Ambassador's Corner

WEEKLY MESSAGE FROM AMBASSADOR JOHN BRUTON

March 31, 2009

Senator Tom Udall, energy and climate change

Last week I met the newly elected Democratic Senator for New Mexico, Tom Udall. He comes from one of the distinguished political families in the United States. His father, Stewart Udall, was a Congressman and a Secretary of the Interior, and his uncle, Morris Udall, was also a congressman, and his cousin Mark Udall is currently Senator from Colorado.

Tom Udall himself was a member of the House of Representatives from 1999 to his election this year to the Senate. He serves on the Environment and Public Works Committee, so climate change and energy were the central focus of our discussions.

He told me that he expected the House of Representatives to produce a bill combining proposals for climate change and changes in US energy policy. Among the changes in energy policy being considered are:

• Minimum standards for the proportion of renewable energy used to generate electricity;

• Improved energy efficiency standards for electrical appliances;

• Federal laws to facilitate the building of electricity transmission lines. This is critical if renewable energies like wind and solar are to become viable economically. Because the locations where wind and sunshine are most easily converted into electricity are often distant from those where electricity is consumed, a means must be found to transmit the electricity, and the present structure of the transmission grid does not facilitate that. The rules for getting permission to build power lines are immensely complex and it can take 12 years to get the permissions for a line that only needs 2 years to build. This is a worldwide problem and I am aware of difficulties with it even in my own former constituency in Ireland.

On climate change, one big issue is what to do with the revenues generated by cap and trade. Will these be made available to compensate states or individuals who will see the biggest proportionate increase in their energy costs due to the new system? Or will they be made available for a general reduction in taxation?

Climate change and trade

Another climate change issue is whether a country which has imposed tough carbon reducing penalties on its own industry, thereby raising the price of its goods and services, should be permitted to impose some sort of border tax on imports of similar products from countries that are not tackling climate change with the same toughness. This issue was dealt with in testimony before the House Ways and Means Committee last week by an expert on trade law, Professor Joost Pauwelyn [below, left]. He said that, if no other option is available, such border taxes could be compatible with WTO rules, but only if they are based on objective evidence and impose no more penalties on imported products that are being borne by domestic producers.

He put it this way:

“To the extent imports of steel or cement from China are undercutting US producers for reasons unrelated to US carbon costs, carbon equalization measures cannot remedy that situation.”

There are also practical difficulties. Professor Pauwelyn said:

“Accurately gauging carbon emissions within the United States is difficult enough; calculating the carbon footprint of foreign operations is even more difficult.”

This discussion illustrates well that, in a sense, the UN negotiation about climate change that will take place in Copenhagen at the end of the year is also a negotiation about trade policy.

This linkage of trade and climate change may open the way to a balanced global solution to both problems.

I attended a fascinating discussion on trade policy organized jointly by the Swedish Embassy and CSIS [Center for Strategic & International Studies] in Washington last week. It was addressed, amongst others by, Dr. Paul Krugman [right], the Nobel prize-winning economist and by the Swedish Minister for Trade, Dr. Ewa Björling [below, left].

The papers for this conference say:

“While the (climate change) negotiators have, to date, focused almost exclusively on reaching universal agreement on acceptable carbon dioxide emission limits, they have ignored the potential for a broader bargain. What the logic of prior WTO agreements suggests is trading the acceptance of emission constraints in industrialized markets, in return for a broad liberalization of trade in environmental goods, services, investment and technology globally.”

From my political experience, I have long believed that blockages in one negotiation can frequently be overcome if that negotiation is linked to another negotiation between the same parties. Thus imbalances between countries in the climate negotiations could potentially be remedied by concessions in the trade negotiations. At the moment, these two negotiations are being conducted separately but the G20 meeting this week may see the productive possibilities of linking the two, in order to make progress in both.

Commissioner Neelie Kroes and banks that are “too big to fail”

The European Commissioner for Competition Policy, Neelie Kroes, made an important speech in Washington last week at the Atlantic Council on the topic of “European Models of Economic Recovery.”

Commissioner Neelie Kroes has been a successful politician in her native Netherlands and has also been a very effective business woman. Her rôle in the European Commission is critically important. As Competition Commissioner, she is charged with ensuring that there is no internal protectionism within the EU, and that no assistance given by one government to its own business sector interferes with fair competition from other EU countries. She has shown great courage and common sense in the performance of this vitally important rôle.

In her speech in Washington, she outlined how she had been involved in approving for the European Commission, dozens of bank rescues proposed by EU Member State governments. Her actions were designed to ensure that the rescues did not create unfair competition for banks that were not the recipients of rescue funds or guarantees.

For example, last week she approved a recapitalization of the Bank of Ireland by the Government of Ireland to the tune of 3.5 billion Euros. The structuring of this deal is interesting in that the Government money will be required to produce a dividend to the taxpayer of 8% annually and there is an inbuilt financial incentive for the bank to buy back the government's shares within 5 years because the purchase price will automatically rise after that. The deal also includes prohibitions of advertising of the aid to gain competitive advantage, restrictions on the payment of dividends and on executives' remuneration, public interest representation on the Bank's board, and the submission for a plan for restructuring the bank within 6 months.

As Neelie Kroes put it in her speech in Washington:

“Some banks may have been too big to fail, but they are not too big to restructure.”

She went on to say that not all banks accept that reality, and that some of them are still in denial about their situation.

This is a topic that was also covered in [February 26, 2009] testimony to the Joint Economic Committee of the US Congress recently.

Professor Joseph Mason of Louisiana State University said:

“It is crucial to dismantle the too-big-to-fail doctrine for the good of the American banking system.”

He also criticized the application of the "mark to market" rule and advocated a change in foreclosure rules that would allow a bank to rent a foreclosed home (perhaps to the original owner) and to wait for market recovery. The bank would thus replace cash flow from the loan with a slightly lower cash flow from the rental income. Such renting arrangements are permitted in many European countries, but apparently not in the United States.

Professor Mason also stressed the interdependence of the banking system in the US with the rest of the world, pointing out that foreign banking institutions hold a quarter of all commercial banking assets in the US. Thus the failure of a foreign bank could have dire ramifications for US business.

Adam Posen, Deputy Director of the Peterson Institute for International Economics, made similar points at the same hearing. He said that the US government should rapidly sort the banks into:

• those that can survive with limited additional capital, and

• those that should be closed, merged or nationalized.

Like Neelie Kroes, he was worried about the prospect of “zombie” banks continuing in business, unable to clean up their balance sheets, unable to lend meaningfully, but still absorbing human and financial resources.

As he put it:

“So long as American banks have partial government guarantees and public funds to play with, but retain current shareholders and top management, they have perverse incentives and losses will mount.”

Adam Posen welcomed the proposed stress tests on the big banks announced by [US Treasury] Secretary Geithner, but hoped that they would be applied rigorously and quickly.

Assessing the quality of life

With all the focus on the economy, it is easy to forget that financial issues are not the only ones that affect the quality of people's lives.

A very interesting statistical report on living conditions in the EU was produced last week by the European Commission. It reported on the quality of the houses Europeans live in, and the extent to which their lives are damaged by noise or pollution, and by the fear of crime or vandalism.

On housing, there is a significant difference between the majority of the EU Member States, and a small number of recent EU members, where conditions have yet to catch up. For example, 20% of houses in Latvia and Lithuania do not have an indoor flushing toilet, whereas the average for the EU as a whole is only 2%. Dampness or dry rot is a problem in 18% of the houses in the EU, and only in 5% of the houses in Finland, but this contrasts with 38% in Poland and 30% in Cyprus.

Europeans were asked whether they felt that their lives were adversely affected by noise from neighbours or from the street. An average of 23% of EU citizens felt they had this problem with noise ranging from highs of 37% in Cyprus, 32% in the Netherlands and 28% in Portugal, down to a mere 13% in Sweden and Ireland and to 15% in Hungary.

A feeling of being affected by pollution was highest in Malta (35%), falling to a mere 7% in Sweden, 8% in Denmark and to 9% in Ireland. 

Asked about crime and vandalism in their area, an average of 16% of EU citizens felt that this was a significant problem in their lives. The lowest levels of concern are observed in Lithuania, where just 7% of Lithuanians think that crime or vandalism is a problem in their area, and the figure is only 8% in Poland and Slovakia. On the other hand, 27% of UK citizens and 30% of Latvians feel that crime or vandalism is a problem.

I will not attempt to explain these quite startling differences in the perceived quality of life between EU Member States and would recommend readers who are interested to have a look at the full set of tables, which is available here.

It is very good that quality of life issues like these are quantified.

Some of the countries that are now most depressed about their economic condition (like my native Ireland) seem to come out quite well on measured quality of life issues. So it is important to keep a sense of proportion.

It is also important to ensure that, in rectifying economic difficulties, we do not dramatically worsen the quality of life. I was very heartened to hear an official of the IMF [International Monetary Fund] tell a recent meeting in Washington that the conditions imposed for IMF/EU funds for Latvia would not involve any cutbacks in the Latvian health service, which happens to be one of the most cost effective in the world, and which deserves support and emulation.

Technological innovation in Europe 

An important step to intensify technological innovation in Europe was taken last week with the conclusion of an agreement of a recommendation for a Unified Patent Litigation System (UPLS) for the EU.

Announcing this breakthrough, the Internal Market Commissioner, Charlie McCreevy said:

“European businesses find the current patent litigation system complex, slow and costly.”

He predicted that the new unified system, with a dedicated unified patent court, would make patent litigation more predictable, faster and less expensive.

The problem with the present system is that, to protect a patent in Europe, a company may have to litigate in all the EU Member States where the patent is validated. This involves considerable cost and the risk of contradictory court decisions. It is estimated that the new unified system will result in savings to companies of up to 289 million Euros per annum by 2013.

Please send me your comments about this or any of my weekly messages or other EU matters. I look forward to hearing from you!