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Italy’s economic crisis and the OECD warnings

Giancarlo Elia Valori

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At the Columbia University in New York I have recently met many young, skilful and well-trained Italians, who are very worried about the future of their country.

 Currently the Italian Statistics Institute (ISTAT) tells us that the cost of training multiplied by the number of Italian researchers abroad amounts to over one billion euros a year.

 Every year approximately 3,000 researchers leave Italy for other countries – the well-known “brain drain”. We lose 16.2% of researchers trained in Italy, but we succeed in attracting only 3% of scientists from other countries.

 The reasons which underlie this situation are the following: old-fashioned universities, exam-rigging, corruption and nepotism, never-ending public competitions and ridiculous salaries.

 The “brain drain reversal scheme” started by the  government back in 2001, has convinced only 488 researchers to come back to Italy, of whom less than a quarter decided to prolong their stay in Italy for the following four years.

 A student at the Columbia University told me “we need to start a revolution”. It is true, but we need to agree on the meaning of this remark.

 No other country in the West is undergoing a structural crisis like Italy – and recession is looming large. The current Purchasing Managers Index, which measures the manufacturing activity, is at its lowest level over the last four years, in Italy as in the rest of the world.

 Hence a very severe crisis of the whole Euro area is  expected, while Italy will distribute an ever decreasing  GDP that will be reduced to nothing in the near future.

 Hence obviously the redundancy Fund shall be increased significantly and the public debt, which is already under pressure, will immediately sky-rocket.

  The VAT cannot but increase by 12.5 billion euros – a “safeguard clause” that cannot be met otherwise.

 According to the estimates made by some research centres, the VAT increases – 23.1 billion euros for 2020 and 28.7 billion euros for 2021 – will naturally entail a 1,200 euro annual extra-cost per each household.

 Young people will be the most penalized, considering the low wages and salaries they normally earn – if any.

 It is self-evident that if the VAT increases, the propensity to buy decreases – and this would happen precisely in a recessionary phase.

  Economic masochism, but probably inevitable when you are wrong in defining the public budget composition, as is currently the case.

 Furthermore, within a framework of fully negative forecasts for Italy’s economy, the OECD report of April 2019 has been made public.

 The topics are well-known, given the wide media coverage,  but it is good to examine them analytically.

 In particular, the OECD recommends to work on institutional, economic and social reforms, which have been debated in recent years.

This means and immediate and strict simplification of the government system – probably including a one-chamber parliamentary system, but not in the regional devolution sense envisaged by former Prime Minister Renzi’s proposal –  tax reform and regional simplification with only two or three macro-regions.

 Nevertheless reducing the Regions’ spending powers is an essential issue, currently still capable of redressing public budgets.

 The OECD also recommends a medium-term budget plan within the framework of the EU Growth Pact.

  This means that a program is proposed to correct the annual imbalances with respect to the Maastricht rules and to the other European financial treaties.

 Said program, however, envisages budget cuts that no one knows whether they are possible.

 It is equally true, however, that – according to the current government’s rhetoric and storytelling – these are Draconian rules and measures for Italy.

 Nevertheless we need to refinance a huge public debt and  at the best rates – hence we can only follow the rule of the great football coach, Nereo Rocco: “kick and run”.

 Control of debt securities sale, reduction of public spending and analysis of its effectiveness.

 The sooner we enter the Euro comfort zone and safety area – without ridiculous pseudo-economic theories – the better.

 Furthermore, the OECD asks Italy to implement measures designed to foster productivity. It is an excellent proposal but, from 2010 to 2016, productivity in Italy increased only by 0.14% a year – which means virtually nothing.

  Here we go back to the issue of science and innovation, which Italy is unable to retain in the country, thus forcing the young researchers who produce them to leave.

 The main reason for it is the excessive fragmentation of companies which, due to their small size, cannot invest in innovation, but rather focus on the gradual specialization of low-tech traditional productions, which will soon be swept away by international competition.

 It should be recalled that in Germany the graduates’ unemployment rate is 2-4%, as against the Italian one which ranges between 8% and 13%.

 Moreover, in Italy the number of humanities graduates is twice as much as in Germany.

 Once again, quantity does not favour quality. Quite the reverse.

 Another OECD request is to fully implement the reform of cooperative banks (BCC), also known as banche popolari.

 It is really a thorny issue. Certainly cooperative banks (BCC) must be placed in a position to face and withstand the other types of banks.

 There is the widespread feeling, however, that much of the cooperative banks’ capital (currently the number of members in Italy is equal to as many as 1.3 million) is strongly desired by larger and currently less capitalized banks.

 Italian banks had the Supervisory Authority of the Bank of Italy when their  European competitors resorted to the  usual consulting firms.

  Hence there should be a good reason why the network of cooperative banks is successful, while the network of ordinary banks has a smaller capital allocation ability.

 Hence obviously the OECD basically wants the recapitalization of Italian banks “by other means”, i.e. with the cooperative banks’ liquidity, which is on average higher.

It is by no mere coincidence that 63% of Italian high-risk banks are in favour of the cooperative banks’ reform.

 Another key aspect of the OECD recommendations is the abolition of the so-called “quota 100″early-retirement scheme intended for employees aged at least 62 and having accrued at least 38 years of social security contributions..

Certainly, from Mario Monti’s government onwards, the Fornero pension reform has been the State’s way to “swell its coffers”.

 The impact of “quota 100”, however, is significant on public accounts, if we consider the expected deficit of 17 billion euros. Furthermore, with this schemethere is the risk of an early retirement of civil servants that the Public Administration can partly replace, but the Municipalities cannot replace at all.

 Without changing the Fornero pension reform, over the next two years 500, 000 civil servants would retire from the Public Administration. Currently, however, the “quota 100″early-retirement scheme costs one billion euros for SMEs alone, in terms of severance pay. Nevertheless, with  “quota 100”, the State shall pay 335,000 pensions more than expected.

 Hence spending will rise to 4.7 billion euros and we do  not know yet where this money can be found.

 Moreover, the OECD considers “quota 100” a generational injustice, given the different economic treatment granted to the various pensioners.

 Nor does it seem credible that any job vacated by a pensioner is ipso facto filled by a young person.

 This is tantamount to applying to pensions the “voodoo economics” with which George Bush senior referred to  Ronald Reagan’s economic and tax policies.

 Certainly the “quota 100” early-retirement scheme will reduce staff in hospitals, schools, courts and municipalities significantly.

 And there are no real and cheap alternative options to solve the issue.

 Moreover, as natural, the OECD recommends to reduce tax amnesties, but also asks for a very interesting measure, i.e.  to improve the coordination of the bodies dealing with taxation.

 This is a dual problem certainly requiring to organize the bodies, but also to simplify and streamline rules and regulations.

 For example, a standard tax system for each activity can be defined and the taxpayers’ data in relation to this tax benchmark can be later checked.

 Without tax simplification, there will never be tax fairness and equity. Currently the tax rate on limited liability companies increases by 14%, while the flat-rate regime decreases and the minimum tax bases increase. Everything is fine but, if we do not deal with taxation on natural persons, there will always be a big problem of tax injustice.

 With specific reference to the public investment that the OECD requires, reference must be made to my old friend Paolo Savona and his plan to set aside 50 billion of savings from treasury bonds (BTP) and other securities to be invested in infrastructure.

 That plan on which he had been working, was immediately shelved because the Five Star Movement members cringe whenever they hear people talking about infrastructure to be built.

 Savona was also thinking of introducing the so-called  mini-BOT, named after Italy’s short-term treasury bills -the quasi-parallel currency also permitted by the EU regulations, which leads to investment and growth.

 It was not possible to implement that plan and this already bears witness to the conceptual and practical narrowness of the current government.

 Once again, no imagination and above all no technical knowledge of problems.

 What about the so-called “reddito di cittadinanza” – a citizen basic income which is conditional upon undertaking “unpaid work” in community-based services? It can be implemented, although it is an expensive and probably useless measure.

I share the OECD view according to which it is an artificial increase in the minimum labour income which, however, many small companies will not accept.

 They will prefer not to hire rather than paying wages and salaries competing with the “reddito di cittadinanza”.

 Hence we will easily reach a situation of massive support for long-term unemployment, which will discourage many individuals from undertaking productive work since they would earn less than the “reddito di cittadinanza”.

 Mass poverty, however, does exist, and it mainly results from the fact that, since 1999, 25% of Italy’s production system has moved abroad.

 The OECD also wants to reduce the “tax wedge”.

 It is an excellent idea that is partly already envisaged by the current tax legislation.

 However, what about workers having a good share of their wages and salaries without tax wedge, in exchange for a normal tax return?

 Certainly there are obvious dangers, but entrepreneurs would gain a good share of tax-insurance costs and  employees would pay their taxes independently.

 Another problem to be discussed is the OECD proposal to gradually lower the “reddito di cittadinanza” and, at the same time, introduce a subsidy for low-income workers.

 It is a good, albeit abstract idea: in principle, those having low labour incomes cannot invest in their training.

  Furthermore the subsidy to workers favours the employers’ tendency to lower wages and hence produces  adverse and costly effects.

 It is better to make investment in the education and training sector open to workers or even to provide tax support to have access to the refresher courses organized by the trade unions.

 Finally, the OECD confronts Italy with its long-standing  problems: the per capita GDP is at the same level of 2000,  when we introduced the Euro, but it is anyway clearly below the pre-crisis level.

 Therefore each negative cycle leaves us poorer and less industrialized.

 And hence less able to face our social needs: poverty; the aging of population and the increase in the number of elderly people; the young researchers who leave the country.

 The OECD recommends to provide subsidies to workers.

 Nevertheless, we need to be careful: if entrepreneurs get used to paying a “political” price for wages and salaries, the whole system will collapse.

 The OECD envisages a living wage that is worth 70% of the average wage.

 Will it be enough? However, it shall be linked to a salary already active in companies or also in the Public Administration which – as university researchers know all too well – currently lives on unpaid work.

 But certainly the State must tackle the wage crisis and supplement wages and salaries with the reduction of the tax wedge – with the aforementioned mechanisms and also with ad hoc funds for the most crisis-stricken sectors.

 Certainly an aggressive operation – like the one designed and planned by Hitler’s banker, Hjalmar Schacht, with the “MEFA” securities, which were “private” bills payable by banks – would not be a bad idea.

 A great deal of imagination will be needed here, because currently all the old theories of economic “balance” do no longer apply.

 The OECD also thinks that the regional development funds must be added to those inside ordinary expenses. Currently, however, they are both lacking. Where are the funds to make them effective?

 In short, if we abandon the current policy based on “all power to the imagination” and study problems more carefully, we will probably make a few steps forward.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr. Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs “International World Group”, he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group. In 1992 he was appointed Officier de la Légion d’Honneur de la République Francaise, with this motivation: “A man who can see across borders to understand the world” and in 2002 he received the title “Honorable” of the Académie des Sciences de l’Institut de France. “

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From Intellectual Powerhouse to Playing Second Fiddle

Dr. Arshad M. Khan

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A multi-ethnic, multi-religious culture built Spain into an intellectual powerhouse so much so that after the reconquesta scholars from various parts of Europe flocked there to translate the scientific and philosophical works from classical Arabic into Latin triggering the European renaissance. 

But soon there were other changes.  The Holy Office of the Inquisition was born.  Muslim dress, Arab names and the Arabic language were outlawed.  A new inferior class of people emerged – Moriscos.  They were Muslims who had converted to Catholicism under threat, usually of exile and loss of property.  Many of course continued to practice Islam in secret. 

Discrimination and mistreatment led to Morisco rebellions which were crushed.  Eventually they were forced into internal exile to the northern provinces of Extremadura, La Mancha and New Castile where there was greater tolerance particularly in La Mancha. 

In Toledo, the area around the cathedral gained fame as an informal school of translators.  Often Morisco, these translators’ services were available to scholars or others requiring translation of Arabic texts.  It is here that the narrator of Cervantes’ epic Don Quixote of La Mancha finds a translator for an Arabic manuscript, a supposedly historical account of Don Quixote’s adventures.  The author of the fictional text is Cide Hamete Benengeli, a name that is clearly of a Morisco.  If Spain was busy making Moriscos a non-people, Cervantes was reminding them of their heritage.  

In 1492 when the last Arab Emirate (Grenada) was relinquished to Catholic Spain the treaty signed promised Muslims the right to their way of life in perpetuity.  Their Catholic Majesties Ferdinand II and Isabella I soon reneged on the deal.  Restrictions, internal exile, discrimination and forced conversions were the result.  But even the converted were not safe.  As Ottoman power expanded to the Mediterranean, Spain felt threatened.  Morisco loyalty became suspect and in the early 17th century they were expelled from Spain as were the Jews.  So ended 900 years of coexistence, fruitful and friendly that changed to suspicions and final expulsion under Catholic Spain.

And what of Spain?  Having lost its intellectual dynamism, it took its brand of intolerant Christianity to the Americas and added it to European diseases to which the people there had no immunity.  A devastated but Christianized population was the result.  Time and immigration have changed demographics.  A majority of Argentines for example have Italian ancestry; German influence in Chile which encouraged immigration from there in the 19th century is another example.  

Our own Ferdinand and Isabella composite resides in the White House with a good chance he will not next year.  Life will go on and people will continue to practice the religion of their birth or choice. 

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The 17+1 Framework between China and Europe

Giancarlo Elia Valori

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In March 2019, Chinese Prime Minister Li Keqiang made a long trip to Eastern Europe.

  The reference for that trip, full of bilateral meetings, was the one found in the Joint Declaration of the EU-China Summit of April 9, 2019.

 A document in which, as usual, some key points are stated: firstly, the Comprehensive Strategic Partnership, which reaffirms global strategic multilateralism, as well as “sustainable development” – whatever we may mean with this term – but in which, however, the EU reaffirms its One-China policy.

It also reaffirms support to the EU-China Cyber Task Force; the strengthening of the Addis Ababa Action Force; the funding to the joint migration agency; the will to achieve a global and inclusive economy; support to the Joint WTO Reform Group and further support to the G20; the joint action for the “Global Forum on Excess Steel Excess capacity”, as well as the reform of the international financial system and the review for the new IMF quotas; the “Paris Climate Agreement” and its Montreal Protocol; the Blue Partnership for the Oceans.

With regard to foreign policy – as if everything else were not-  reference is explicitly made to the support of both players, namely EU and China, for the 2015 nuclear JCPOA with Iran. Also the peace process in Afghanistan is mentioned, as well as Venezuela.

In this list of bilateral issues there is also the request for a peaceful and democratic solution for Kabul.

Not to mention – of course – the Law of the Sea and finally the situation in Myanmar.

 An encyclopedia of very important international topics, which are only proclaimed and mentioned as headings. But, as far as I know, not even in confidential talks they have gone beyond the good intentions with which, as we all know, the road to hell is paved.

In that Summit, tension could be easily perceived.

 China wanted to have the EU on its side, at a time of maximum trade tension with the United States, while the EU had increasing doubts about the extension – the so-called 17+1 Framework – of the Belt and Road Initiative to the Balkans and former Yugoslavia.

It should be recalled that Italy, Hungary, Greece and Portugal broke EU unity towards China at that time.

Was it just a signal to the EU? Or a well-considered choice based on the fact that the EU was a technocrat structure operating side by side with Member States – as Germany said – but did not replace them? We do not know yet.

What is certain, however, is that the Chinese seduction towards the Mediterranean and Eastern EU is based on two facts: the U.S. slow disengagement from the NATO EU pillar, regardless of its future president, and China’s awareness that it has to deal with an EU which is now a “paper tiger”.

Nevertheless, China carried out an even more practical operation, at least following the Confucian logic: the support for a Belt and Road network, namely the “16+1 Framework of cooperation with countries in Central and Eastern Europe” -which is celebrating its eight anniversary -to which Greece joined.

 The meeting about which we are talking took place in Dubrovnik in April 2019.

 The logic of the Chinese Framework is to be closely related with the “Three Seas Initiative” of 2016, an EU initiative in which China simply participated.

 As stated above, at the time Greece joined the group.

The Framework, however, had been created in Budapest in 2012 to foster cooperation between the (then) 16 European countries plus China, based on the new Chinese Silk Road and investment in infrastructure, with a view to  creating the China-Europe land and sea express line.

Besides Greece, the European countries participating in the Framework are the Czech Republic, Poland, Hungary, Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Estonia, Lithuania, Romania, Serbia, Macedonia, Montenegro, Slovakia and Slovenia.

Among the current participants, 16 are EU Member States, five are members of the Euro area, four are candidates for participating in the single currency and one is even a potential EU Member State.

 From the geopolitical viewpoint, China has built an ad hoc format basically within the EU, a mechanism that minimizes the risks of crisis in the Eurozone, creates an autonomous area of interest for China and can even create a Chinese mainmise within the EU, which could also undermine its future development – if any.

 The Chinese consortium managing the operation is the China-Road and Bridge Corporation, a subsidiary of the China Communication Construction Company– a company included in the Fortune 500 list.

The Eastern European countries’ underlying idea was to use Chinese support to stimulate their development but, in a document of the Czech government, it is pointed out that the bilateral commitments are now scarcely honoured.

 This is due to the coronavirus and the ongoing financial crisis in European countries, as well as to an often high debt burden on the Chinese side.

The EU, however, has changed its political and economic approach towards China – rather quickly considering its normal standards.

 In January 2019, in fact, a paper was published by the Federation of German Industries (BDI), which defined China as a “systemic investor” and asked the EU to make its rules and regulations stricter in view of competing with China and protect its companies.

This was followed in March 2019 by a document from the European External Action Service, the Brussels-based structure that believes it is a secret service – often with comical results.

 The document told us it was necessary a) to strengthen relations with China, albeit carefully, in view of promoting common interests at global level; b) to control Chinese investment in the EU, on an equal footing (fat chance) and c) to push China towards a “sustainable” economy.

 A psycholinguist should still help us to investigate into the effects of the word “global” in the minds of current political leaders.

 The document also informed us that the EU should seek a more robust and, above all, mutual relationship at economic level.

 Finally, it was maintained- coincidentally – that the countries of the 17+1 Framework should operate in a homogeneous relationship with EU laws. We can rest assured they will do so.

 Then there was the same old story about “human rights” and the obvious “sustainable” development, not to mention climate change, China’s claims on the South China Sea which, we imagined, would be pursued with or without the EU “fine souls”, as well as the request for a connection between China and the EU in Eastern Europe – apart from the 17+1 Framework – which would be anyway pursued until China saw its interest, and finally the substantial repetition of the above stated China-EU agreement of 2019.

Just to avoid remaining in an imaginary world, we should recall here a very useful Machiavellian concept: “There is no avoiding war, it can only be postponed to the advantage of others”.

Not to mention that “States are not ruled and maintained with words”.

What is the solution to the dilemma? In all likelihood, the EU has had a very strong warning from the United States, and is trying to bridle, slow down and restrict its relations with China.

With reference to the 5G, a key issue for the United States, the European Commission has signalled a series of “necessary measures”.

 The EU document tells us that the 5G network is very important – just what we needed – and that the Union also supports competition and the global market. It then lists the European agencies that deal with it.

 Finally, the solution for the EU is to foster cybersecurity “through the diversity of suppliers when building the network”.

It should be recalled that Japan signed an agreement with the EU on the same issues in September 2019.

 Everything will be known, however, once the EU’s foreign investment screening mechanism has provided its results, considering that it was launched on April 10, 2019 and will be implemented by October 11, 2020.

It is connected to the Commission’s Communication “A New Industrial Strategy for Europe” which maintains that “we need a new way of doing business in Europe” and that this must “reflect our values and social market traditions”.

It also states that “our industrial strategy is entrepreneurial in spirit and action” but also that “scalability is fundamental in the digitalised economy” – and this is another key point for us.

 An essential topic, but left on the sidelines.

 Let us leave aside the other banalities and trivialities typical of the 1968 protesters newly converted to the market economy.

 Obviously the new Agency will have the following aims: to create a “cooperation mechanism between the European Commission and the Member States to exchange information” – as if it were not already in place – to enable the Commission to make an evaluation (obviously a non-mandatory one) to stop the operations concerning any foreign investment- albeit is not clear whether for SMEs or otherwise – to be authorized by the Member States to “comment” on foreign investment in the EU; to list a sequence – albeit not exhaustive –  of foreign investment sectors that could trigger an analysis by this very powerful organization: critical infrastructure and technology, critical inputs, access to personal data and finally guarantee of media pluralism – that has little to do with it, but “anything goes” and every little bit helps.

 That is all, so far.

In December 2015, China set up the People’s Liberation Army Strategic Support Force(PLASSF), the structure of the Chinese Armed Forces dealing with cyberwarfare, space warfare and electronic operations. Has the EU something similar?

 Obviously not. Furthermore, NATO has a cyber-defence policy, defined at the Wales Summit of September 2014 and at the Warsaw Summit of 2016. But it has no joint agency for cyber policy, which is not only defence, but also attack.

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Gas Without a Fight: Is Turkey Ready to Go to War for Resources in the Mediterranean?

Artyom Semyonov

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Active exploration of gas deposits in the Eastern Mediterranean has boosted the region’s importance for the local powers. Most European states depend on imports of energy resources, which means that taking hold of new gas sources is an important element for strengthening their energy security and diversifying their sources of hydrocarbon supplies.

Currently, Greece, Cyprus, France, and Italy are among the main players that have divided up the known and future gas deposits in the Mediterranean among themselves. All these states are EU members. We should add that other EU states also indirectly benefit from new resources, even if they do not have immediate access to gas deposits. They will, however, gain an opportunity to diversify their gas imports and distribute their hydrocarbon dependency among a greater number of suppliers.

The discovery of a new treasure trove of hydrocarbons often produces not only profits, but also additional problems since natural resources frequently turn into a source of conflict. The case of the Eastern Mediterranean is no exception, as another power has staked its claim to a share of the region’s resources, a power that had officially received no piece of the gas “pie” that the European states had divided up among themselves. This power is Turkey, which has decided to actively explore the gas deposits in the Eastern Mediterranean and has also visibly increased its military presence in the region. Over the last few months, Turkish and Greek warships have been involved in several dangerous incidents, with both parties declaring their readiness to open fire at a pinch. Ankara has also warned that it would “not back down” in a potential confrontation. Like Greece, Turkey has already held military manoeuvres in the region.

Turkey’s Motives

Why does Turkey need the gas deposits of the Mediterranean? Today, Ankara is forced to import most of the gas it needs. According to 2016 data, imported gas accounts for 99 per cent of Turkey’s total gas consumption. Most of this gas (over 50 per cent) is purchased from Russia, with Iran, Azerbaijan, Algeria, and Nigeria being among Turkey’s other important suppliers. Multibillion natural resource purchases are a heavy burden on Turkey’s struggling economy. Its GDP has been stagnating since 2017, with a growth of just 0.877 per cent in 2019, compared to over 7 per cent two years ago . These negative trends have been exacerbated by the coronavirus pandemic. It has been a particularly painful time for Turkey, as the country has had to deal with the consequences of the lockdown, the partial suspension of economic activities and a sharp drop in tourist flows, which have always been an important source of revenues for Ankara. The timing of the shortened 2020 holiday season could not have been worse for Turkey. According to official data from the Turkish government, by June 2020, Turkey’s GDP had dropped by 9.9 per cent compared with the previous quarter.

It is extremely important under such circumstances that Turkey finds new energy sources: the gas deposits in the Mediterranean will lift the overwhelming burden on the country’s budget and give its weakened economy room to breathe. In such a situation, decreasing dependence on gas imports could be posited as the short-term goal. In the long term, Turkey intends to become a net gas exporter, which will require huge gas deposits, including those outside the Mediterranean.

Fighting for resources fits well into Recep Erdogan’s “neo-Ottoman” foreign policy concept that envisions a Turkey that is more willing to engage in confrontation with Western powers. Additionally, the “neo-Ottoman doctrine” entails bolstering Turkey’s regional influence—and gaining new resources in the Mediterranean fits well within this task.

International Legal Conflicts within the Dispute

Ankara’s problem is that the formal provisions of the law of the sea do not allow Turkey to explore and develop potential and known gas deposits in the Eastern Mediterranean. The situation, however, is complicated by the fact that the law of the sea, like any other international legal norms, has understandable problems in terms of compliance. Additionally, the provisions of the law of the sea are very complex, and different states frequently interpret them differently, which is true for both Turkey and Greece. For instance, Turkey is actively exploring gas deposits in the Aegean Sea, although legally it does not have the right to do this: under the law of the sea, virtually all of the Aegean Sea belongs to Greece’s exclusive economic zone due to a chain of Greek islands that are closer to Turkey’s coasts than to continental Greece itself. Ankara, however, insists that the islands should not be taken into account when determining exclusive economic zones, which has created the first international legal conflict in the dispute.

The second conflict pertains to another stretch of the Mediterranean between Italy and Libya. Turkey has staked its claim to this stretch, citing its agreement with Libya’s Government of National Accord. The problem is that the GNA does not control all of Libya’s territory, which could put a question mark over the government’s legitimacy. On the other hand, the GNA enjoys international recognition, a fact that Turkey repeatedly stresses.

Another case is connected with gas deposits closer to the coasts of Cyprus. Turkey does not recognize Cyprus; it only recognizes the Turkish Republic of Northern Cyprus (it is the only country to do so). Consequently, Ankara views exploring and developing gas deposits in the Exclusive Economic Zone of Cyprus as a violation of Turkey’s rights. In the meantime, the colossal Calypso gas deposit that was discovered off the coast of Cyprus in 2018 is one of the main bones of contention in the present energy dispute.

The Role of the European Union and Individual European Stakeholders

From the very outset, Brussels supported Greece and condemned Ankara’s aggressive actions. However, the European Union is not entirely homogeneous in its attitude to the dispute. Firstly, some of its members are locked in a confrontation with Turkey, such as Greece and Cyprus, and their stance in unequivocal. There are stakeholder states, such as France and Italy, two European Mediterranean powers that also have an interest in the region’s gas deposits. Their oil and gas companies, France’s Total, and Italy’s Eni, have already bought shares in the discovered Mediterranean gas reserves and made relevant arrangements with Athens and Nicosia. In the standoff between Greece and Turkey, Paris and Rome are solidly behind Greece. Moreover, France has not limited itself to rhetoric, and has sent warships to the Eastern Mediterranean, thus demonstrating its willingness to support the Hellenic Navy in a critical situation. This is a particularly important step, since it entails a radical shift in the military balance of power within the dispute.

Out of all the EU member states, particular mention should be made of Germany, which has a special connection with Turkey and currently holds the presidency of the Council of the European Union. Tellingly, Berlin also sided with Greece, although, unlike France, it has been far more restrained in its conduct. Germany did not send its Navy to the region. Berlin’s principal message is the need for dialogue between the opposing parties and a détente in the conflict. This is Germany’s typical foreign policy stance since it prefers to avoid exerting pressure by force. Additionally, Germany has no additional incentives within the dispute since it stakes no claim to the resources of the Mediterranean.

As for the European Union in general, the overall support for Greece is easy to explain. Brussels proceeds from the official provisions of the law of the sea and, unlike Turkey, it recognizes Cyprus and, consequently, the right of Athens and Nicosia to the gas deposits. In the long term, this new source of gas could help stabilize the European Union and serve as a safety net in the event of a crisis. It was not that long ago that the global financial crisis and the subsequent Eurozone troubles, which hit Greece especially hard, almost resulted in Athens defaulting and withdrawing from the European Union—a fact that could have set a very dangerous precedent and entailed a chain reaction in other Eurozone states with major financial woes (such as Italy). With this is mind, European politicians may very well count on the fact that the revenues from developing the gas fields will help keep the Greek economy on an even keel and insure both Athens and Brussels against possible new economic shocks. We should keep in mind here that the European Union had to establish a financial aid programme and spend significant funds to save Greece from bankruptcy.

Additionally, as we have already mentioned, the new source of gas will allow many EU countries to diversify their energy suppliers and thus to boost their energy security.

How Likely is the Dispute to Turn into a “Hot” Conflict?

Despite several critical incidents, an open conflict over the gas deposits in the Eastern Mediterranean is not particularly likely, mostly due to the forces being unequal. Turkey has found itself almost completely isolated, and the only agreement Ankara can rely on has been achieved with Libya’s unstable Government of National Accord. On the other side, there is an entire coalition of states, with Greece and France having already held joint military exercises.

France’s military intervention radically changes the balance of power. Turkey’s Navy is larger and stronger than Greece’s (149 warships vs. 116, according to the Global Firepower Index), but significantly smaller than that of France (180 warships). However, it is not only a matter of how many warships each side has. What is important here is their quality: for instance, France has four aircraft carriers, while Turkey has none.

The European Union’s general support for Greece is also important. The idea of imposing sanctions against Turkey was evoked at the most recent EU Foreign Ministers Meeting. Financial penalties could have a major effect on Turkey, given that the European Union is Ankara’s principal trade partner, accounting for 42.4 per cent of its exports and 32.3 per cent of its imports. In such a situation, trade sanctions may prove very painful for Turkey, especially given its stagnating economy and the significant losses it has suffered as a result of the coronavirus pandemic.

Additionally, the scope of the European Union’s non-military leverage against Turkey is not confined to economic sanctions. In the event of an open conflict between Athens and Ankara, Brussels can strip Turkey of its current benefits in trading with European states. In particular, the question of excluding Turkey from the EU Customs Union may appear on Brussels’ agenda. Additionally, the European Union could take Turkey’s potential EU membership off the table forever and strike Ankara from the list of candidates.

Still, we should not discount the serious obstacles in the way of Brussels imposing sanctions against Turkey and using other measures to apply pressure on Ankara. One such obstacle is Ankara’s geopolitical significance for Washington. Despite all the recent complications in their relations, Turkey remains one of the key U.S. allies in the region and a NATO stronghold in the Middle East.

As for Turkey itself, a “hot” conflict could prove detrimental to the country in several ways at once. First, given the unequal military power, it is extremely unlikely that Turkey would emerge victorious from such a conflict. Second, a war will undermine Turkey’s global standing and its membership in international organizations. Third, Turkey cannot afford in its current economic state to either actively build up its military power (even though its authorities claim the opposite and have announced significant increases in the naval budget, with the construction on aircraft carriers being top of the spending list) or bear the burden of possible sanctions which, given the country’s many connections with the European Union, could prove very painful.

The rhetoric of the Turkish leadership is highly belligerent rhetoric, yet Ankara is very well aware of the real consequences of breaking up with Europe and starting an open conflict with a country that is a member of both the European Union and NATO. It is possible that, instead of instigating a “hot” conflict, Turkey could attempt to use its own instruments of applying non-military pressure, such as the huge number of refugees present on Turkish territory. Since 2016, Brussels and Ankara have had a refugee agreement in place. However, Recep Erdogan has already demonstrated in the past that he is capable of suspending this agreement and “cracking open” the door to Europe for migrants, which would set new crises in motion at the borders to the European Union.

Does the Gas Dispute in the Mediterranean Affect Russia?

Special attention should be paid here to the possible prospects for Russia in the ongoing dispute. Naturally, Russia has a very tangential relation to the confrontation in the Mediterranean, although the outcome of this confrontation may be important for Moscow.

On the one hand, Russia can hardly profit from Turkey gaining its own major sources of gas. Currently, Moscow is the main supplier of gas to the Turkish market. Undoubtedly, Russia is interested in preserving this status quo. The recent launch of the Turkish Stream confirms that Moscow intends to maintain its dominant standing in the Turkish energy resources market.

On the other hand, a new source of gas for European countries could shake Russia’s position in the even more important European market. It is no secret that the EU countries are attempting to diversify their resource suppliers for greater energy security. However, abandoning Russian gas is very difficult since a gas pipeline infrastructure has already been created in Europe, making Russian gas relatively inexpensive. Much will depend on whether Greece, Cyprus, and Israel will succeed in jointly building the EastMed gas pipeline meant to deliver gas from the Eastern Mediterranean to Greece. Theoretically, EastMed could be extended to other European states. It currently has a design capacity of 10 billion cubic metres, which may be increased by tapping the currently unexplored resources of the Eastern Mediterranean. This is a very ambitious and expensive project, but if it does materialize, it could change the situation in the European gas market, since pricewise, it could compete with cheap Russian gas. If there is no pipeline running from the Mediterranean, Mediterranean gas will have a hard time pushing Russia aside in the European market: without the gas pipeline, gas will be shipped as liquefied natural gas (LNG), which will significantly increase its price and make it far less attractive to European countries.

From our partner RIAC

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