).
• Commitment to maintain open access by passporting third country firms into Europe.

These developments clearly have profound implications for the future structure of European integration and the future political relations between UK and its European partners, and between those countries members of the Eurozone and those outside as well as potentially the future enlargement of the EU and future composition of the Eurozone.

Below are a number of key initial points to note – we will provide further analysis following this afternoon’s summit at 26 (minus the UK).

FIRST HEADLINE ANALYSIS:

• The most immediate and obvious question is calling in the UK’s future relations with the EU, symbolically demonstrated by the UK empty chair in the remainder of today’s negotiations.
  • This will translate into high political isolation in all legislative negotiations. It is noteworthy that UK could not persuade any country to align with it in its opposition.
  • European governments will draw their own conclusions from the fact that the UK appeared to prioritize more highly a narrower national financial services agenda over what is perceived as being vital to the future of the Euro and the EU.
  • Given the choice by Merkel and Sarkozy to opt for a more ambitious integration agenda, they raised a much higher risk of non-ratification by the remaining 26 countries, most notably Ireland and the Netherlands which will have to hold referenda.
    • Failure to ratify by one country need not prevent the other countries proceeding with the Treaty; failure to ratify will be perceived as a vote to leave the Euro, which creates a higher risk particularly in the case of Ireland.
    • The length of time involved and the uncertainties associated with ratification of such an ambitious new Treaty will in the short to medium term lead to significant new instability in the markets. The core strategy in the short term will therefore be heavily relying on the willingness for high ECB intervention.
    • The new two-tier structure which will result between those ratifying and those non-ratifying the intergovernmental Treaty will raise significant questions over the future institutional structureof the EU.
      • Given new Treaty will not be an EU Treaty, raises questions over how any EU law [ie law applicable to both those who are member of the group and those outside] will be subject to initiatives in codecision within the existing institutions and subject to the limitations on enhance cooperation which exists within the EU institutions. This raises the question whether a parallel set of decision making procedures will have to be integrated within the new intergovernmental Treaty.
      • Given the two-tier nature between the decision making structures and the political commitments, there is a high risk that those outside the core will experience the same EEA effect over time of having to apply laws without as much influence over them, given political majorities will be formed around the inner core.
      • Strengthens the role of intergovernmentalism and raises profound questions about the future role of the EU Parliament, given the intergovernmental Treaty will be based on international commitments and not formally involve the European Parliament.
      • Political outcomes resulting in discrimination between infrastructures and companies inside and outside the core/Eurozone.
      • The political will for the UK to pay the cost of not being part of the core will be a lot higher.
        • The outcome of the pending ECJ ruling around the access to liquidity of central bank will be crucial in determining how far this discrimination will be limited by the free movement of capital and people within the Single Market, which will continue to apply within the EU.
        • Based on that, the Euromarkets could be mandated to relocate within the Eurozone.
        • The decision severely compromises leadership roles for the UKin any areas of core economic importance in the EU,
          • In the short term it will undermine those in prominent positions such as Chairmanship of ECON Committee, Director General of Internal Market DG, Chair of ESMA, Vice-Presidency of the European Commission.
          • In the medium term it will prejudice their capacity to hold such posts.
          • Implications for future enlargement prospects: countries willing to join will need to agree on the core political vision.

DETAILS OF THE COMMUNIQUE

FISCAL PACT

• Scope: Eurozone members + Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania. Sweden, Hungary and Czech Rep will consult their parliaments first, the UK will stay out.
• Implementation: New intergovernmental Treaty, outside of the EU framework – to be approved in March.
• Details:Based on the Merkel-Sarkozy proposals:
  • The Treaty will render the Stability and Growth Pact more robust (based on secondary legislation until now).
  • Automatic sanctions in case of non respect of the 3% deficit target – reverse qualified majority voting to reject these.
  • Harmonised “Golden rule” / budget balance rule to be enshrined in national constitutions (0,5% of nominal GDP).
  • Rule complemented by automatic correction mechanism if deviation (spending cuts and/or taxes increase) to be specified by each Member State.
  • European Court of Justice will control that the national implementation of the fiscal rules gives national constitutional courts the power to reject a budget on the ground of its unconstitutionality (related to this national golden rules).
  • Calendar for convergence to be established by the Commission.
  • “Economic partnership programme” to be submitted by Member States in EDP – implementation monitored by EC and Council.
  • Ex ante reporting of national debt issuance plans.
  • Debt adjustment path of 1/20 to be enshrined in new provisions.
  • Secondary law: Complemented by further reinforcement of the excessive deficit procedure – secondary legislation (cf Commission proposals of November: strengthened surveillance for programme/EDP countries) and Commission powers.
  • Further details: To be discussed today without the UK and Hungary presence.
  • Ratification: Agreement expected by March, ratification to start after the French elections.
  • Open questions:
    • How will this be articulated with the EU institutions? (given UK veto over using them)
    • How will it impact the Single Market?
    • What other areas will this Treaty cover?
    • Future of the EU / Eurozone +.
    • Eurobonds never mentioned, even at longer term horizon.

STRONGER POLICY COORDINATION

• Scope: Eurozone members, others?
• Implementation: Unclear – secondary legislation?
• Details:
  • Will make stronger use of enhanced cooperation on matters essential for the smooth functioning of the euro area, “without undermining the internal market”.
  • Procedure to make all major economic policy reforms planned by a Member State discussed and coordinated at Euro area level.
  • Euro Summits at least twice a year + other measures agreed in October (Eurozone President, stronger Eurogroup, etc).
  • Ratification: Unclear.
  • Open questions:
    • Extent to which enhanced cooperation will be used?
    • Articulation with Single Market?

STABILISATION TOOLS

• Scope: Eurozone members.
• Implementation: Reforms of existing intergovernmental treaties (ongoing).
• Details:
  • EFSF leveraging to be rapidly deployed.
  • ESM brought forward to July 2012 (as soon as 90% members have ratified).
    • PSI in ESM to be aligned to IMF practices.
    • Voting rules changed to include emergency procedure – mutual agreement replaced by qualified majority of 85% in case EC and ECB conclude urgent decision needed as euro area sustainability in danger (need be confirmed by Finnish parliament).
• Overall EFSF/ESM ceiling of 500 Bn € (to be reassessed in March 2012).
• EU to provide 200 Bn € to IMF (hopes other will increase provisions as well).
• Ratification: Ongoing (intergovernmental).
• Open questions:
  • Role of the ECB – no change so far.
  • Ceiling too low, especially if EFSF and ESM won’t run in parrallel?
  • Capacity to bring ESM forward (national ratifications).
  • Finnish parliament to confirm ESM change of majority rule.
  • ESM access to ECB money – ruled out by Germany.

 David Cameron MP UK Prime Minister

 “David Cameron’s isolation is a sign of weakness not of strength … It is not in Britain’s national interest for decisions to be taken without us even at the table and it’s a direct result of David Cameron spending more time negotiating with his own backbenchers than with our European partners.”

Douglas Alexander MP
UK Shadow Foreign Secretary

“Mr Cameron was right to reject a deal designed by the French, for the French.”

The Daily Telegraph

The UK has most of the EU’s financial business, but we have a minority of the votes. The City does business globally but pays its taxes here, so retaining a strong, vibrant, international finance hub here is good for jobs and our economy.”

Angela Knight
British Bankers Association

“Britain did not walk out of the EU last night. But let there be no doubt about it: we have started falling out.”

The Economist

EU Council – Britain’s Veto
Friday 9th December 2011

A major part of David Cameron’s modernisation plan for the Conservative Party was to heal their internal rift over Europe. This rift stemmed from the Conservative rebellion against UK Prime Minister John Major over the 1992 Maastricht Treaty – a formative political experience for both Cameron and Chancellor George Osborne. In this they largely succeeded by producing a Eurosceptic party in which opposition to anything that hinted at federalism assumed the level of a litmus test amongst activists; the 2010 intake of Conservative MPs are amongst the most Eurosceptic to date. This was a purely domestic project, in which the implications for the UK’s influence in the EU were largely ignored.

However, with the formation of the coalition, the European faultline running through government is if anything more significant than at the time of Maastricht. The Liberal Democrats are avowedly pro-Europe, and see the EU as entirely consistent with their internationalist and regionalist approach – a position that evokes a range of emotions from bewilderment to rage amongst their Conservative counterparts.
Against this backdrop, could last night’s debacle in Brussels destroy the coalition? It is unlikely, as neither party wants to face the electorate with the economy stalling and the austerity cuts beginning to bite. In particular, current polling suggests that the Lib Dems would face electoral oblivion at the polls – they need all the time they can get for economic recovery to vindicate their decision to enter a coalition with the Tories and implement the painful austerity programme.

Could this embolden the Tories to call time on the Coalition? Not unless the Conservative Right can convince the leadership that they can win an outright majority in a snap election – something more likely after the October 2013 boundary changes have taken effect. On balance, we therefore expect the Coalition’s increasingly unhappy marriage to continue in the short term – most likely through to 2015. However, the Conservative’s right wing is likely to continue causing trouble on Europe as the Parliament wears on – aided and abetted by Labour for tactical reasons – resulting in increased coalition friction.
UK – EU Relations

In broad terms, the EU has now split between the UK and everyone else. This is a moment that bears more than a passing resemblance to the 1990s – when John Major was isolated in Europe through repeated use of the veto abroad and Tory rebels at home – except that now the stakes are much higher.

Realistically, a disorderly break-up of the eurozone will only be averted if the package agreed between the Eurozone 17 plus the (now) 9 other non-Euro members (i.e., every Member State but the UK) is judged to be sufficiently credible and likely to stick through the three years it is likely to take to negotiate, ratify and implement. The markets will ultimately be the judge of that.
Beyond this, it is clear that we now have a two-speed Europe, regardless of whether the agreement between the rest of the Member States is formally within the EU institutions or not. In vetoing treaty change, Cameron has denied the rest the use of the Commission and EU officials. This may well have been in the UK’s short term interests; however, the reality is that we have also entrenched a large voting bloc whose interests will inevitably start to converge as they embark on closer union.

Given the dramatic way in which the negotiations broke up, and the rancour directed towards the UK (on top of the existing tensions), it is difficult to see how this will not further limit the UK’s ability to influence the EU negotiations in our favour. It is likely that it will take a decade or more for Britain’s influence in the EU to recover – and any future enlargement of the EU is unlikely to change this – the expectation is that any future Member States will also have to sign up to the new treaty.

As a public affairs professional, it is absolutely fascintating to get “on the ground” reports about significant events occuring all over the world.  I talked to a colleague who was on the phone with the prime minister of a European country this very morning providing guidance on a speech he is about to deliver.   I talked to another colleague who took umbrage when I quoted a Financial Times article critical of his government.  And then discussed a project that a colleague is working on with the President of an Asian country.

The dinner took place in a high rise on the 80th floor with a spectacular view of South Chicago along Lake Michigan.  It was very convivial.  Our CEO gave a brief toast, but clearly did not want to interrupt the comraderie.

A very good kickoff to the meeting.