Saturday, April 09, 2005

France's finance minister (Diana Colibaba)

Breton to the rescue
Mar 3rd 2005 | PARIS

From The Economist print edition

A turnaround king is brought in to cure the ills of France's economy
THIERRY BRETON could not refuse twice. Jacques Chirac, France's president, tried to persuade the boss of France Telecom to be his finance minister last November, but he wanted to stay at the telecoms firm. Three months on, Mr Chirac was again looking for a finance minister. Now Mr Breton has agreed to become France's fourth in less than a year.
Mr Chirac needed to repair quickly the damage done by the resignation of Hervé Gaymard, Mr Breton's predecessor. Mr Gaymard got into trouble when Le Canard Enchaîné, a satirical newspaper, revealed that he and his large family had moved into a palatial flat in a posh part of Paris, at taxpayers' expense. After days of embarrassing revelations, made worse by contradictory statements from Mr Gaymard, Mr Chirac told his former protégé to go. By picking Mr Breton, he has both brought in somebody with private-sector skills and avoided a cabinet reshuffle.
Mr Breton, nicknamed le zorro du business, has helped to rescue three state-owned companies. He is credited with turning around Bull, a computer maker, and Thomson, a consumer-electronics firm, though critics say both floundered after he left. His biggest turnaround was France Telecom, which had over €70 billion ($69 billion) of debts when Mr Breton took over in 2002. After radical restructuring, France Telecom has pulled back from the brink of bankruptcy: its credit rating has risen from junk to investment grade, its net debt is down to €44 billion and it made net profits of €2.8 billion in 2004.
The new finance minister will need all his business savvy to manage France's state coffers. Growth remains anaemic at best. New figures this week put the budget deficit for 2004 at 3.7% of GDP; the government has pledged to cut it to below 3% next year. This will make it hard to cut income taxes, another government promise. Privatisations could help, but the unions are already up in arms against plans to sell parts of Electricité de France, Gaz de France and Areva, a maker of nuclear reactors.
Can Mr Breton turn France round? Privatisation is the kind of job he should be good at. He managed France Telecom's partial privatisation without stirring up huge labour unrest. He may also have more room for manoeuvre than some predecessors. Mr Chirac will surely try to keep the same finance minister until the end of his mandate in 2007. Mr Breton's German and British counterparts, Hans Eichel and Gordon Brown, have been in their jobs six and eight years, respectively.
If French business hopes for less state interference by Mr Breton, it may be disappointed. He believes the state should promote national champions. He may be less of a populist meddler than was Nicolas Sarkozy, who intervened in a merger in the drug industry last year and staged a big bail-out for Alstom, an engineering group. Yet when Mr Breton met the German economy minister, Wolfgang Clement, this week, he called for more “industrial co-operation” between the two countries.
Mr Chirac is hoping the swift replacement of Mr Gaymard will limit any broader political damage. Some observers detected the hand of the ambitious Mr Sarkozy, Mr Chirac's great rival and boss of the ruling UMP political party, in the Gaymard revelations. The bigger worry is that the affair could affect the referendum on the European Union's constitution, likely to be held in May. A majority of voters support the treaty, but growing discontent with the government could change minds.
And grounds for discontent abound. Unemployment has hit 10%, a five-year high. On March 1st students protested against reforms of the educational system. Next week public-sector workers will take to the street to defend jobs and perks. The unions are mobilising to defend the 35-hour week. It adds up to quite a challenge for France's turnaround king.
Germany's Green Party

Endangered species
Mar 3rd 2005 | BERLIN

From The Economist print edition

A party that suddenly seems less invulnerable than before
MIGHT Germany's Greens need a spot of recycling? Newspaper readers may wonder. Whether lowbrow tabloid or highbrow weekly, much of the press now treats the Greens as self-righteous and incapable of accepting that well-intentioned policies can have ugly effects: eg, that opening up borders can be an invitation to people-trafficking. If Joschka Fischer, the party's posterboy and foreign minister, has to resign over a visa scandal provoked by this truth, the Greens could face a big electoral setback.
This is a reversal of fortunes for the world's strongest environmental party. A few weeks ago, as it marked its 25th anniversary, the Green Party's world seemed in good shape. A year of success had made it the biggest party in some German cities. Mr Fischer was showered with compliments over his response to the Asian tsunami: he led the taskforce that worked round the clock to organise help.
If the Greens have come down to earth, one reason is that the opposition has changed strategy. Having realised that its leaders and programme are not attractive enough, the conservatives have resorted to aggressive attacks against the government. The scandal over visas issued to people-traffickers in Ukraine, now the subject of a parliamentary inquiry, provides ammunition: it weakens Mr Fischer, and seems to show that the entire government is soft on immigration despite Germany's terrible unemployment (which hit a post-war record of 5.2m in February).
Perhaps more important, the media seem ready to change their tune after years of shamelessly hyping the Greens and helping Mr Fischer to reach almost godlike status. Some of the generation of journalists now reaching positions of influence see themselves as actors with a political agenda, rather than mere reporters. Der Spiegel, the leading newsweekly, seems especially intent on pushing Mr Fischer out of office, after being a firm supporter in recent years.
If the attacks have hit home, it is partly because the Greens have let them. While success was springing eternal, they became complacent. It took weeks for them to realise how damaging the visa scandal could be, because it seems to show them up as moralists disconnected from reality. The reaction also highlights a contradiction the party has yet to resolve: the leadership is now decidedly pragmatic, but most party members see themselves as the only defenders of truth and goodness.
Germany's Zeitgeist also seems to be shifting away from things the Greens hold dear. Multiculturalism is increasingly under question. The public mood favours tighter security, as the visa scandal has shown. Germany's continuing economic malaise also makes people think twice about the merits of government regulation. Pending anti-discrimination laws are now seen as more costly red tape rather than harbingers of greater equality.
The Greens will not disappear even if Mr Fischer goes. That might cost the party a third of its votes, but it still has plenty of political assets. Green politicians are very professional, and can come up with new ideas. Many of their voters will stick with them no matter what. The crisis could even strengthen the party if it draws the right conclusions: that success is not automatic, and that it needs soon to groom a successor to the struggling god at the top.

The Czech Republic and Slovakia

Gross misdemeanours

From The Economist print edition

A tale of two countries, one doing badly, the other well
WHEN Czechoslovakia broke up in 1993, the fate of its successor states seemed obvious. Slovakia would drift deeper into authoritarianism under its ham-fisted leader, Vladimir Meciar. The Czech Republic would be a model of prudence. For the next few years that was just what happened. But in the late 1990s the Czechs lost the secret of good government—and the Slovaks found it.
A fragile coalition ousted Mr Meciar in 1998, promising to get Slovakia into the European Union and NATO. It duly joined both last year. Its flat-tax reform has brought investors flocking in (see article). Voters re-elected the coalition in 2002 and may give it a third term next year, making Mikulas Dzurinda central Europe's longest-serving prime minister. Last week he proudly hosted the Bush-Putin summit in Bratislava.
In the Czech Republic, the idealism of the early 1990s has collapsed into cronyism and cynicism, thanks to selfish politicians and a complacent public. These days the government scarcely functions. A weak coalition, the second in this parliamentary term, was again on the verge of collapse this week. It is not serious politics that has provoked the crisis, but a scandal of almost incomprehensible silliness involving wives, uncles, trivial sums of money and burnt IOUs. An optimist might say that things can only get better. But with an unreconstructed Communist party getting stronger, things might yet get worse.
The trouble began when a Czech newspaper found in January that the prime minister, Stanislav Gross, a Social Democrat, had bought a flat in 1999 costing more than he could afford from his parliamentary salary. Mr Gross retorted that he had borrowed money from an uncle, who claimed to have borrowed it from relatives abroad but apparently got it from a Czech journalist, who took an IOU that he gave to a fringe politician, who burnt it—or so the parties claim. Later, a company belonging to Mr Gross's wife was reported to have bought a house with help from a woman later charged with fraud.
This week Mr Gross was arguing with one coalition partner, the Christian Democrats, which wants him to go, as do most voters. The Czech constitution makes snap elections hard, so the outcome could be yet another coalition, of Social Democrats, Christian Democrats and the Freedom Union—enough for a one-seat majority in the 200-seat parliament. Mr Gross's predecessor, Vladimir Spidla, struggled with a similar coalition last year, before becoming a European commissioner.
Mr Gross has no obvious successor in his party, so he could ride out the crisis. But that may mean looking for support from the Communists, who have 41 seats. Open co-operation would be a big step. All parties have shunned the Communists since the velvet revolution of 1989. If Mr Gross handled the adventure brilliantly, emasculating the Communists, the country might thank him. But he is in a position of weakness, and might thus have to do much of the compromising. Many voters might then abandon his party in disgust.
Nothing in politics is immutable. If the weakness of the Social Democrats drives more Czechs to the right, that would raise the chances of a stronger government, led by the opposition Civic Democrats, at the next election. As for Slovakia, the most popular party in the country is the left-wing Smer (Direction), which wants to reverse Mr Dzurinda's reforms. Smer's leader, Robert Fico, who recently turned 40, can afford to wait: one day Mr Dzurinda will go. Perhaps the Czechs should bid for him.

Russia's opposition

Mar 3rd 2005 | MOSCOW

From The Economist print edition

Russia's Victor Yushchenko? Not quite
“EVERYTHING is possible,” said Mikhail Kasyanov when, after criticising Russia's government a year after being sacked as prime minister by President Vladimir Putin, he was asked if he might run for the presidency in 2008. Compared with Mikhail Fradkov, his compliant and over-promoted successor, Mr Kasyanov is now remembered as an independent reformer, whose defenestration marked the final ascendancy in the Kremlin of the siloviki, or “power people”. Analogies have been drawn with Victor Yushchenko, once prime minister of Ukraine and now its president. Misplaced though these may be, the stir does point up two questions about Russia's liberal opposition.
Neither is whether Mr Kasyanov will be the next president. Everything may be possible in Russia, and Mr Putin's popularity has fallen slightly. Yet something huge would be needed to thwart his chosen successor in 2008 (Sergei Ivanov, the defence minister, is the current favourite) or, should he amend the constitution and stand for a third term, Mr Putin himself.
The first question is whether Russia's bickering liberal factions can unite and then spearhead a broad Ukraine-style opposition, with a view to the parliamentary poll in 2007, and perhaps the presidential elections in 2012 or 2016. A union between Yabloko and the Union of Right Forces (SPS), the two main liberal parties, has been mooted since 2003, when both fell short of the threshold for party-list representation in the Duma, or lower house of parliament. The merger's fruit, it is suggested, could be the “Pear” party.
Unfortunately, personal enmity obstructs such a deal, as do ideological divisions. Grigory Yavlinsky, Yabloko's leader, says SPS is “neo-conservative”, while his party is liberal-democratic. Mr Yavlinsky adds that Mr Kasyanov is linked to the “criminal privatisations” of the 1990s, as well as the already repressive policies of the first Putin term. On this view, Mr Kasyanov and some SPS leaders are part of a bigger problem: that, for many Russians, democracy and capitalism have become synonymous with chaos and corruption.
By contrast, Boris Nemtsov, an SPS leader who now advises Mr Yushchenko, thinks Mr Kasyanov could indeed emerge as leader of a broad democratic opposition. But SPS is divided over how friendly it should be to Mr Putin. More wrangles over a merger might end in an SPS split, not a deal with Yabloko.
The second, more depressing question is whether, even if the liberals united, anybody would notice. The emergence of a Russian middle class ought by now to be boosting the standing of parties sticking up for business-friendly policies, the sanctity of private property, and the independence of the media and the judiciary. But, some gloomy liberals conclude, in Russia economic empowerment has not brought with it such political expectations.
Even winning seats in the Duma, says Mr Yavlinsky, would count for little, such is the Kremlin's stranglehold. Given its grip on television, it would be hard for a new liberal leader to drum up support. Two candidates are Garry Kasparov, a chess champion turned anti-Putin campaigner, and Vladimir Ryzhkov, a courageously outspoken Duma deputy, but neither would find it easy to make a mark. As for Mikhail Khodorkovsky, ex-boss of the Yukos oil firm, who sponsored a range of political parties and was touted as a presidential contender, his trial is now reaching a less than suspenseful climax. It would be surprising if he were at liberty in 2008.
Italian phone-tapping

Mar 3rd 2005 | ROME

From The Economist print edition
The tangled tale of a country with too many phone taps
ITALIANS are strikingly un-private. They argue in public, pour out romantic secrets on television and talk so loudly and incessantly on their mobile telephones that it can be hard not to listen in. But even they worry that, when it comes to mobile-phone tapping, the authorities may have gone too far.
The biggest mobile-phone operator, Telecom Italia Mobile (TIM), has told the government it cannot meet demand by police and prosecutors for phone taps. All of the 5,000 duplicate lines it has for eavesdropping are in use. TIM is one of four mobile-phone operators, and there is a fixed-line operator, Telecom Italia. So extrapolating from TIM's subscribers, it seems that some 15,000 Italians are being bugged at any one time.
Roberto Castelli, the justice minister, accepted that there has been an “explosion” in the number of warrants for phone taps. It is doubling every two years and is “far higher than for any other European country”. Last year, phonetapping cost the Italian taxpayer €300m ($225m). Warrants are usually issued by a judge at the request of a prosecutor. Most are valid for a couple of weeks, or 40 days for organised-crime investigations. But they can be renewed.
A spokesman for the prosecutors argues that the spread of eavesdropping is justified because it is hard to persuade Italian witnesses to testify in court. The penalties for failing to appear can be less intimidating than the disincentives from organised-crime syndicates. Yet critics say investigators have become addicted to the evidence that phone tapping can supply; they worry that not enough attention is being paid to civil liberties.
A few days after TIM's letter, renewed controversy arose when extracts from intercepted conversations were broadcast on television. They were taken from evidence in a case that is still being tried. Three of the callers quoted were members of parliament. The programme showed that, before the 2001 G8 summit in Genoa, which led to violent clashes between police and demonstrators, Italian investigators had recorded conversations between left-wing lawmakers and anti-globalisation protesters, some of whom are now on trial on subversion charges. The outraged defendants declared that “no one is free from being bugged, from mayors to bishops, and from lawyers to clients.”
Meanwhile mobsters are taking more direct evasive action. A man shot dead outside a bar in Rome last month was found to have been the proud owner of no fewer than 22 mobile telephones.

Flat is beautiful
Mar 3rd 2005

From The Economist print edition

The impact of central Europe's tax revolution
ONE of the more bizarre events on the Brussels calendar is the annual capitalist ball, staged by the Centre for the New Europe, a free-market think-tank with an appropriately Rumsfeld-like title. This year's event was dedicated to the memory of Ayn Rand, a libertarian novelist and one-time muse to America's Federal Reserve chairman, Alan Greenspan. Her dedication to capitalism was so complete that, at her memorial service, a six-foot high dollar sign was placed next to the open coffin. Previous balls featured a cigar-chomping American speaker in a tuxedo, pumping the air and encouraging shouts of “Viva capitalism”.
The ball-goers are not what you might call mainstream Brussels. Officials from the European Commission are conspicuous by their absence. The core audience is drawn from a network of right-wing think-tanks in Europe and America. It would be easy to dismiss the whole thing as a fringe event. Who could be less relevant to the business of the European Union than a bunch of American conservatives and their wild-eyed fellow travellers from central Europe or Sweden?
But the free-marketeers may now have the last laugh. One of their most cherished policy ideas—the flat tax—is fast gaining ground in Europe. To its proponents, the flat tax is the ultimate in fiscal simplification. If all corporate and personal income is taxed at a single flat rate, that slashes red tape and improves incentives. But flat-tax opponents have always countered that it is unjust not to have higher marginal rates for the rich. When Steve Forbes proposed a flat tax in the American presidential primaries in 1998, it was widely dismissed as no more than an eccentric millionaire's fantasy.
An idea that failed to gain purchase in the United States is, however, fast winning converts right across central Europe. At the 2003 capitalist ball Mart Laar, a former prime minister of Estonia, was given a special award to celebrate the fact that, in 1994, his country had become the first in Europe to introduce a flat tax, of 26%. At the time, developments in Estonia, a tiny Baltic country which was not then even a member of the EU, did not seem particularly significant. True, Latvia and Lithuania, the two other Baltic countries, swiftly followed suit, but nothing much happened for a while after that.
Then in 2001 Russia, facing widespread tax evasion, moved to a flat tax of 13% on personal income. Over the next two years Serbia and Ukraine followed, with rates of 14% and 13%, respectively. Much as advocates of the privatisation of pensions were sometimes embarrassed to have Pinochet's Chile as their laboratory, so Russia, Serbia and pre-Yushchenko Ukraine were not the ideal poster children for flat taxes. But then Georgia, fresh from a democratic revolution, introduced the lowest flat tax yet: 12%. And the flat-tax experiment that has attracted most attention in the EU has been in Slovakia, where a 19% rate for all personal, corporate and sales taxes was introduced in 2003.
Slovakia's flat tax became a lot more significant when the country joined the EU a year later, thereby gaining complete and unfettered access to Europe's single market. As advocates of the flat tax had long predicted, Slovakia's fiscal innovation helped to spur foreign investment and economic growth, while actually leading to a slight increase in tax revenues. Encouraged by Slovakia's experience, Romania, which is supposed to join the EU in 2007, has just introduced a flat tax of 16%. The centre-right opposition parties in Poland and the Czech Republic are both now pushing the idea of flat taxes set at 15%.
To many in the rich, high-tax countries of western Europe, all of this smacks of the dreaded “race to the bottom”, long forecast by those who feared that the enlargement of the EU would lead to a loss of jobs and an erosion of the welfare state. Joschka Fischer, the German foreign minister, has argued that it is intolerable for his country, struggling with a rising budget deficit and unemployment of over 10%, to finance EU subsidies to countries that are luring investment and jobs out of Germany by slashing taxes. As Mr Fischer sees it, the Slovaks and others can afford to set low flat taxes only thanks to big EU subsidies. Reality is more complex. That tax revenues have actually risen in Slovakia makes it a lot harder to sustain the charge of “fiscal dumping”. The main cost advantage that central Europe has over Germany and France is not low taxes, but low wages: an average Slovak worker is paid about a fifth as much as his German counterpart.
If you can't beat 'em
Flat-taxers are in such an exuberant mood that they risk feeding the myth of fiscal dumping. At a recent Brussels seminar organised by the Stockholm Network of pro-market think-tanks, Dan Mitchell of America's Heritage Foundation crowed that France and Germany are “being caught in a pincer movement” by their flat-tax neighbours. “The money is going to leave those countries, investment will be leaving those countries, and sooner or later they will have to reform.” Mr Mitchell predicts that the flat-tax movement in Europe will be imitated around the world, rather like the Thatcher-Reagan cuts in income-tax rates and Ireland's cuts in corporate tax.
So far, the preferred response of the Germans and French is to press for an EU-wide ban on “fiscal dumping” and to push the EU towards tax harmonisation. The trouble is that EU decisions on tax are taken by unanimity—and there is no way that the Slovaks and others are going to surrender their freedom to set their own taxes. So some in western Europe are beginning to think of copying the flat-taxers, rather than fulminating against them. Gerrit Zalm, the Dutch finance minister, has said that his Liberal Party is considering a flat tax for the Netherlands, albeit at the high rate of over 30%. More surprisingly, advisers to left-of-centre governments in Spain and Germany have also done serious feasibility studies on flat taxes. If old Europe cannot beat the flat-taxers of new Europe, it may have to join them.

George Bush in Europe

Into the lions' den

From The Economist print edition

Widely different expectations of the transatlantic partnership were on display during the American president's visit to Europe
GEORGE BUSH had one chief aim on his trip to Europe: to find out if his European allies would help with security challenges in Iraq, Iran and beyond. But to do it, he first had to change the mood, from unilateral to co-operative. At Mainz, in 1989, his father had declared America and Germany to be “partners in leadership”. In Brussels, 16 years on, the son did not go so far. But by talking of a “new era of transatlantic unity” and by visiting the top two institutions in the European Union (the European Commission and the Council of Ministers), Mr Bush became the first president to be seen taking the EU, as opposed to NATO or individual countries, seriously as a negotiating partner.
His visits to the commission and council were a recognition of the EU's growing influence in foreign policy. They also reflected changes within the administration. In his first term, Mr Bush's team was more interested in Europe's divisions than its unity. His speech in Brussels will have given little comfort to neo-conservatives who believe that further European integration may be bad for America.
Yet the Bush charm offensive was met with, at best, a nuanced response. France's Jacques Chirac, whom Mr Bush hosted to an elaborate dinner (lobsters and Bollinger), thanked the American president for his “concern to demonstrate his attachment to our alliance”—as if Mr Bush had wandered off the reservation. Mr Chirac then suggested, at a time when Americans have been sceptical about Europe's diplomacy in Iran, that it was time to consider offering Iran membership of the World Trade Organisation. Stephen Hadley, America's national security adviser, said Mr Bush would “think about” Europe's Iranian policy.
The German chancellor, Gerhard Schröder, whom Mr Bush met on February 23rd at a summit in Mainz, also stood by his recent assertion that NATO was no longer the premier forum for transatlantic debate—a view with which the president flatly disagrees (see article). It is true that, for the first time in three years, the NATO summit in Brussels was not dominated by bickering about Iraq, shifting from “were we justified?” to “how can we help?” But the help on offer was only symbolic. Every NATO member has agreed to cough up something to a training mission, which the Americans trumpeted as a triumph. But the money is pitiful ($4m)—and France is seconding only one officer.
Mr Bush thus comes away from the trip with only modest help for his immediate priorities. But he also wanted to test how far the transatlantic alliance, and in particular the EU, could help with three broader challenges that America frets most about over the next 20 years: the democratisation of the Middle East, the growth of China and, to a lesser extent, developments in Russia.
The two sides have reasons of their own for talking up the alliance's continued value. If democracy is the best guarantor of global security, say the Americans, they can hardly be at odds with the EU, which has done most to secure it in central and eastern Europe. Europeans insist the EU will be a more stable partner than any individual country (Britain, perhaps, excepted). Both sides know that of three recent “crises of democracy”—Afghanistan, Iraq and Ukraine—the two that came out best were those where they co-operated.
At the broad strategic level, however, the Bush visit produced at best mixed results. American disappointments over Iraq and Iran were mitigated by continued co-operation with France over Syria, and by an expansion of NATO's peacekeeping mission in Afghanistan. But the administration remains unpersuaded that the EU will be much help in democratising the Middle East, where European governments worry more about stability than freedom. One day, the EU might influence Russia, perhaps the biggest backslider from democracy. But for now, nobody can do much beyond scolding Vladimir Putin, whom Mr Bush met in Bratislava on February 24th.
By far the biggest strategic worry for America, though, is China, and particularly the EU's determination to lift its arms embargo this summer. The administration might accept a deal under which the embargo is ended in exchange for tight controls on technology exports (though Mr Bush was sceptical). But he added that it was up to the EU to persuade Congress of the merit of such a deal. Opposition on Capitol Hill is fierce: the House of Representatives condemned the lifting of the embargo by 411 votes to three. Richard Lugar, chairman of the Senate foreign-relations committee, has threatened to respond by restricting military exports to Europe. The Americans also disapprove of the Europeans' covert rivalry over how many dollars and euros the Chinese central bank should hold. It all suggests to some Americans that the EU could be a rival, not an ally, in East Asia.
Two views from the bridge
In the European view, Mr Bush's trip was a manifestation of failure. In an interview with the International Herald Tribune on the eve of the visit, Javier Solana, the EU's foreign-policy supremo, said the elections in Iraq were “not a vindication”. Europeans think Mr Bush is paying the price of arrogance, has lost international respectability and is now begging for a second chance. For them, European integration is the central concern, and international consequences flow from it. As Mr Chirac said, a “more united Europe plainly implies a stronger, more effective Atlantic alliance.”
The Americans, in contrast, see the Bush trip as a product of success. Elections in Iraq have vindicated the invasion; the possibility of peace between Israel and Palestine now vindicates the entire Middle East strategy. They feel their European critics have marginalised themselves, and are now being given a second chance to board the freedom train. For America, the transatlantic relationship is essentially a means to that end. As Mr Bush put it in Brussels, “America supports a strong Europe because we need a strong partner in the hard work of advancing freedom in the world.”
In short, Europeans think Mr Bush was wrong, wants to recoup lost ground and now realises he needs the EU. Mr Bush thinks he was right, wants to advance his agenda and is generously willing to let the Europeans come along. This is not to deny that this week marked a step to better management of the transatlantic alliance. But the Americans want it because they hope the two sides share long-term interests. The Europeans want it because they fear that those interests may be diverging.


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