Climate Financing: The 50 Billion-Euro Question

 

Words can be explosive. Especially if they imply that billions of euro will be transferred from state coffers.

So it should not come as a big surprise that the Swedish government has difficulties in finding agreement on the financing of climate adaptation measures in developing countries. EU Finance Ministers fought about the issue last Tuesday. Now, climate financing is likely to dominate the European Council on Thursday and Friday (together with discussions on the top posts in the Lisbon Treaty).

The draft conclusions for the Summit (prepared for the COREPER meeting last Wednesday) mentions both short-term and long-term costs. Two key sentences illustrate the stakes involved:

 “The European Council appreciates the Commission´s estimate of an overall financing need of EUR 5-7 billion per year for the first three years following an ambitious agreement in Copenhagen and underlines that the EU in this context is ready to contribute its fair share of these costs”

 “The European Council considers that the overall level of the international public support required could lie in the range of EUR 22 to 50 billion per year by 2020, subject to a fair burden sharing at the global level in line with the distribution key agreed by Parties…”

Poland is refusing to agree on concrete numbers without promises that the burden sharing will to a large extent be based on GDP, not only on carbon emissions. Negotiations are further complicated by the fact that Germany is forming a new government.

Billion Euro Baby: Finance Minister Anders Borg is keeping a firm grip on climate negotiations. Photo: Pawel Flato/Government offices

Thus, the conclusions are likely to be watered down. That may come at a high price. Climate negotiations are already in crisis, with a close adviser to Fredrik Reinfeldt ruling out a legally binding agreement in Copenhagen. If the EU Summit does not mention ambitious figures on climate financing, it will be even more difficult to achieve a political deal in December that is strong enough.

There are a number of other open issues. What should happen to the `hot air´, the emission allowances not used by countries primarily in Eastern Europe? How will the new system of flexible mechanisms work in practice and how will it be controlled? What criteria should apply for the distribution of financial support to developing counties? Will climate financing be additional to current development assistance?

Agreement at the European Council is further complicated by internal conflicts in the Swedish government. `I hope the rumour is true, that Anders Borg is running the government´, former Finance Minister Pär Nuder said at a seminar about the Government Offices last week. But when it comes to conducting the EU Presidency, a strong Finance Ministry is not always a good idea.

Regarding climate, Finance Minister Anders Borg seems to lack the diplomatic skills needed to find agreement among 27 Member States. Dogmatic instructions from Stockholm are making things difficult in Brussels. Unfortunately, the Prime Minister´s office is weaker this time than in 2001, when State Secretary Lars Danielsson was able to give negotiators clear guidance.

Agreement on climate change in Copenhagen is the Swedish government´s first priority for the EU Presidency. It would have been easier to achieve if Fredrik Reinfeldt had been more active from the start. Instead, the Swedish Prime Minister already in December last year stated that it would be difficult to agree new commitments for emission reductions by developed countries. The government negotiators are accused of trying to accommodate every divergent view instead of showing leadership in the way former chief negotiator Bo Kjellén did. In the important area of `policies and measures´, Sweden has not put forward any innovative proposals.

Some of the criticism might be unjustified. The task is difficult. However, the government has made a number of strategic mistakes. Fredrik Reinfeldt might have to pay a high political price for the lack of a strong agreement in Copenhagen.

Note: The excellent Arte blog on Europe also highlights climate and the Swedish EU Presidency.

Reinfeldt´s Big Test

 

Preparing a European Council is never easy, but this time it seems extremely difficult. Few will envy Fredrik Reinfeldt, the Swedish Prime Minister. After Ireland voted yes to the Lisbon Treaty, the prospects for the EU Summit 29-30 October looked bright. Then Vaclav Klaus put forward his demands for concluding the Czech ratification process.

Yesterday, Vaclav Klaus made clear that he will not block the ratification until after the UK elections. He also backed down from demanding legal guarantees already now. However, Klaus is asking for a declaration that such guarantees will be included in the future – probably in connection with the accession treaty of Croatia.

This will be difficult for other governments to accept. Many would prefer a simple and strong message to Klaus: `F*ck off´. That is not how the EU works, however. There has been so many cases before when people making a lot of noise get a fig leaf to cover their retreat in the end. The most likely solution seems to be a declaration stating that the Charter of Fundamental Rights applies to EU institutions only, and not to issues within the competence of the Member States. Without any specific mentioning of issues related to the Second World War.

Will that be enough for Vaclav Klaus? Only the Czech President himself knows. But it is also an issue about what Member States such as Austria, Hungary and Slovakia can accept, and about the responsibility for EU leaders not to reignite old sensitive controversies. Vaclav Klaus should follow the advice John Cleese is giving to himself in Faulty Towers: `Don´t mention the war´.

Vaclav Klaus is a difficult obstacle, but there is also a positive scenario for the European Council.

If the Czech constitutional court already 27 October decides against the complaints about the Lisbon Treaty, and Klaus backs off, it might even be possible to keep to the original plan and fill the new posts at the Summit. This is very optimistic, but should not be ruled out entirely. Otherwise, the positions might be filled at an extra Summit in November, as foreseen by the Financial Times. Why not bet a euro on Dutch Prime Minister Jan Peter Balkenende as President of the European Council?

Climate is another nightmare for Fredrik Reinfeldt. It seems extremely complicated to reach a legally binding agreement in Copenhagen. On Tuesday, EU finance ministers will try to agree on financing, with environment ministers meeting the following day to negotiate the full EU position for Copenhagen.

Although there was progress in COREPER last Friday, sensitive issues remain, including the burden sharing of  additional financing and the future of the Clean Development Mechanism. Environment ministers will also have difficulties agreeing on how to handle the `hot air´  in the Kyoto protocol, the emission allowances not used by the participating countries.

On another issue, Reinfeldt can be more optimistic. The Swedish Presidency has been very active on the principles for the External Action Service, which will be established by the Lisbon Treaty. Although there has been differing views on inter alia the competence of the EU Commission, a compromise solution now seems close.

According to a text to be discussed by COREPER tomorrow, the controversial issue about development assistance would be solved by emphasizing the High Representative´s role as Vice-President of the EU Commission. Strategies and similar decisions of principle would be submitted to the College by the Commissioner for Development Aid, in agreement with the Vice-President, but detailed programming would be the sole responsibility of the Commissioner for Development Aid. Should this compromise satisfy Member States, the Swedish Presidency will have at least one positive result to show at the European Council.

If Reinfeldt also can overcome the resistance of Vaclav Klaus, he will be able to claim success at the Summit. But climate negotiations remain a dark cloud over the Swedish Presidency.

A decisive week for Latvia

 

`Let´s hope for the miracle save´

That was the response from a high-level official at the Swedish Central Bank in December 2008 when former IMF senior economist Torbjörn Becker questioned the policy towards Latvia. The comment was made public last week, when the Supreme Administrative Court gave me access to some of the official Swedish documents regarding Latvia´s economy.

Not as friendly as it seems. Swedish Prime Minister Fredrik Reinfeldt and Latvian Prime Minister Valdis Dombrovkis. Photo: Gunnar Seijbold/Swedish Government Offices

Torbjörn Becker, Director of the Stockholm Institute of Transition Economics, had sent an e-mail first to Christoph Rosenberg at the IMF, then to the Swedish Central Bank (Riksbanken). In his e-mail, Becker criticized the painful defense of Latvia´s fixed exchange rate with argument he and others have later used in the public debate (although with somewhat more diplomatic language):

`It seems that (the IMF statement on Latvia) mostly is a way of defending the honour of their politicians and central bank, as well as protecting the Swedish banks, when nothing is done about the currency in a situation when every normal person understands that an overvalued currency does not help the necessary adjustment of the current account balance. Now they will instead get a meltdown of the real economy, if there is not a miracle save of the world economy´ (my translation).

No one seems to have listened. The laconical response was: `Let´s hope for the miracle save´.

Swedish Finance Minister Anders Borg had already decided to support the Latvian government´s efforts to preserve the exchange rate of the currency, lats. According to several sources, one reason was the heavy losses Swedish banks would suffer if there was a devaluation in Latvia (although Anders Borg denies this).

The rescue package put together almost a year ago is now close to failure. Developments next week will be crucial.

Tomorrow, the Latvian government is supposed to agree further reinforcements of the budget with 175 million lats. At the latest ECOFIN meeting, Anders Borg threatened Latvia with serious consequences unless the budget target was achieved. After some friction between the Latvian and Swedish government, the aim is now to have a budget decision ready when EU Commissioner Joaquín Almunia visits Riga on Tuesday.

Whether all parties in government can agree to further budget cuts and a property tax remains to be seen. Drastic reductions of social welfare and public salaries are already taking a heavy toll. Latvian Prime Minister Valdis Dombrovskis is right in saying that further budget cuts would hurt the economic recovery and increase social unrest.

Still, Latvia will be forced to close even more schools and hospitals, because of the rigid policy of the EU and the IMF.

I have written extensively earlier about Sweden and the crisis in Latvia, and many others (including the Financial Times) have criticized the approach by international lenders.

The question now is whether the Swedish EU Presidency will continue along a path that could led to economic collapse in Latvia and dangerous political instability in a strategic part of the European Union.

Do all EU governments believe in miracles or is there still some strategic thinking left?

The crisis is not over

 

A feeling of relief was evident among EU policy-makers when the result of the Irish referendum was made public yesterday. The revised Lisbon Treaty had cleared the most significant hurdle.

Everybody is now looking at the Czech Republic, wondering what the next step of Vaclav Klaus will be. Fredrik Reinfeldt will meet his Czech counterpart on Wednesday, at the same time as Cecilia Malmström visits Prague.

The signature of Vaclav Klaus is crucial for the institutional development of the EU. Hoever, there is a risk is that an even more fundamental problem is forgotten. The gap between citizens and EU institutions still remains.

It has taken seven years to get this far with institutional reform – and it will not be enough if the EU is really going to play a strong role on the international scene. More urgently, hard decisions on climate change, reform of the common agricultural policy and enlargement will be difficult to take as long as citizens do not feel connected to policy-making in Brussels.

That is why Margot Wallström´s communication portfolio in the present Commission has been so important.

Critics are partly right. Progress has not been quick enough and there is a tendency (more by Barroso than by Wallström) to reduce communication to PR. The task was never going to be easy.

That does not mean that the basic idea was wrong. On the contrary, opening up EU institutions and creating a `democratic infrastructure´ should be an even more important task for the next Commission.

Margot Wallström has been successful in a number of areas. Interactive communication on the Internet, Citizens´summaries for new proposals, EU Youth Summit, European citizens´ consultations.

However, other developments in the EU have not been as encouraging.

The Commission proposal for a revised regulation on access to documents has been critized for not going far enough, even weakening some of the current provisions.

Although a voluntary register for lobbyists has been established, many remain outside the system. EU regulations on lobbyism still lags far behind the US, where Barack Obama has recently established even more stringent rules.

The Council of Ministers is still lacking in transparency, to some extent because openness has never been Javier Solana´s favorite theme. Sometimes, statements from the Council are politically insensitive and further decrease the trust in EU institutions. ECOFIN´s threat to Latvia this week is one such example.

Even if Lisbon is finally approved, the fundamental crisis of confidence remains. The next Commission should build on the new Treaty and move quickly to implement the articles on citizens´ intiatives and on civil society.

Barroso should appoint a new Commissioner with a stronger mandate to improve transparency and consultation with citizens, and to strenghtening pan-European civil society.

Relaxing is not the right answer to ratification of the Lisbon Treaty.