Enlarging the European Union

Chicken or Kiev?

The European Union must not abandon its most successful policy when it comes to Ukraine

IT IS, quite simply, the European Union’s greatest achievement. The offer of EU membership to its neighbours in the east and south has proved a masterly way of stabilising troubled countries and inducing them to make democratic and liberal reforms. The contrast with the United States, which despite spending billions of dollars has failed to find an equivalent policy for the countries of the Caribbean rim, is striking.

Enlargement is, however, unpopular in many older EU members. It is accused by some of making the club unwieldy. Others blame it for an unwelcome inflow of cheap labour and an outflow of jobs. Still others complain that too many countries have been let in before they were ready. Indeed, the recent wave of EU enlargement has precious few defenders in western Europe. Even fewer stand up for the principle of letting in anyone else: France is poised to confirm that any big country’s membership must be put to a national referendum.

Yet scare stories about enlargement have led to false alarms. Several studies confirm that the club functions as well with 25 (now 27) members as it did with 15. Cheap labour helps hosts as well as new members. Fears of job losses and rising competition have more to do with China than eastern Europe. The economies of several old EU members, notably Germany and Austria, have gained massively from enlargement—making their hostility especially perverse. As our special report this week argues, far from joining too soon, most of eastern Europe arrived in the nick of time.

This is not to say that enlargement has been trouble-free. Some countries may have come in unprepared, notably Bulgaria and Romania. The EU mistakenly guaranteed these two, plus Cyprus, a membership date in advance, instantly losing leverage for more reforms (or, in Cyprus’s case, for a deal with the north of the island). The eurocrats have learnt that, once a country is in, they have less influence on it. But less is not none. Bulgaria and Romania now face sanctions for failing to fight hard enough against corruption and organised crime.

Catching a Ukrainian wave

In any case, teething troubles with a few new members should not become an excuse for slamming the door on others. It is right for the EU to be tough in negotiating entry terms, as it is being with Croatia and Turkey, the two countries now engaged in membership talks, even if that causes delay. But to suggest that these places, or others such as the western Balkan countries, should be kept out indefinitely, regardless of their progress with reform, risks provoking instability or even downright hostility from places smack on the EU’s borders.

In reality, the case for eventual EU membership of the western Balkan countries is widely understood. Turkey is more controversial, as a big and mainly Muslim country—but it is sui generis. In many ways the bigger test of the EU’s commitment to enlargement lies to its east, in countries like Moldova and, above all, Ukraine. Ukraine matters: it is the largest European country after Russia, with around 46m people, a lot of fertile farmland and significant industrial capacity, including in large aircraft and steelmaking.

The recent story of Ukraine seems, at first blush, depressing. The country’s political leaders have been squabbling among themselves almost since the heady “orange revolution” in the Kiev snow during the winter of 2004-05 (see article). Inflation is worryingly high and corruption is rife. Yet some encouragement can be found behind the headlines. The country’s political chaos and its vigorous media are testimony to a healthy democratic debate. Although Ukraine has no oil or gas, its economy has been growing strongly. It has just joined the World Trade Organisation, ahead of Russia.

Nobody could pretend that Ukraine is ready for membership of the EU. That could take a decade or more. But it would be wrong permanently to bar it as a candidate. It is as much a part of Europe as Bulgaria, and arguably more so than Turkey. Although many Ukrainians have doubts about joining NATO, almost all—even in the Russian-speaking east of the country—want to get into the EU. If Ukraine were kept out, it could easily fall back under the sway of a newly resurgent Russia; and the knock-on effects for other vulnerable places, such as Georgia and Moldova, could be serious. If, on the contrary, it were welcomed as a candidate, that would hugely encourage liberals who hope to bring proper democracy to Russia as well. It is high time that western Europe’s political leaders began explaining to their voters just why both past and future enlargement of the EU is so much in their own interests.

Business this week

Arun Sarin said that he would step down as chief executive of Vodafone, the world’s biggest mobile-phone operator by sales. During his five years in the job Mr Sarin endured rocky relations with shareholders, some of whom wanted him to sell the company’s 45% stake in America’s Verizon Wireless. But he also made important investments in emerging markets, including a controlling stake in Hutchison Essar, an Indian mobile operator. Mr Sarin’s replacement is Vittorio Colao, who heads Vodafone’s European business. See article

MTN, a mobile-phone operator based in South Africa, said it was talking to India’s Reliance Communications about combining somehow. The talks were made public soon after the breakdown in merger negotiations between MTN and Bharti Airtel, Reliance’s larger domestic rival.

Trouble in the boardroom

Privacy advocates in Germany voiced concern as allegations surfaced that the phone conversations of senior officials at Deutsche Telekom had been tracked, possibly at the behest of internal sources, in 2005 and 2006, around the time the company pushed through a controversial restructuring plan. René Obermann, Deutsche Telekom’s boss, said he was “shaken to the core” by the revelations and turned the matter over to the authorities.

Société Générale held its general meeting, at which shareholders vented their anger about a rogue-trading scandal that has rocked the French bank. Earlier, an internal investigation found that SocGen had been slipshod in overseeing the activities of Jérôme Kerviel, the futures trader at the centre of the alleged fraud. See article

The first trial in connection with a big corruption case at Siemens got under way in Munich. Reinhardt Siekaczek, a manager in the company’s telecoms unit, has admitted playing a part in what may be the biggest ever instance of corporate bribery, but insists he was working under the guidance of his superiors.

A proposal to split the jobs of chairman and chief executive at Exxon Mobil was defeated by shareholders. The resolution rose to prominence with the support of the Rockefeller family, descendants of the founder of Exxon’s forerunner, Standard Oil.

Franco-American sentiments

American consumer confidence dropped to a 16-year low in May, according to one measure. Americans were not the only ones to register rising pessimism. High prices and worries about economic prospects also caused French consumer confidence to slide in May, to its lowest level since 1987, according to France’s national statistics office. See article

There was more gloomy news in housing markets. Sales of newly built homes in America were down by 42% in April compared with a year earlier; home sales in Spain, another overheated housing market, fell by some 40% in March; and house prices in Britain dipped in May by 2.5%, compared with April, according to Nationwide—the largest ever monthly fall in its index. See article

The International Monetary Fund appointed Olivier Blanchard as its chief economist, following the departure of Simon Johnson. Mr Blanchard is a professor at the Massachusetts Institute of Technology and the author of numerous textbooks on macroeconomics. Separately, Frederic Mishkin tendered his resignation from the Federal Reserve’s board of governors. A highly influential member of the board, Mr Mishkin is returning to Columbia University.

In a decision that contravenes the spirit of a European court ruling last autumn, the German government approved a draft law that retains the ability of the state of Lower Saxony to block a takeover of Volkswagen. Lower Saxony is VW’s second-biggest shareholder and is not happy with Porsche’s intention to increase its holding in VW to a controlling stake.

Stella looks to Bud

Markets were rife with speculation that InBev, a brewer that includes Stella Artois and Becks among its brands, may launch a takeover for Anheuser-Busch, which produces the Budweiser range of beers. Consolidation among beermakers has picked up of late, but a bid for Anheuser could face stiff resistance from American politicians. The company’s headquarters are in the swing state of Missouri; InBev is based in Belgium.

CKX, which owns and develops entertainment brands, agreed to a $1.2 billion management buy-out. CKX owns the rights to the name, image and likeness of Elvis Presley and of Muhammad Ali, as well as the format of the “Idol” television programmes, the American version of which recently ended with 97m people voting in the final.

Politics this week

Israel’s prime minister, Ehud Olmert, came under pressure to resign after more revelations of payments made to him when he was mayor of Jerusalem (and a minister) by an American businessman, Morris Talansky. See article

Iran’s parliament elected Ali Larijani, a former nuclear negotiator, as its speaker. He is a critic and rival of President Mahmoud Ahmadinejad. But his first target was the International Atomic Energy Agency, which he lambasted for a new report that expressed concerns about Iran’s nuclear programme. See article

Following a peace deal brokered in Qatar, Lebanon’s parliament elected General Michel Suleiman, a Christian, as its president. A new government of national unity is expected to be formed soon. See article

The Japanese government hosted 40 African leaders in Tokyo and pledged to double Japanese aid to the continent by 2012. Like China and India, which have recently hosted similar get-togethers, Japan wants more access to Africa’s natural resources. See article

In Somalia, Islamist insurgents attacked an African Union peacekeepers’ base in the capital, Mogadishu, killing at least 13 people, most of them civilians. The country remains virtually ungoverned.

Ethiopia’s Supreme Court sentenced the country’s former ruler, Mengistu Haile Mariam, to death in absentia. His Marxist regime, known as the Derg, presided over a proclaimed “red terror” after the fall of Emperor Haile Selassie in 1974. Mr Mengistu has lived in Zimbabwe since his own ousting from power in 1991.

A deadly month

Colombia’s FARC guerrillas confirmed that their founding leader, Manuel Marulanda, died in late March—of a heart attack, they said. He was the third member of FARC’s seven-man commanding secretariat to die that month. See article

Canada’s foreign minister, Maxime Bernier, resigned after his former girlfriend, Julie Couillard, revealed that he had left secret government documents at her home. Ms Couillard had previous ties to criminal biker gangs. The political demise of Mr Bernier, who is from Quebec, is a blow to the hopes of Stephen Harper, the Conservative prime minister, of gaining a parliamentary majority by winning seats in the province.

Argentina’s farmers resumed a protest strike against an increase in export taxes. They will hold back grain exports and meat sales. See article

The Inter-American Development Bank said that higher food prices risked pushing 26m Latin Americans into extreme poverty. It launched a $500m credit line to boost anti-poverty programmes and agricultural productivity. Separately, Mexico’s government said it would increase cash subsidies to 26m poor people to offset higher food prices.

To the (belated) rescue

Foreign aid-workers began to trickle into the cyclone-hit Irrawaddy delta after the ruler of Myanmar, General Than Shwe, promised the United Nations secretary-general that the country would let in aid-workers “regardless of nationality”. Separately, the military junta renewed the house arrest of the opposition leader, Aung San Suu Kyi.

Two large aftershocks hit Sichuan province in China, which was devastated by an earthquake three weeks ago; no deaths were reported. Meanwhile, officials raised concerns about the safety of so-called “quake-lakes” created by landslides that block rivers; plans were made to evacuate 1m people from Mianyang, a city downstream from one such lake.

AFP

Wu Po-hsiung, the chairman of Taiwan’s ruling Kuomintang party, met China’s president Hu Jintao during an official visit to Beijing. He was the highest-ranking figure from the island to visit China since the two split in 1949. The two sides agreed to resume bilateral talks that had been suspended for a decade.

A special assembly in Nepal voted by 560-4 to abolish the 239-year-old monarchy. The king was given 15 days to leave the palace. Bombs went off in Kathmandu, Nepal’s capital, shortly before the assembly convened. See article

Brown left black and blue

Troubles mounted for Britain’s prime minister, Gordon Brown, following the humiliating defeat of his Labour Party in a by-election in Crewe. Amid reports that he might capitulate to fuel-tax protesters, speculation grew about a leadership challenge. See article

London’s new mayor, Boris Johnson, ended an arrangement with Venezuela’s Hugo Chávez that provided the city with cheap fuel for buses. Mr Johnson’s critics accused him of putting ideology above London’s interests.

The Social Democrats upset their grand-coalition partners, the Christian Democrats, by nominating their own candidate to be Germany’s president. Tensions within the coalition have increased as next year’s federal election draws closer. See article

A UN report confirmed that Russia had shot down a Georgian spy plane over Abkhazia in April. Georgia called it an act of Russian aggression and demanded an apology.

At a meeting in Dublin, more than 100 countries agreed to ban the current generation of cluster munitions. America, Russia and China want to keep them.

McCain reaches out

John McCain made a big speech on nuclear security, in which he said America and Russia were no longer “mortal enemies” and called on Russia and China to help strengthen the world’s non-proliferation regime. The presumptive Republican nominee made a point of stressing his commitment to multilateralism, a sharply different approach to that taken by George Bush.

Speculation about vice-presidential candidates was rife after Mr McCain met three hopefuls: Charlie Crist, the governor of Florida, Bobby Jindal, the governor of Louisiana, and Mitt Romney, Mr McCain’s early rival. Other strong favourites are Tim Pawlenty, the governor of Minnesota, and Rob Portman, who is from Ohio and is a former director of the budget office at the White House.

EPA

The spacecraft Phoenix touched down on Mars, the first successful powered landing on the planet since the Viking missions in 1976. As scientists at NASA celebrated, Phoenix got on with its task of scouting for evidence of life on Mars. See article

rade in wildlife

Just let them get on with it

Poor people who rely on nature’s gifts should be helped to help themselves

CONSERVATIONISTS and animal-welfare types please take note: trade in wildlife products, as long as it is properly managed, is an indispensable boon for the poor. And what is more, it’s big business, worth around $300 billion in 2005—chiefly in timber and fisheries.

That is the message of a new report* from TRAFFIC, a group based in Cambridge, England, which monitors the commerce in undomesticated animals, freely growing plants and their products. It also notes that some countries have a large domestic trade in wildlife, unreported by statistics. Estimates of how many people depend on the wildlife trade for at least part of their income vary from 200m globally to a billion in Asia and the Pacific alone. And a new report due to be released at the Convention on Biological Diversity in Bonn says damage to nature could halve living standards for the poor.

or these people, wildlife provides not only cash but food and health care (in the form of natural medicines). That is particularly important for the world’s poorest people, in marginal agricultural areas. As the report points out, many poverty-reduction efforts depend on the survival of natural wildlife. Wildlife trade also provides cash that helps children go to school.

Take Uganda’s lake fisheries, which yield fish worth over $200m a year while employing 135,000 fishermen and 700,000 small operators in processing, trade and associated industries. The fisheries also generate $87.5m in exports and contribute fully 2.2% of GDP. The report also highlights the wild-meat trade in seven countries in east and southern Africa: the victuals consumed are the equivalent of up to 40% of household monthly income.

Well-managed trade, as exists in species such as seahorses, humphead wrasse and certain ornamental fish, not only promotes these species’ own conservation but can also help the preservation of other important animals and plants. But the report laments that far too much of the harvesting of, and trade in, wild products is poorly supervised, with the result that habitats are degraded and stocks depleted.

One important point: allowing for the secure ownership of wildlife resources by a clearly defined group of poor people is essential for sustainable harvesting. If no public authority is able to offer secure tenure of land or resource rights to a reasonable number of people, there is little incentive to invest in long-term sustainability. This, for example, accounts for the over-collection in central Africa of rattan, a climbing plant that is used to make wicker furniture. Nobody owns the forest or wilderness where rattan usually grows—and as a result it is increasingly scarce.

Establishing such property rights is hard; it may mean the exclusion of “outsiders”, often other poor people or even refugees, from using wildlife resources. But it is necessary: many of the problems involved in the marine aquarium trade in wild fish in Indonesia and the Philippines, for example, are caused by migrant fishermen. In Gabon the government is considering giving village associations a legal monopoly on selling bush meat to outside traders.

One recommendation in the report is to establish wildlife farms; another is certification schemes that help poor people to advertise the sustainability of their wares. The wildlife trade is rarely high on official agendas, and those who rely on it are often the weakest groups in society. It makes sense to treat them, and their business, as a solution, not a problem.

Al-Assaf, Paulson Agree on Saudis Keeping Dollar Peg (Update1)

May 31 (Bloomberg) — U.S. Treasury Secretary Henry Paulson and Saudi Arabian Finance Minister Ibrahim Al-Assaf agreed that the Gulf kingdom benefits from keeping its currency pegged to the dollar.

The riyal’s peg “has served this country and the region well,” Paulson said today at a joint press conference.

“I totally agree with Secretary Paulson,” al-Assaf said at the press conference in Jeddah. “As we have said many times, we have no intention of de-pegging or of revaluation.”

Paulson is getting an update on the fixed exchange rates retained by most oil-rich nations in the Middle East on his four-day trip to the region. Gulf officials in April agreed to strengthen efforts to establish a currency union by 2010, diminishing speculation of a quick change to the dollar pegs.

Any change to currency regimes in the region “is a sovereign decision,” Paulson said.

The Treasury chief is touting the U.S. as an investment destination for Persian Gulf funds flush with $4 trillion thanks to oil prices that have doubled in the past year. He is aiming to persuade Middle East investors to continue putting money in the U.S. as American banks seek to raise capital, while encouraging Gulf countries to avoid political objectives in investing through government-run sovereign wealth funds.

“The major purpose of my visit trip is open investment,” Paulson said. “The issue that I’m most concerned about, looking globally, is a protectionist sentiment around the world at a time when it makes no sense.”

Oil Price `Burden’

The Treasury chief said investing in developing better oil production technology as well as alternative energy sources is necessary as oil prices continue to soar.

“There’s no doubt that the current prices are a burden on the world,” Paulson said. “This situation doesn’t lend itself to quick, easy fixes.”

Saudi Arabia, the world’s largest oil producer, said during a visit this month by President George W. Bush that it would boost output by 300,000 barrels a day.

“As our oil minister has indicated many times, we are for stability in the oil market,” al-Assaf said. “We don’t like extreme volatility.”

Paulson also reiterated his belief in a “strong dollar,” and said the currency will benefit over time from the U.S. economy, which is in “a tough time” right now.

“A strong currency, a strong dollar, is very much in our nation’s interest,” he said. “I believe the long-term economic fundamentals are going to be reflected in our currency.”

The Treasury chief will meet with Saudi King Abdullah before flying tonight to Doha, where he will meet with Qatari Finance Minister Yousef Houssein Kamal.

Dollar Posts Monthly Gain, Reaches 3-Month High on Fed Outlook

May 31 (Bloomberg) — The dollar rose this month, reaching the highest since February against the yen, as economic reports signaling the U.S. economy may avoid a recession led traders to bet the Federal Reserve will raise interest rates this year.

The U.S. currency gained a second straight month versus the yen and euro as the government said growth was faster last quarter than initially estimated while a measure of durable goods orders unexpectedly rose. At the same time, evidence mounted that Europe’s economy was slowing. Brazil’s real was the biggest gainer this month among the 16 most-traded currencies.

“The U.S. might be coming out of the slowdown when the rest of the major economies start to cool,” said Jeff Gladstein, global head of foreign-exchange trading at AIG Financial Products in Wilton, Connecticut. “That added fuel to the dollar’s rebound.”

The dollar climbed 1.5 percent this month to 105.52 yen, from 103.91 on April 30. It reached 105.87 on May 29, the highest since Feb. 28. The U.S. currency advanced 0.4 percent to $1.5554 per euro, from $1.5622 on April 30. The euro rose 1.1 percent to 164.15 yen, from 162.36 yen at the end of April.

Brazil’s real was the biggest gainer this month among the 16 most-traded currencies versus the dollar, rising 2.2 percent to 1.627 per dollar. Fitch on May 29 raised Brazil’s credit rating to investment grade, matching a move by Standard & Poor’s on April 30. South Korea’s won, with a 2.5 percent drop, was the weakest major currency this month.

First Quarter GDP

The dollar’s biggest gain this past week came on May 29 as the Commerce Department said the economy expanded at a 0.9 percent annual pace last quarter, faster than its April 30 estimate of 0.6 percent. The government also said this week that durable goods orders excluding transportation equipment rose 2.5 percent in April. The median forecast in a Bloomberg survey was for a 0.5 percent drop.

“The data has been dollar-positive because they’ll allow the Fed to keep rates where they are,” said Greg Anderson, a foreign exchange strategist at ABN Amro Bank NV in Chicago. “They show the opposite of stagflation.”

The National Association of Purchasing Management-Chicago said yesterday its business index rose to 49.1 this month, higher than forecast, from 48.3 in April. Figures below 50 signal contraction.

German Retail Sales

Futures speculators flipped to betting on euro losses in the past week. Speculators including hedge funds held a net 3,390 contracts wagering on euro losses versus the dollar, compared with a net 6,841 contracts betting on euro gains a week earlier, the Commodity Futures Trading Commission in Washington said yesterday.

The euro briefly fell yesterday after retail sales in Germany, Europe’s largest economy, unexpectedly dropped for a second consecutive month in April as faster inflation left consumers with less money.

Sales adjusted for inflation and seasonal swings fell 1.7 percent from March, when they dropped 2.2 percent, the Federal Statistics Office in Wiesbaden said. Economists in a Bloomberg News survey forecast a gain of 0.6 percent.

“Consumption in Germany is cooling down due to hefty oil prices,” said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany’s second-largest bank. “In such a situation, the Fed could raise rates faster than” the European Central Bank. The ECB’s benchmark rate is 4 percent.

The inflation rate in the euro area rose to 3.6 percent this month, matching a 16-year high, from 3.3 percent in April, the European Union statistics office in Luxembourg said yesterday.

`Close Call’

Crude oil for July delivery traded at about $128 a barrel on the New York Mercantile Exchange yesterday. Futures reached a record $135.09 on May 22. Prices have doubled over the past year.

Futures on the Chicago Board of Trade show a 27 percent chance the Fed will raise its target rate by a quarter- percentage point to 2.25 percent on Sept. 16, up from 19 percent a month ago. The Fed has cut rates seven times since September by a total of 3.25 percentage points as concern mounted that a slumping housing market would trigger a recession.

Most Fed officials viewed the decision to cut rates on April 30 as “a close call,” according to minutes of that meeting released on May 21, signaling they may hold off from further reductions.

“The idea that the Fed will continue to cut rates has been completely put to bed and the market is now flirting with the idea of a rate hike,” said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. “That has given the dollar a boost.”

Canada’s dollar fell 0.6 percent yesterday to 99.32 Canadian cents, trimming its monthly advance to 1.5 percent, after a government report showed the economy unexpectedly shrank in the first quarter, fueling speculation the central bank will cut borrowing costs next month.

The Bank of Canada lowered the target rate a half- percentage point to 3 percent on April 22.

U.S. Stocks Rise as Economic Outlook Improves, Oil Prices Drop

May 31 (Bloomberg) — U.S. stocks rose this week, sending the Standard & Poor’s 500 Index to its second straight monthly advance, after the government said economic growth accelerated and oil dropped the most since March.

Dell Inc. climbed to a five-month high as overseas sales helped the second-largest personal-computer maker report more profit than analysts estimated. Big Lots Inc. and Polo Ralph Lauren Corp. rose the most in the S&P 500 after the retailers’ earnings exceeded forecasts and oil prices fell 3.7 percent.

The S&P 500 rose 1.8 percent to 1,400.38. The Dow Jones Industrial Average added 1.3 percent to 12,638.32. The Nasdaq Composite Index increased 3.2 percent to 2,522.66. The Russell 2000 Index of small-cap stocks climbed 3.3 percent to 748.28.

“The GDP report, the decline in oil prices and the computer sales from Dell came together to make a pretty good week for stocks,” said Jerome Dodson, a fund manager at Parnassus Investments, which oversees $1.4 billion in San Francisco. “We don’t want to be on the sidelines of this market.”

The S&P 500 rose in each trading session during the holiday-shortened week, giving the benchmark index for U.S. stocks a 1.1 percent gain in May. That was the second straight monthly advance. The government’s gross domestic product report showed the economy grew 0.9 percent in the first quarter, more than a previous estimate of 0.6 percent, helping to reassure investors that the U.S. may avoid a recession.

Overseas Sales

Dell climbed 8.8 percent to $23.06 this week after rising revenue in Asia led overseas sales to exceed those in the U.S. for the first time. The stock has climbed 24 percent in the past month, the biggest increase since October 2001.

Higher-than-estimated quarterly earnings lifted shares of Big Lots, Polo Ralph Lauren and Tiffany & Co. and sent a group of S&P 500 retailers up 3.1 percent. Big Lots, the best- performing stock in the U.S. equity benchmark, climbed 15 percent to $31.06. Polo Ralph Lauren jumped 17 percent, the most since July 2006, to $69.85, while Tiffany added 6.3 percent to $49.03.

Countrywide Financial Corp. gained 16 percent, the most since March, to $5.26. The biggest U.S. home lender set June 25 as the date for shareholders to vote on the $4 billion takeover by Bank of America Corp. and agreed to settle three shareholder lawsuits challenging the deal.

Kosan Biosciences Inc. had the biggest gain in the Russell 2000, more than tripling to $5.42. Bristol-Myers Squibb Co. agreed to buy the developer of experimental cancer drugs for $235 million, or $5.50 a share in cash.

Protection From Declines

The VIX, as the Chicago Board Options Exchange Volatility Index is known, lost 8.8 percent to 17.83. The benchmark gauge for U.S. equity options, which measures the cost of protection from S&P 500 declines, has fallen in the past three trading sessions, the longest streak in a month.

Energy stocks lost 0.6 percent, the only decline among 10 industries in the S&P 500, on signs consumers are cutting back fuel purchases. Crude oil futures settled at $127.35 a barrel yesterday after reaching a record $135.09 on May 22.

Exxon Mobil Corp., the world’s largest oil company, lost 2.1 percent to $88.76. Apache Corp., a Houston-based oil and natural-gas producer, slumped 3.8 percent to $134.06. Anadarko Petroleum Corp., the second-largest independent oil producer in the U.S., declined 1.4 percent to $74.97.

KeyCorp slumped 11 percent to $19.47 for the biggest weekly decline since October. Ohio’s third-largest bank doubled its forecast for loans it doesn’t expect to be repaid. The company raised its anticipated net loan charge-offs to between 1 percent and 1.3 percent yesterday from as low as 0.65 percent as it “deals aggressively with reducing exposures in the residential homebuilder portfolio.”

The U.S. lost jobs for a fifth month in May and manufacturing contracted, signaling the economy is stagnating, economists said before reports next week.

EU ENLARGEMENT

In the nick of time

If the recent entry of 12 new EU members had been delayed much longer, it might never have happened, argues David Rennie (interviewed here). That would have been an historic error

IN ITALY’S recent general election, voters in the north of the country were greeted by posters showing a Native American chief in feathered headdress (pictured above). The caption read: “They suffered immigration, now they live on reservations.” The posters were the work of the Northern League, a regionalist grouping that blames immigrants and globalisation for many of Italy’s ills. The party struck a chord: it almost doubled its share of the vote. Silvio Berlusconi, the overall winner, chimed in, declaring that Italy should close its borders and open camps so police could track down jobless foreigners.

Italians knew whom he was talking about: an estimated half a million Romanians living in Italy, many of them gypsies (Roma), who are blamed for a spate of violent crimes. Romania, along with Bulgaria, joined the European Union at the beginning of last year, giving its citizens the right to travel freely all over their new club. Many duly went west. Mr Berlusconi’s oddly precise promise to round up jobless foreigners was no accident. One of the few legal grounds for expelling foreigners from another EU nation is to show they have no means of support. To show that they have a criminal record is not enough: EU citizens may be deported only if they gravely threaten public order.

The arrival of Bulgaria and Romania completed what Eurocrats call the “fifth enlargement” of the union, begun in May 2004 with the admission of ten new members, from Estonia in the north to Cyprus in the south. In under three years the EU grew from 380m people in 15 countries to half a billion in 27.

This report will argue that enlargement has been a force for good. Freedom of movement is a founding principle of the European Union and one of its greatest strengths. Successive waves of enlargement have injected new life into societies and labour markets across old Europe that were in danger of sinking into elegant, arthritic decline.

Freedom to trade has also brought huge benefits. The most recent enlargement added a dozen mostly fast-growing, unusually open economies to the single market, providing a big boost to anaemic EU growth rates. Dan Hamilton, an American academic, calls Europe’s eastern fringes “the China next door”.

The accession process that began more than a decade ago provided an historic incentive for reforms. Yet the expansion of the club has been jarring for citizens of older member countries (for example, Italy) who have discovered that their national governments are no longer in full control of their borders.

Many people in older EU member countries believe that enlargement has triggered a wholesale exodus of jobs from west to lower-paid east. According to a 2006 Eurobarometer poll, three-quarters of EU citizens think that enlargement speeds the transfer of jobs to countries with cheaper labour. Yet according to the European Restructuring Monitor, an official survey, only 8% of EU jobs lost to restructuring between 2003 and 2006 involved offshoring.

Globalisation started long before enlargement, but enlargement has crystallised public fears about it, often setting one corner of Europe against another. Nokia bosses were heavily criticised earlier this year when they announced the closure of a mobile-telephone factory in the German city of Bochum and the transfer of the work to Cluj in Romania. A German minister demanded assurances that EU funds would not be used to subsidise the move.

In truth, EU firms have been investing heavily in central and eastern Europe since soon after the Berlin Wall came down, and Italy was home to about 350,000 Romanian migrants before Romania joined the union. Yet public fears about Polish plumbers and other bogeymen are real enough. Even though German exporters have flourished by selling to the new member states, 63% of Germans, according to Eurobarometer, think that enlargement is making Europe as a whole less prosperous.

Some of the newcomers have not helped their cause since joining. Nasty populists have done well in elections in several countries, and Romania, Bulgaria, Slovakia and the Czech Republic have shown prejudice against the Roma too. But then prejudice, bad government, corruption and organised crime are not the exclusive preserve of the new members. Some existing members have been setting a bad example for them.

Nor was the fifth enlargement a simple matter of countries governed by former dissidents accepting the democratic embrace of the West. Plenty of ex-communists smoothly relabelled themselves and hung on to power across the block. Brussels is full of talk about “backsliding” to describe the way that politicians in the new member countries forgot, or actively undermined, reforms that the EU demanded during accession negotiations. Corruption and organised crime blight many of the newcomers. Parliaments and ministerial suites shelter too many bad men.

All this has led some to suggest that enlargement happened too soon, and that many of these problems could have been avoided by waiting until the accession countries were better prepared. This report will argue the opposite: that enlargement came in the nick of time. Inside the candidate countries the first victims of further delay would have been reformers who for years had been pushing painful changes as vital for achieving EU membership. Had the public started to doubt that entry was fairly imminent, the drive for reforms would have been undermined.

For the existing member countries, three big reasons would have made enlargement far more difficult if it had come any later than it did. These can be summarised as migration, money and Moscow.

The m-words

First, migration. Immigration from the east to the EU accelerated with the 2004 enlargement, though it had been going on for years before that. As the Italian example shows, if any one of the 12 new members, especially Romania and Bulgaria, were still queuing to enter the EU, there would now be a heated debate about immigration, and the EU keystones of free movement of people, capital, goods and services might soon be under attack.

Second, money. During the long years of entry negotiations, many European economies were doing pretty well. Now, with the world looking bleaker, the older members might be feeling a lot less generous. Back in 2002, 66% of the French supported the coming EU enlargement. By early 2006, France’s then prime minister, Dominique de Villepin, was blaming enlargement for the French rejection of the EU constitution in a referendum the previous summer. “France did not say no to Europe,” Mr de Villepin told an EU meeting in Salzburg; rather, Europe did not adequately prepare the ground for the enlargement of 2004.

The European Commission ordered an opinion poll in France immediately after the “no” vote in 2005 which identified three main reasons why French voters rejected the constitution: it would shift jobs out of France; the document was overly liberal and pro-market; and the economy was ailing. (A similar poll carried out after Dutch voters said no in their own referendum, days later, found that only 7% of respondents were worried mainly about the loss of jobs overseas. The most common explanations were “a lack of information” and concerns about national sovereignty.)

Money worries would play a bigger part if the latest round of EU enlargement were still being debated now. Poorer countries have been admitted before. When Greece joined in 1981, its GDP per person stood at 58% of the then European Community average (at purchasing-power parity). When Spain and Portugal came in five years later, their income was around 70% and 56% of the EU average respectively. But the newcomers are in a different class of poverty. For Poland, the figure at entry in 2004 was about half the EU average. When Bulgaria and Romania joined last year, theirs were 38% and 40% respectively.

The newcomers are different in other ways too. Romania, which added 4.5m farm holdings when it joined, now accounts for a third of all the farms in the union. (It also brought several thousand wild bears, more than doubling the EU’s bear population overnight.) The newcomers have changed established views of EU history, which had long concentrated on the West and Franco-German reconciliation. As one official puts it, they are full of people for whom 1945 was not a “magic year” but the start of a new occupation.

That occupation was ordered from Moscow, and Russia’s increasing assertiveness is the final reason to believe that enlargement happened just in time. EU enlargement brought dramatic changes in Russia’s backyard and reduced the country’s sphere of influence. Yet Russia did not block the eastern expansion of the EU.

In reality, Russia’s then president, Vladimir Putin, raised only two big concerns ahead of the event, recalls Günter Verheugen, a former EU enlargement chief. One was to protect the status of the Russian language and the rights of non-citizens in Estonia and Latvia. The second, and trickier, one involved Kaliningrad, a chunk of Russian territory sandwiched between Poland and Lithuania (see map). To the horror of eastern European governments, Mr Putin proposed linking Kaliningrad with the rest of Russia by a railway corridor drawn across Lithuanian territory. At a summit in 2003, Italy (then, as now, led by Mr Berlusconi) backed Russia’s plan, with encouragement from France. Britain, Sweden and Germany opposed it. Residents of Kaliningrad now travel through Lithuania on a simplified visa. It is not hard to imagine Russia playing even tougher today than it did five years ago.

Earlier this year Mr de Villepin, now safely out of office, told a Belgian newspaper that enlargement was proof of Europe’s “genius” for getting along with others. Had it, he mused, been in Europe’s interest to open its doors to the nations of the east? “No. But Europe had no other choice but to hold out its hand.”

This report would not dispute that Europe had no choice, but it will also contend that enlargement was very much in the union’s interests. It will describe an enlarged Europe that is changing fast, in terms of globalisation, infrastructure or efforts to resolve the remaining legacies of communism. It will ask why EU membership has so far failed to end the frozen conflict in Cyprus, and whether that is about to change. On all these fronts, it will argue, it is a good thing that half a billion Europeans are now in this together.

Posted by RICARDO VALENZUELA at 9:19 PM 0 comments

Europe.view

Can the EU defend itself?

A bit of paranoia is a healthy thing

AS WESTERN countries scramble to deal with Russia’s increasingly energetic espionage efforts, their security services are hurriedly rehiring some of the seasoned spycatchers they let go in the past years.

But at the European Union attitudes are still worryingly dozy. Russian spying in Brussels and Strasbourg, say those who try to keep an eye it, is far better financed, better aimed and better co-ordinated than ever before. The efforts of the elite foreign-intelligence service, the SVR, and the GRU (military intelligence), are now supplemented by the FSB, a much more thuggish outfit that used to deal solely with internal issues.

Some of the intelligence officers are under traditional diplomatic cover; others are journalists, lobbyists, consultants and even students. It would be an unusually stony-hearted eurocrat who did not try to help a charming young enthusiast who wants material for a doctoral thesis.

AFPWho’s listening?

A combination of vanity and naivety makes it remarkably easy for Russians (and those working on their behalf) to snoop, nudge and make mischief. It is sad but true that many people working in European institutions (the parliament is a particular culprit) are immensely self-important but largely insignificant to the outside world. That makes them vulnerable to deft flattery on the lines of: “It is only people like you, Mr Mepnik, who really understand the importance of this issue. I greatly appreciate your insights, and I wonder if you could help me with one rather specific question…”

Darker arts may be at play too. Lobbying in the European system is still scandalously murky and underregulated. If the reward for a full and frank discussion, or for a copy of an interesting document, is a bottle of €300 wine, or a discreet evening spent in particularly pleasant company, it passes almost without notice.

Though the Russian efforts are increasingly brazen, keeping track of them is proving tricky. Belgium’s counter-intelligence service is notoriously understaffed and toothless. The European Commission has hugely improved its internal security in the past five years, but it is only as strong as its weakest links. Its in-house encrypted e-mail system is secure—until some lazy official forgets to use it and sends an extra copy in plain text. MEPs and their staff have the right to see sensitive materials, but are slack about taking care of them.

Member states’ attitudes to Russia differ (to put it mildly). An approach that would set alarm bells ringing in officials from, say, Finland or Britain may seem nothing to worry about (or positively welcome) from countries with little or different historical experiences of Russia.

The problem is most urgent in the EU’s external relations. What is the point of negotiating if the bottom line is leaked to the other side in advance? How will the proposed new diplomatic service handle classified information?

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It is hard to imagine any part of the EU administering a security-clearance regime of the kind common in countries serious about their security, complete with exhaustive background checks and intrusive questions about the subject’s personal life. Yet without a high common standard for handling information, the new EU foreign service will be at best useless, and at worst a danger to all member states’ own security.

To see how strikingly asymmetrical the position is, try imagining it the other way round: a world where bright-eyed interns from EU countries wander the corridors of the Kremlin at will, snaffling documents and bamboozling bureaucrats. The EU’s ideals of openness and trust are admirable. But as long as the rest of the world does things differently, a healthy dose of paranoid secrecy is long overdue.

Posted by RICARDO VALENZUELA at 9:17 PM 0 comments

KAL’s cartoon

Illustration by Kevin Kallaugher

The Democratic nomination

Looking dicey for Hillary

An obscure committee is the next battleground in the Democratic presidential nomination

FOR Hillary Clinton, it is the final throw of the dice, and the odds look terrible. On Saturday May 31st, the Democratic Party’s hitherto obscure Rules and Bylaws Committee (RBC) meets in a Marriott hotel on the outskirts of Washington, DC, to try and unravel the brain-numbing mess the party has concocted for itself by disenfranchising the voters of Florida and Michigan. The two have been penalised by the Democratic Party for holding their primaries too early, but it has now dawned on the party bigwigs that alienating voters in two such important states was not exactly helpful to the wider cause of getting a Democrat into the White House. Both of them are battlefield states, and they are the fourth and eighth largest in the Union to boot.

To realise her ambitions, Mrs Clinton needs something like a blindfold hole-in-one, and the RBC meeting is essential. Even if she can convince the committee to re-enfranchise the Florida and Michigan voters, then she will not pick up enough delegates to have any hope of toppling Barack Obama’s lead in the delegate count (in which he is currently 160 ahead). But the inclusion of the two states would allow her to add the votes cast there to her raw popular-vote total. Then, assuming that she scores a big victory in Hispanic-dominated Puerto Rico, which holds its primary on Sunday, she might be able to claim that she has, overall, won more of the popular vote than Mr Obama captured. And in that case, she might theoretically be able to talk enough superdelegates around to win her the nomination.

It is the slenderest of possibilities: the superdelegates have been breaking overwhelmingly for Mr Obama in recent weeks, whereas she would need them to swing overwhelmingly the other way. So perhaps what she is after instead is to make a convincing case that she should be the vice-presidential nominee. Or possibly she is after being the next majority leader of the Senate: no one, in fact, knows what Mrs Clinton is really holding out for. But getting the excluded states counted will be a big boost for her.

The first step in the process is tricky all by itself, and would be so even without the drama that will be added to the occasion by the massed demonstrations of both candidates’ fans that are expected. In theory, it would be a simple matter for the RBC simply to vote to seat the Florida and Michigan delegates. But that would be terribly unfair to Mr Obama. In most states where he actively campaigned, he was able to narrow a big initial gap between him and Mrs Clinton considerably. But he did not campaign in either of the penalised states, and in Michigan he took his name off the ballot.

Even if an agreement could be struck to let the Florida results stand and divvy up the delegates proportionately, Michigan would remain a large problem. Mr Obama recorded no votes at all in the state, though “uncommitted” took 238,000 votes compared with Mrs Clinton’s 328,000. Many, perhaps most, of those uncommitted voters were expressing a preference for Mr Obama, though many pro-Obama voters might have thought it a waste of time voting at all. How many delegates should he be awarded, and (potentially much more important), what imputed number of popular votes should he be given from the state?

The RBC will have to attempt answers to these tricky questions, and deadlock is probably the most likely outcome. Even if the committee comes up with a plan, either candidate could appeal against it, right the way to the floor of the convention in Denver at the end of August. Democrats are nothing if not litigious.

Mrs Clinton has, pretty outrageously, compared the exclusion of the Florida and Michigan results to the rigging of the ballot in Zimbabwe. It is tricky to explain why she supported the party’s decision when it was made last year, at a time when she did not imagine that she might need the vote of either state to secure a nomination that looked to be hers for the asking. But that small detail will not stop her putting up quite a fight.

Subprime Finds New Victim as Muni Defaults Triple

Commentary by Joe Mysak

May 30 (Bloomberg) — The amount of municipal bonds that have defaulted this year is already more than triple what it was for all of 2007.

And who could doubt there’s more bad news on the way?

So far this year, $736 million in municipal bonds have defaulted. That doesn’t necessarily mean they didn’t pay investors; they may have just drawn down reserves. That’s what happens just before they stop making payments to bondholders.

During all of 2007, only $226 million in municipal bonds defaulted, according to the May edition of the “Distressed Debt Securities” newsletter, published in Miami Lakes, Florida.

That $736 million is nowhere near the record for municipal bond defaults, to be sure. The record year, if you’re counting, was 1991, when almost $5 billion went bust. That’s still small potatoes compared with what happens over in the corporate-bond market, where $36.6 billion blew up in 2006, and almost $24 billion in 2007.

But wait a minute: Municipal bonds never default, do they? Or at least this is how they are perceived by individual investors, right?

We’re probably going to see a lot more munis default this year and in the years to come, because of the subprime crisis and maybe, just maybe, because of the high price of a barrel of oil.

New Residents

The hangover from the collapse in real-estate prices is going to be a boom in so-called dirt-bond defaults.

These are bonds sold by municipalities to build the infrastructure for housing developments, and are backed by the taxes paid by all the new residents who are going to move in. If no residents move in, or too few do, the bonds aren’t repaid.

Of the 30 bond issues that have defaulted so far this year, more than half are from issuers in two of the states that have figured prominently in all tales of the housing bust: 10 in Florida and seven in California.

Consider the $50 million in special assessment bonds sold by the Monterra Community Development District in Broward County, Florida, for example. On May 7, the district disclosed that it had tapped its $1,279,200 reserve fund for $1,211,727.11.

You can just stop right there and know that this story is bound to be a sad one.

These particular bonds were sold by the district in 2006 in a limited offering. The bonds were unrated, and sold in minimum denominations of $100,000. The bonds carried a 5.125 percent coupon due in 2014, and were priced to yield 5.198 percent.

Remember Colorado

The Monterra development is located in Cooper City, which is about 20 miles north of Miami and has a population of almost 30,000. Of the 10 Florida bonds that defaulted this year, all were sold by community development districts, and all within the last four years.

The big jump we are going to see in the number of such municipal bond defaults this year won’t be limited to Florida and California, but will include all those places where the high tide of real-estate mania has now receded.

This isn’t an uncommon phenomenon after housing busts. In the past, the damage was usually confined to certain states where the boom was craziest, such as Colorado in the 1980s.

More bondholders are going to be affected this time around because the housing collapse is more national rather than regional or isolated, and because of the relatively recent development of so many “exurbs,” as chronicled, for example, by New York Times columnist David Brooks in his 2004 book, “On Paradise Drive.”

Three-Hour Commutes

These are the suburbs beyond the suburbs, where Americans have moved to enjoy the good life, commute (usually) be damned. Not too long ago, the newspapers seemed to be filled with stories about people who gladly commuted two and even three hours each way for affordable real estate. Most people knew actual examples of such hearty souls. I wonder how much gasoline at $4-plus a gallon will dent the growth, and tax base, of such communities.

It’s not just the price of gasoline that is going to make the nation’s many far-flung communities less attractive. On May 28, Bloomberg carried a story detailing how the increase in the price of jet fuel was causing airlines to curtail service throughout the country.

Maybe we’ll have to reconsider this whole flight-from-the- coasts idea that got such attention a few years ago.