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The Covid-19 epidemics and the issue of Italy’s public debt

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How will the E.U. resources be defined in the near future for the coronavirus issue? The issue is, in fact, much more complex than we may think.

 The actual European Funds that are theoretically available are manifold: the European Regional Development Fund, the European Social Fund, the Cohesion Fund and, finally, the European Maritime and Fisheries Fund.  All of them have been activated by President Von der Leyen in the initial phase of the COVID-19 spreading to Europe.

 The resources identified by President Von der Leyen for providing support against the epidemics and its economic effects are all drawn from these budget items, which are also those transferred to the States, usually as pre-financing, i.e. as advances on operating expenditure.

 The unspent part of these advances will soon be renamed without any particular bureaucratic problems and these funds will cover at least some past expenses, precisely as from February 1, 2020.

 President Von der Leyen’s proposals affect also the General Regulation of European Funds, which will also enable us to use the Regional Development Fund to finance capital and investment, particularly to improve the efficacy of regional health services.

 In principle, contributions from these Funds will only be used to cover the losses caused by health crises, climate events, environmental accidents or accidents at sea which, however, account for at least 30% of the turnover of the affected company, calculated on the average of the last three previous years.

 For severe diseases and epidemics, this new E.U. system envisages that these Funds can be activated if damage greater than three billion euros or 0.36% of the usual GDP can be proved (well, what next? No end to bad news).

 Hence a total of only 8 billion euros are expected to be made available to all the European economies affected, plus further 29 billion euros as cascading effects of investment already being made.

 Too little, as is evident to us all.

 The 2021-2027 EU budget, however, has not been approved yet. The resources are therefore already scarce and, to tell the truth, completely insufficient for all EU countries. Nevertheless, approximately 850 million euros will be transferred to the Italian regions alone to face the epidemics, in exchange for a not so formal guarantee of “enhancing the managerial approach” to health management – which is already high in Italy – and also to the relationship between spending centres and political authorities.

 However, we are back again to the usual routine of a too little too late approach in the E.U., both for the Italian health spending and for the equally high one of the other countries affected by the epidemics, such as Spain, France and Germany, in the very near future.

 In the German case, however, the public budget cosmetics – which I am surprised is not well known to the international financial markets – will make it possible to turn a plater, i.e. the German public finance, burdened with colossal debt, into a very fast Varenne.

 It will not be with this little money and these post factum bureaucratic criteria that the European Union will rebuild its image in the European productive forces and industrial systems destroyed by the epidemics.

 In the meantime, Prime Minister Conte’s government has already funded – – with 25 billion Euros, mostly as debt instruments- the whole package of measures to face the Covid-19 pandemic.

 The government bonds that can be issued are valid only as from 2020 – as a starting date – but there will be specific “aid” for Air Italy, the Sardinian airline being closed, and the Solidarity Fund for Air Transport and the airport system will anyway have additional 200 million euros available.

 All these measures can be found altogether in the Prime Minister’s Decree, so that we have the feeling that, in the end, with a view to setting again the economy into motion in the productive Northern regions after the epidemics, there will be less money than it is needed just to rebuild the industrial system of Small and Medium-sized Enterprises, which – as is well-known to all scholars and experts – have a much shorter time of permanence on the markets than large companies.

 These 25 billion euros – which are clearly too little – also include funds for the publishing sector, given the unavoidable decline in advertising revenue, as well as an anti-spread shield for insurance companies to face the tension recorded on Italy’s public debt bonds. This is a very technical issue on which I will not elaborate in this article.

 As always happens, however, if investors know it, they discount the insurance value on the amount of bonds acquired or on their price.

 It is a painful mystery how, today, we can take a measure like the spread seriously, considering it measures a difference between the ten-year Bund of an ailing country, namely Germany, with the ten-year BTP of an equally ailing country, namely Italy.

 Indeed, I have always had little faith in the average intelligence of private financiers.

 Prime Minister’s Conte government, however, is ready to implement the E.U. changes to the volatility adjustment, which has always had a very discontinuous trend and a very limited effectiveness.

 Thus, by purchasing the tools for estimating the spread parameters, the companies that hold public debt bonds should be in a position to evaluate the functioning of the mass of bonds and calibrate the mix of investment in “paper” instruments, as well as the duration of all the bonds they own. But there is no guarantee in this respect.

 With specific reference to business support, the 25 billion additional public spending will allow to apply for the ordinary wage subsidies or for access to the ordinary allowances, but only for a period of nine weeks.  

 Once again there is not a single word about the companies’ operations to recover market shares, as well as to recover the profit already forecast. All these measures would apply for just nine months, which, even if the pandemic ended immediately, would probably not be enough for the many Italian SMEs affected by the epidemics to recover their place and positioning in the E.U. and international markets which, meanwhile, the others will have already taken.

 The fact that economic intelligence exists has not yet been understood by Italian politicians.

 With specific reference to the healthcare sector, the 25 billion euros – which, as can be seen, are becoming ever less available – also include only 150 million euros for the increase in overtime for the medical and paramedical staff.

 Based on the Decree enacted, the potential of specialized military medical staff will be increased by 320 doctors and nurses, but more money will be invested in local control offices for checks on goods and people.

 Moreover, a total amount of 340 million euros will be available to use the beds in the private healthcare facilities’ intensive care units. What about the already available direct funding for private healthcare facilities?

 It should also be recalled that the Supreme Defence Council has not yet been convened, which would be the minimum in the current situation.

 Once again, too little too late. There is no reliable data on the permanence of the virus and its distribution throughout the country.

 For SMEs, however, the Central Guarantee Fund will have only one billion euros available, which is still too little.

 If we overlap the maps of the infection areas, from the province of Lodi to the Veneto region, we can also have the map of the development area of Italy’s Small and Medium-sized Enterprises in the North.

 They face the international markets “barehanded”, just as Karate or Judo men fight. Whatever happens, the COVID-19 epidemics has put an end to Italy’s particular system of development and industrial organization, precisely in the most productive regions.

 Now for Northern Italy there is a possible future either as a “guaranteed” area or as an area completely dependent on the other countries’ economic cycles. This is the real game at stake. Especially for Germany, which thinks strategically about its economy within the EU.

 The guarantee, however, will in any case be increased up to 5 million euros per company. For those who are still in difficulty, there will also be easy access to the “Gasparini Fund” for the suspension of mortgage payments. Said Fund has been increased with as many as 500 million euros for the whole 2020.

 For the usual nine months after the entry into force of the Decree, access to this Fund will be provided also to the self-employed and freelancers who self-certify – and it will be very easy – a drop in turnover higher than one third which, however, shall be connected with the COVID-19 emergency (although no clear details are provided on how this correlation shall be proved).

 For banks, as well as for the other companies’ creditors, the turning of debt into tax credits is envisaged for a maximum amount of 2 billion euros.

 Hence we are well over the 25 billion euros initially envisaged, as debt instruments, by the Prime Minister’s package of measures, well knowing the debt conditions of many and often excellent SMEs in Northern and Central Italy.

 For restaurants, cafés, gyms, entertainment and culture, as well as transport services, there is an exemption at source of withholding tax payments on income. However, real income support would be needed rather than the usual tax exemptions on income that is no longer there.

 Finally, there is income support for freelancers only to the tune of 500 euros per month. Income support is envisaged also for those who have an active VAT number, as well as for the Made in Italy sector, which has always been the key for the SMEs’ economic penetration abroad. As to the latter, this income support – the amount of which is not specified – will be managed by the Institute for Foreign Trade (ICE). What about SACE for the companies which are already active overseas? In this case, everything is too vague.

 However, there are already all the signs of the E.U. trip.

 In one day the alleged gaffe of current ECB Governor Lagarde has already destroyed the Italian Stock Exchange, which, indeed, is owned by the London Stock Exchange, but the Franco-German banking axis has been speculating for years on the difference between the interest rates paid by Germany and France and the Italian ones.

 This is a real industry. Hence Lagarde’s alleged gaffe can be easily understood.

 Obviously all this is also a prelude to a sale of Italian companies and real estate sector, while it is increasingly likely that the rating agencies will downgrade Italy to junk from the current valuation of its public debt bonds, as a result of the 25 billion euros – albeit insufficient – spent as debt instruments to face the COVID-19 emergency.

 As already mentioned above, while describing President Von der Leyen’s plan, nobody within the E.U. is still outside the old “austerity paradigm”, which works badly even when things go well. Let us not delude ourselves, in the future, about what the Popperian epistemologists called “paradigm shift”.

 Hence de facto industrial stoppage due to the epidemics and E.U. Member States’ subsequent joint speculative action on the Made in Italy companies, as well as downward operations against all listed SMEs. In this regard, we should also recall the 2019 ruling of the Strasbourg Court on insolvent Municipalities, in which it was decided that the whole amount of local debt plus interest shall be taken over directly by the central State.

 This is already a huge blow. Currently there are, in fact, 66 large insolvent Municipalities, with 54 small administrations in the Calabria region and 409 medium and small Municipalities in crisis, for various reasons, as well as 111 insolvent Municipalities in Sicily, all for amounts which are currently difficult to assess but, however, very close to the famous 25 billion euros invested as debt instruments to face the COVID-19 epidemics.

 This is an evident manoeuvre to circumvent our fiscal and economic crisis, which will be used at the right time by our E.U. and non-E.U. competitors.

 Furthermore, if – as many current leaders of the ruling parties maintain – there will be Italy’s access to the European Stability Mechanism, a European Court will judge whether private assets should play their role in the default procedure, in addition to the public ones.

 It should also be recalled that 91% of Italian Municipalities are at risk of landslides and soil crumbling.

 Hence, for all public assets and companies, there would be the classic bankruptcy procedure, which may also involve private assets. Just as happened with Greece.

 And as was the case with Germany in Versailles, at the end of the First World War, thus paving the way for Nazism and the Second World War and, above all, for the European one.

 What about temporary solutions? A double circulation of the old lira, which should be made interchangeable with the euro – something that, in fact, former Prime Minister Monti prohibited in 2012 and that Germany never dreamed of abolishing – or the circulation of forward and futures contracts, as done by Hjalmar Schacht, the Jewish and Freemason brilliant President of the German Central Bank under Hitler’s rule, who invented the MEFO bills to ward off the last blows of Weimar Republic’s hyperinflation.

 With specific reference to public debt, the Bank of Italy speaks about an increase in debt – precisely with additional 9.8 billion new liquid assets of the Treasury, which brings it to 55 billion euros – with a further central government’s debt that has increased by 7.2 billion euros and that of local governments – whose bad financial situation has already been mentioned above – by 0.5 billion euros in 2020.

 For the long-standing theory of Eurobonds, called for by many more or less experienced economists, there is still a key question.

 What if, in fact – as a result of a possible persistence of the COVID-19 epidemics – the investors, skilfully manipulated – and we can well imagine by whom – turned to other bonds, such as BTPs?

 Currently Italy’s public debt is held by 80% of private markets/operators, by 33% of European institutions and central banks and by 20% of “other entities”, namely small and medium savers or other organizations.

 According to the European Commission, with a zero economic growth, at the end of this year the Italian public debt could reach, ceteris paribus, 2,435.7 billion euros out of a total EU-27 debt of 12,814 billion euros.

 If the Italian economy is set again into motion at the end of May, as forecast by Cerved, our companies could recover a level of turnover even 1.5% higher than the one recorded at the beginning of the epidemics.

 In essence, between 2020 and 2021 the COVID-19 epidemics is expected to cost companies 275 billion euros.

Certainly too much, but nothing that cannot be spread by a public debt carefully managed in its main components, if this data is disseminated among international investors. Hence we can definitely expand the range of buyers of our public debt bonds, carefully calibrated and even renewed, to open up to the financial markets in which we have ventured little in recent years: Great Britain, which certainly has a political, strategic and financial interest in opposing the E.U. policies, now that it is no longer a E.U. Member State; the United States, a market in which we have been present with our large companies, but much less with listed SMEs and other excellent companies; obviously China, but even India, not to mention Australia and New Zealand which, thanks to the London Stock Exchange – which knows the Milan Stock Exchange very well – could buy our bonds confidently.

 Hence, we should no longer ask for charity from the E.U. financial markets, which have not shown any interest in our internal and economic situation. We should begin to make high-level propaganda and skilful promotion of Italy’s “image”, not with a tourist-oriented approach but with excellent financial expertise.

 Moreover, there are those who – not heeding danger and experience – propose to turn the European ESM into the E.U. “Economy Ministry”, which could issue the famous Eurobonds or other instruments that, hopefully, would “sell like hot cakes” on the markets.

 Does anyone know that nowadays countries compete, by all means, on their public debt bonds?

 This operation – as debt instruments of the whole EU-27 – could raise the whole E.U.  budget, so as to help the less “fortunate” countries.

 The idea is good, in principle, but it does not take for granted what now seems obvious: the E.U. project to make Italy end up just like Greece – as in slow motion, like in sport events such as football and athletics.

 Moreover, the famous one trillion euro budget for the Green Compact, equal to seven years of the E.U. whole budget, was in fact an advertising idea, but we cannot even imagine where we can get this huge amount of money.

 According to other reliable banking sources, the situation of Italian SMEs in the COVID-19 epidemics phase will have an impact on the working capital of our Small and Medium-sized Enterprises equal to over 18 billion euros, out of an already calculated total of 342 trade receivables and payables.

 Nevertheless, only for the whole 2020, the requirements for SMEs could reach 46 billion euros, including repayments of debt coming due and investment.

 50% of this amount regards companies in Lombardy, Veneto and Emilia Romagna.

 Creating debt to set again the economy into motion is of no use in the long run – if not as a stopgap measure. A direct interest-free financing from the Bank of Italy is needed but – and this is going to be tough – also from the ECB, an institution in which experts study the old microeconomics and believe that it is the whole economic theory.

 With a view to solving the COVID-19 crisis, the State Rescue Fund – the well-known ESM – could resort to its “toolbox”, albeit this is very dangerous.

 Within the ESM, there is the possibility to activate the Precautionary Conditioned Credit Line (PCCL), i.e. loans granted quickly to avoid the default, but which are NOT conditional upon a Memorandum of Understanding (MoU) of mandatory cuts in public spending and “structural reforms”.

 This would mean a significant increase in unemployment, further compression of the internal market, as well as subsequent and obvious impact, as well as knock-on effects, for Italy’s companies. For an indebted government it is enough to sign a Letter of Intent, which is similar to a MoU, but is less imperative. Hopefully so, although no one has experienced it yet.

 Furthermore, in the case of an Enhanced Conditions Credit Line of the ESM, with MoU-style reinforced guarantees which, I imagine, would be required from Italy, the effects would be directly proportional to the amount of credit granted and the average return time.

 The ESM is therefore a trap and, in the long run, it would create the same disasters it would like to solve.

 Microeconomics is not the whole economic theory. Today there is no soup, like the Marginalists’ one, having the maximum marginal value at the first spoon and the minimum value at the last one. Usually, you finish earlier.

 Another nonsense, albeit very widespread, is the wealth tax called for by the IMF and other scarcely experienced economists.

 The first house owned does not produce income, but an increase in taxation is created immediately during an economic recession and you do not need to be John Maynard Keynes to understand what would happen next.

 Meanwhile, the big financial information agencies say far and wide that “there are 40 billion U.S. dollars of reasons to avoid the Italian public debt”.

 Hence the real and future struggle will also be fought with the careful and authoritative explanation of how the Italian public debt is made, and above all by avoiding the counter-propaganda of some of our scarcely affectionate E.U. friends.

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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Economic situation is EU citizens’ top concern in light of the coronavirus pandemic

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In a troubled period marked by the coronavirus pandemic, trust in the EU remains stable and Europeans trust the EU to make the right decisions in response to the pandemic in the future. In the new Standard Eurobarometer survey released today, European citizens identify the economic situation, the state of Member States’ public finances and immigration as the three top concerns at EU level. The economic situation is also the main concern at national level, followed by health and unemployment.

In the new Eurobarometer conducted in July and August, concern about the economic situation is reflected in the perception of the current state of the economy. 64% of Europeans think that the situation is ‘bad’ and 42% of Europeans think that their country’s economy will recover from the adverse effects of the coronavirus outbreak ‘in 2023 or later’.

Europeans are divided (45% ‘satisfied’ vs 44% ‘not satisfied’) regarding the measures taken by the EU to fight the pandemic. However, 62% say they trust the EU to make the right decisions in the future, and 60% remain optimistic about the future of the EU.

Trust and image of the EU

Trust in the European Union has remained stable since autumn 2019 at 43%, despite variations of public perceptions during the pandemic. Trust in national governments and parliaments has increased (40%, +6 percentage points and 36%, +2 respectively).

In 15 Member States, a majority of respondents says they trust the EU, with the highest levels observed in Ireland (73%), Denmark (63%) and Lithuania (59%). The lowest levels of trust in the EU are observed in Italy (28%), France (30%) and Greece (32%).

The proportion of respondents with a positive image of the EU is the same as that with a neutral image (40%). 19% of respondents have a negative image of the EU (-1 percentage points).

In 13 EU Member States, a majority of respondents has a positive image of the EU, with the highest proportions observed in Ireland (71%), Poland and Portugal (both 55%). In 13 other Member States, the EU conjures up a predominantly neutral image for respondents, with the highest proportions observed in Malta (56%), Spain, Latvia and Slovenia (all 48%).

Main concerns at EU and national level

Citizens mentioned the economic situation as the most pressing issue facing the EU – over one-third (35%) of all respondents, a strong increase of 16 percentage points since autumn 2019, and rise from third to first concern. Concern about the economic situation has not been this high since spring 2014.

Europeans are also increasingly concerned about the state of Member States’ public finances (23%, +6 percentage points, the highest level since spring 2015), which moves from fifth to second place on a par with immigration (23%, -13 percentage points), the latter now being at the lowest level since autumn 2014.

In the midst of the coronavirus pandemic, health (22%, new item) is the  fourth most mentioned concern at EU level. The issue of the environment and climate change has lost ground, down 8 percentage points to 20%, followed by unemployment (17%, +5 percentage points).

Similarly, the economic situation (33%, +17 percentage points) has overtaken health as the most important issue at national level, rising from seventh to first position. Although in second position, health has had a notable increase in mentions since autumn 2019 (31%, +9 percentage points), taking it to its highest ever level over the past six years.

Unemployment has also increased considerably in importance (28%, +8 percentage points), followed by rising prices/inflation/cost of living (18%, -2 percentage points), the environment and climate change (14%, -6 percentage points) and government debt (12%, +4 percentage points). Mentions of immigration (11%, -5 percentage points), are at their lowest level for the past six years.

The current economic situation

Since autumn 2019, the proportion of Europeans who think that the current situation of their national economy is ‘good’ (34%, -13 percentage points) has declined considerably, while the proportion of respondents who judge this situation to be ‘bad’ has increased sharply (64%, +14 percentage points).

At national level, a majority of respondents in 10 countries says that the national economic situation is good (down from 15 in autumn 2019). The proportion of respondents who say the situation of their national economy is good ranges from 83% in Luxembourg to 9% in Greece.

The coronavirus pandemic and public opinion in the EU

Europeans are divided on the measures taken by the EU institutions to fight the coronavirus outbreak (45% ‘satisfied’ vs 44% ‘not satisfied’). However, a majority of respondents in 19 Member States is satisfied with the measures taken by the European Union institutions to fight the coronavirus pandemic. The highest positive figures are found in Ireland (71%); Hungary, Romania and Poland (all 60%). In seven countries, a majority of respondents is ‘not satisfied’, especially in Luxembourg (63%), Italy (58%), Greece and Czechia (both 55%) and Spain (52%). In Austria, equal proportions of respondents are satisfied, and not satisfied (both 47%).

However, more than six Europeans in ten trust the EU to make the right decisions in the future (62%). The most frequently mentioned priorities for the EU’s response to the coronavirus pandemic are: establish a strategy for facing a similar crisis in the future and develop financial means to find a treatment or vaccine (each 37%). 30% think that developing a European health policy should be a priority.

Europeans’ personal experiences of confinement measures were very diverse. Overall, close to three Europeans in ten say that it was fairly easy to cope with (31%), while a quarter say it was fairly difficult to cope with (25%). Finally, 30% say that it was ‘both easy and difficult to cope with’.

Key policy areas

Asked about the objectives of the European Green Deal, Europeans continue identifying ‘developing renewable energy‘ and ‘fighting against plastic waste and leading on the issue of single-use of plastic’ as the top priorities. More than one third think the top priority should be supporting EU farmers (38%) or promoting the circular economy (36%). Just over three in ten think reducing energy consumption (31%) should be the top priority.

Support for the Economic and Monetary Union and for the euro remains high, with 75% of respondents in the Euro area in favour of the EU’s single currency. In the EU27 as a whole, support for the euro has increased to 67% (+5).

 EU citizenship and European democracy

A majority of people in 26 EU Member States (except Italy) and 70% across the EU feel that they are citizens of the EU. At a national level the highest scores are observed in Ireland and Luxembourg (both 89%), Poland (83%), Slovakia and Germany (both 82%), Lithuania (81%), Hungary, Portugal and Denmark (all 80%).

A majority of Europeans (53%) say they are satisfied with the way democracy works in the EU. The proportion of respondents who are ‘not satisfied’ has increased, by 3 percentage points since autumn 2019 to 43%.

 Optimism for the future of the EU

Finally, in this troubled period, 60% of Europeans say they are optimistic about the future of the EU. The highest scores for optimism are observed in Ireland (81%), Lithuania and Poland (both 75%) and Croatia (74%). The lowest levels of optimism are seen in Greece (44%) and Italy (49%), where pessimism outweighs optimism, and France, where opinion is evenly divided (49% vs 49%).

Background

The ‘Summer 2020 – Standard Eurobarometer’ (EB 93) was conducted face-to-face and exceptionally completed with online interviews between 9 July and 26 August 2020, across the 27 EU Member States, in the United Kingdom and in the candidate countries 26,681 interviews were conducted in the 27 Member States.

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Could the EU Make its ASEAN Breakthrough with the Emerging Indo-Pacific Strategy?

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The Indo-Pacific policy guidelines that was announced by the German Federal Foreign Office last week, is a clear signal from Berlin in becoming a shaper for the international order in the volatile region. Entitled “Germany-Europe-Asia: Shaping the 21st Century Together”, the policy guidelines is the second of such document in the European Union (EU) after the Macron administration released its own Indo-Pacific strategy back in August 2019. But considering that Germany is the current president of the EU Council, this policy guidelines has been ever more significant. For one, Berlin has made clear its intention to lead Europe into this new Indo-Pacific charge as the ‘third power’ after the US-led coalition and China ⸺ an aim that is highlighted not just by this German government’s policy guidelines but also, incisively described by the French as the ‘mediating power’.

The release of such document, of course, reverberates different responses from political observers outside of Europe. For instance, Sebastian Strangio sees the German latest move as part of Europe’s reassessment of its approach to China and boldly predicts that other EU nations are to follow suit with their new stand on China. Prominent Filipino expert, Richard Javad Heydarian, meanwhile, is of the view that Germany’s pursuit as the shaper of international order is deliberately focused on the key regions which bear strategic importance to Europe overall. On the other hand, Xin Hua, adopts a pessimistic view on the ability of Europe to influence the Indo-Pacific region. With Berlin’s policy guidelines, the Chinese scholar sees Europe’s reliance on soft power (such as norms diffusion)to influence the Indo-Pacific region, in contrast to the US that projects its hard power in the region through military prowess in the region, will make it less than what it aimed as the shaper of international order.

Be it applause or skepticism, the observers are in the same view that Berlin’s latest move is a drastic shift from its previous ambiguous position on the Indo-Pacific region which has become the hotbed for the Free and Open Indo-Pacific (FOIP) vision pushed by the US and its military allies such as Japan and Australia. With this policy guidelines in place, it signals the seriousness of the German government in joining the Indo-Pacific region with the rest of the EU, as a third power that is independent from the US camp and China. What is left is the forming of a full European-level Indo-Pacific strategy and its implementation in the years ahead.

The ASEAN Context

In the ASEAN context, Germany’s move has created two questions that are worthy to ponder. First, how will this emerging Indo-Pacific strategy be different to Europe’s current cooperation policy toward ASEAN as a whole? This is the foremost question to ask among ASEAN member states as the German government’s Indo-Pacific policy  guidelines singled out the Southeast Asian bloc as the country’s focused cooperation partner in different areas of cooperation: climate change, marine pollution, rule of law and human rights, culture, education, science, trade and technology. That said, this is not the first time ASEAN appeared as the important partner for the EU.As a matter of fact, two-way cooperation has been ongoing since the establishment of dialogue relations in 1977.

As of 2020, two EU-ASEAN Action Plans have been agreed upon, implemented and in the middle of enforcement. Within the Action Plan (2018-2022) that runs through the year 2022, a myriad of cooperation areas has been outlined, spanning across political-security, economic and socio-cultural pillars. In particular, those areas of cooperation identified in Germany’s Indo-Pacific policy guidelines are within the trans-regional plan as well. What is new is that Berlin has set security policy as a special focus area for Indo-Pacific cooperation ⸺ a point that is emphasized by the German Foreign Minister, Heiko Maas in his press release following the announcement of the country’s Indo-Pacific policy guidelines. In line with such niche orientation, Germany can readily lead the European initiative to assist ASEAN in the two sub-areas of non-traditional security that do not have substantial cooperation but chiefly important in the coming months and years: cybersecurity and public health security. These two sub-areas will be the best start for the EU’s Indo-Pacific push in the ASEAN region.

Second, how will the EU’s Indo-Pacific approach be different from its current dogmatic approach in its cooperation with ASEAN? By all means, it is no secret that dogmatic adherence to rules and norms remained to be the greatest obstacle for the EU’s full amelioration of ties with ASEAN in the past years. As of today, the EU’s ban of Indonesian and Malaysian imports as well as its unease on Filipino President Duterte and Burmese junta’s human rights records, are the contentious issues that prevented the European bloc to go past its finishing line in negotiating a full free trade pact with ASEAN. From such case alone, it is clear that the European bloc’s normative stance predicated upon Brussels’ strictly defined rules, norms and values on climate change and human rights issues, is in play when comes to international cooperation with ASEAN.

Having said that, Germany’s latest Indo-Pacific policy guidelines do not precisely highlight of its normative stance apart from maintaining the international rules-based order in the volatile region. But on the other hand, Germany’s aim for the EU to become the shaper of such order also sparks an open-ended question of whether its strict adherence to rules, norms and values (as in the present) will continue to be the defining feature of its cooperation with ASEAN. From the Indo-Pacific policy guidelines, this question is yet to be answered by the German government and perhaps, this dilemma is to betackled in the EU’s emerging Indo-Pacific strategy. Should a pragmatic approach is adopted by the EU ⸺ as has been recently demonstrated by the conclusion and enforcement of the EU-Vietnam Partnership and Cooperation Agreement despite human rights concern in the ASEAN member state ⸺ it will definitely clear the normative obstacle for the eventual conclusion of a free trade pact with the Southeast Asian bloc. More than that, it stands to facilitate greater cooperation in all areas of partnership between the two regions.

All in all, the EU’s emerging Indo-Pacific strategy should need to address these two questions that have surfaced fromthe former’s past and current experiences with ASEAN. While the German government’s Indo-Pacific policy guidelines have set new tone to Europe’s engagement with the volatile region, such document has yet to tackle these two difficult questions. Only by tacklingthese two questions will the EU be able to make its much-needed ASEAN breakthroughwith the emerging Indo-Pacific strategy.

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A Recipe For The War

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Authors: Zlatko Hadžidedić, Adnan Idrizbegović*

There is a widespreadview that Germany’s policy towards Bosnia-Herzegovina has always been friendly. Also, that such a policy stimulated the European Union to adopt a positive approach to the Bosnian quest to eventually become a part of the Euro-Atlantic integrations. However, Stefan Schwarz, a renowned German politician, in his recent comment for Deutsche Welle, raised the question of the true nature of Germany’s policy towards Bosnia,from 1992 to the present day.Here we shall try to offer possible answers to this question, so as to present a brief history of that policy.

A history of (un)recognition

Germany officially recognised Bosnia-Herzegovina as an independent state on April 6, 1992.Prior to that, such recognition had been grantedto two other former Yugoslav republics, Slovenia and Croatia,on January 15, 1992. Germany recognised these two states against the advice by Robert Badinter, a jurist delegated by the European Commision to arbitrate in the process of dissolution of the former Yugoslavia, to recognise all Yugoslav republics simultaneously. Under the pressure by Germany, 12 members of the European Community (United Kingdom, Italy, France, Spain, the Netherlands, Denmark, Belgium, Ireland, Luxembourg, Portugal, Greece, Austria) recognised Slovenia and Croatia in January 1992. As Washington Post wrote on January 16, 1992,

The German government hailed today’s event as a historic development and immediately opened embassies in the two republics. But France and Britain, which still harbor doubts about the wisdom of early recognition, said they would wait to see if Croatia fulfilled its promises on human rights before carrying out an exchange of ambassadors.

There is a well-known myth, spread by the diplomats of Britain and France, that ‘early recognition’ of Slovenia and Croatia triggered the war in the former Yugoslavia. Such a claim is both absurd and obscene, bearing in mind that Serbia had already waged war against Slovenia and Croatia and was preparing a military attack on Bosnia for several months. However, the question that should be posed here is, why Germany recognised Slovenia and Croatia separately, instead of recognition of all the Yugoslav republics simultaneously, as advised by Badinter and strongly supported by the US? Does that imply that Germany practically left the rest of the republics to their fate, to be occupied and annexed by Serbia, which controled the former Yugoslav army and its resources? Was it a deliberate policy, or simply a reckless decision? In the same article, WP quotes the then German Minister of Foreign Affairs: 

“The German policy on Yugoslavia has proved correct,” said German Foreign Minister Hans-Dietrich Genscher. “We’ve said for months that if the Community decided on recognition . . . that would initiate a process of rethinking, above all by the leadership of the Yugoslav army.”

Mr. Genscher probably offered a definite answer to that question. Also, the actual response of the Yugoslav army’s leadership to the German push for separate recognition of Slovenia and Croatia, counted in hundreds of thousands of dead and millions of ethnically cleansed in Croatia and Bosnia, testifies to the ‘correctness’ of such thinking. Yet, was it a momentary miscalculation by Genscher, the then Minister, or a long-term German foreign policy towards Bosnia, already projected to be the ultimate victim of the Yugoslav army’s agression?

An answer to this question is not very difficult to reach if we consider the German policy concerning the initiatives for ethnic partition of Bosnia, disseminated through the channels of the European Community. These proposals may have been initiated and instigated by the British Foreign Office and the French Quai d’Orsay; yet, partition along ethnic lines has always been the only European consensus about Bosnia, a consensus in which Germany participated with all its political will and weight.

Appeasement, from Munich to Lisbon

Prior to the 1992-1995 war, the European Community delegated the British and Portugese diplomats, Lord Carrington and Jose Cutileiro, to design a suitable scheme for ethnic partition of Bosnia, and in February 1992 they launched the so-called Lisbon Conference, with the aim of separating Bosnian ethno-religious communities and isolating them into distinct territories. This was the initiation of the process of ethnic partition, adopted in each subsequent plan to end the war in Bosnia. However, at the Lisbon Conference such a ‘solution’ was imposed by Carrington and Cutileiro as the only available when there was no war to end, indeed, no war in sight; and, curiously, it has remained the only concept the European Community, and then the European Union,has ever tried to apply to Bosnia.

Contrary to the foundations of political theory, sovereignty of the Bosnian state was thus divided, and its parts were transferred to the chiefs of three ethnic parties. The EC recognised these usurpers of the state sovereignty, having promoted them into legitimate representatives of their respective ethnic communities. The Carrington-Cutileiro maps were tailored to determine the territorial reach of each of these communities. What remained to be done afterwards was their actual physical separation, and that could only be performed by war, genocide and ethnic cleansing. For, ethnically homogenous territories, as envisaged by Carrington and Cutileiro, could only be created by a mass slaughter and mass expulsion of those who did not fit the prescribed model of ethnic homogeneity. In this way, the European Community created a recipe for the war in Bosnia.Yet, ever since the war broke out, the European diplomats have never ceased claiming that the ‘chaos’ was created by ‘the wild Balkan tribes’, who ‘had always slaughtered each other’. 

No one ever noticed German opposition to the Lisbon principles of ethnic separation and territorial partition, clearly leading to war and bloodshed. Is it, then, possible that German foreign policy was truly surprised by the Lisbon’s bloody outcome? Or the Lisbon Agreement was tailored in the best tradition of the Munich Agreement, as a consensus on another country’s partition between the three leading European powers – Great Britain, France, and Germany –  again,in the name of peace?

Landgrab rewarded

In the following ‘peace plans’ for Bosnia, the European Community was represented by Lord Owen, accompanied by the representatives of the Organization of United Nations, Cyrus Vance and Thorwald Stoltenberg. Although the British diplomacy was clearly dominant in these attempts to find a ‘proper’ model for Bosnia’s ethnic partition, Germany’s Foreign Ministry was always fully present there through its Director of Policy Planning Staff, Wolfgang Ischinger. In the structure of the German Ministry, this position is occuppied by the most senior career diplomat, so that there can beno doubt about Ischinger’s capacity to articulate Germany’s strategic interests. During the process of negotiations under the Vance-Owen and Owen-Stoltenberg plans, Ischinger coordinated German policy towards Bosnia together with Michael Steiner, the head of„SoBos“ (Sonderstab Bosnien), a special Bosnian unit established within the Ministry of Foreign Affairs.[i]

During the war in Bosnia, from 1992 to 1995, Germany and the European Community never abandoned the concept of Bosnia’s ethnic partition. In 1994,Germany took a more active role in its implementation within the (informal) International Contact Group, consisting of the UK, France, Germany, Italy, Russia and the US, where Germany was represented by both Ischinger and Steiner. The Contact Group Plan defined the final model of ethnic separation, having led to the ultimate breakup of the Bosnian territory into two ethnically cleansed and homogenised ‘entities’, tailored in accordance with an arbitrary proportion of 51:49%, which was subsequently implemented in the Dayton Peace Accords. The entire struggle within the Contact Group was fought over the percentage and disposition of territory granted to particular ethnic communities, two of which served as Serbia’s and Croatia’s proxies. The principle of ethnic partition was never put in question. In this process, Germany became the exclusive advocate of Croatian interests, in Croatia’s attempts to cede the south-western part of Bosnia, whereas Britain and France advocated the interests of Serbia in its efforts to cede eastern and western parts of Bosnia. To some people’s surprise, the United States was the sole defender of Bosnia’s territorial integrity within the Contact Group. However, under the pressure by the European Community, the US was forced to make concessions, so as to eventually accept the prescribed 51:49% territorial distribution as an’internal reorganisation’ of Bosnia.

The US thus tacitly accepted the European initiatives to reward the landgrab of Bosnia’s territory, performed by Serbia and Croatia, against the UN Charter and international law. The European Community’s leading powers –Great Britain, France, and Germany – claimed that there was no other option but to accept such a landgrab, because the status quo, caused by the neighbours’ military aggression, could not possibly be altered. To strengthen this argument, the European Community also played the main role in imposing an arms embargo on the ‘warring parties’. This embargo effectively deprived the landlocked Bosnian army of the capacity to purchase weaponry and thus alter the status quo and liberate the country’s territory. Here the EC acted as a whole, again, without any dissent on Germany’s or anyone else’s part. 

Whose responsibility?

The Dayton Peace Accords is commonly perceived as an American political project. The partition of Bosnia is thus being interpreted as a concept that emerged for the first time during the Dayton negotiations, and its authorship is ascribed exclusively to the American negotiator, Richard Holbrooke. However, it is not so. The history of Bosnia’s partition clearly demonstrates that this very concept has persistently been promoted by the European Community, and then by the European Union, from the 1992 Lisbon Conference to the present day. Even the notorious partition proportion of 51:49% was determined by the Contact Group, well before the Dayton Conference. A clear responsibility of the US negotiators is that they caved in to the pressures by the EC within the Contact Group. Still, the consistent striving to impose ethnic partition as the sole appropriate concept for Bosnia should definitely be attributed to its real advocates – the members of the European Community. Since Italy and Yeltsin’s Russia certainly played a minor role in the Contact Group, the lion’s share of responsibility for the final outcome, verified in Dayton, belongs equally to three EC powers, Great Britain, France, and Germany. The fact that the British policy-makers conceived the very principle of ethnic partition, that their French colleagues were so enthusiastic about its implementation, while the Germans accepted it as the best available mode of appeasement, abolishes neither of them of gigantic moral and political responsibility for all the suffering the Bosnians have had to go through.

*Adnan Idrizbegović, Independent Researcher, Sarajevo, Bosnia-Herzegovina


[i]As consequent advocates of the German foreign policy in the Bosnian episode, both Ischinger and Steiner have continuously enjoyed upward promotion within the ranks of the German foreign policy establishment. Thus Ischinger first took the position of the Ministry’s Political Director under Foreign Minister Klaus Kinkel, and then of the Staatssekretär (deputy foreign minister) under Foreign Minister Joschka Fischer.Ischinger also represented Germany at numerous international and European conferences, including the 1999 G8 and EU summit meetings in Cologne/Germany and the 2000 Review Conference of the Nuclear Nonproliferation Treaty at the United Nations, New York. He was also appointed as the European Union Representative in the Troika negotiations on the future of Kosovo in 2007. Since 2019, Ischinger has been co-chairing on the Transatlantic Task Force of the German Marshall Fund and the Bundeskanzler-Helmut-Schmidt-Stiftung (BKHS) and, finally, has become the Chairman of the Munich Security Conference (!). During his mandate in the Contact Group, Steiner was awarded the position of head of the Ministry’s co-ordination unit for multilateral peace efforts. After the war, he served six months (January–July 1997) as a principal deputy to Carl Bildt, the first high representative in Bosnia-Herzegovina. In 1998, he was selected by Chancellor Gerhard Schröder to work as the Chancellor’s foreign and security policy adviser.

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