Ana Palacio: The Next Task for China’s New Leaders

BEIJING – On a recent fact-finding trip to China, organized by the European Council on Foreign Relations, I began with the assumption that the country’s biggest challenge revolved around the need to promote domestic consumption in order to maintain rapid economic growth. By the end of the trip, what had emerged was a complex picture of Chinese assertiveness and uncertainty, poise and anxiety.

Although impending, the 18th Congress of the Chinese Communist Party (CCP) is shrouded in mystery. While the congress is presumably set for October, the exact dates remain unknown, as does much about the internal process and preparatory discussions.

For much of this year, there seemed to be one certainty in the coming leadership transition: the CCP’s new general secretary would be Xi Jinping, a man whose political vision could be elaborated in well under 30 seconds. But Xi’s mysterious vanishing act, in which he dropped from public view for almost two weeks in September – after abruptly canceling meetings with US Secretary of State Hillary Clinton and the prime minister of Singapore (rare occurrences for the protocol-fixated Chinese leadership) – has stirred more speculation. It has also fueled concerns about whether so secretive a leadership can effectively govern the world’s second-largest economy.

Despite its outward appearance of monolithic resolve, China is in a state of flux, flaunting its confidence while bulging with internal sources of insecurity. Its undeniable economic success – albeit closely tied to that of the global economy – stands in stark contrast to the heightened sense of crisis and insecurity that hovers in the background.

Two distinct quandaries confront China’s leaders: the first centers on the growing demands and dissatisfactions of Chinese society – from peasants and students to white-collar workers and pensioners; the second consists in the country’s conduct of foreign policy. Will the next CCP administration address these critical issues?

Internally, as China has moved from mass poverty to widening prosperity, economic growth – though a vital source of the CCP’s legitimacy – is no longer enough. Restlessness is pervasive: while statistics vary, depending on how government agencies define the term, it is estimated that there were roughly 180,000 “mass incidents” in China in 2011 alone. China’s rising urban middle class and its surprisingly well-organized rural communities are increasingly demanding less corrupt and more accountable government, cleaner air and water, safer food and drug supplies, and an independent, well-functioning judicial system.

Popular dissatisfaction partly reflects a phenomenon that invariably arose in numerous conversations with academics, intellectuals, and top officials: the murky frontier of legality currently reigning in China. The blurriness of the law creates a no-man’s land of ambiguity in which the authorities thrive: legal predictability is aspirational, while daily life for ordinary people requires navigating the shallow, shifting waters of what the powerful will tolerate.

At the same time, the rule of law plays a prominent role in Chinese political discourse. But, while nominally acknowledging its importance, officials creatively turn the concept on its head. Nowhere was this more apparent than in recent efforts to portray the purge of Chongqing’s former Party boss, Bo Xilai, as an example of the CCP “safeguarding the rule of law.”

And yet, formal pronouncements aside, if China’s leadership is to meet growing popular demands and quell rising discontent, it will have to commit itself to the rule of law in fact. Such a move would have far-reaching benefits for China’s global standing as well.

China’s recent emergence as a key international player (albeit a reluctant one) has exposed its leaders’ uncertainty about the country’s future global role, as well as raising questions about their readiness to bear the responsibilities that its stature implies. China still falters when it comes to building “soft power” or assuring interlocutors, near and far, that its “peaceful rise” will remain peaceful.

Indeed, China today is increasingly perceived to be undermining the international order, while promoting novel interpretations of concepts such as democracy, pluralism, and representation. For many, its behavior toward Syria – aligning itself with Russia to block international action – and in maritime territorial disputes with its neighbors exemplifies this tendency.  

It is, therefore, little surprise that China’s policies are widely regarded as a reflection of former Chinese Premier Deng Xiaoping’s call for a strategy of “hiding our light and nurturing our strength.” But China’s ability to persuade others that its international behavior stems from its search for balance will depend on its leaders’ ability to embrace the rule of law – in substance rather than just in rhetoric – as a fundamental basis for the harmony that they publicly espouse.

So far, the survival of China’s political system has rested on the identification and deft handling of the most pressing issues of the day. Every Chinese leader since Mao Zedong’s death in 1976 has left an indelible mark. For Deng, it was the move toward a market economy, articulated through the “Four Modernizations.” His successor, Jiang Zemin, undertook internal reevaluation of the CCP and expansion of its base through the “Three Represents.” And the outgoing Hu Jintao’s objective was development, particularly in the country’s vast interior, unleashed through large-scale privatization.

Despite continuing uncertainty surrounding China’s coming political transition, it is expected that pragmatism – the common thread among its leaders after Mao – will carry over to the new ruling cohort. If so, it should impress upon them the notion that their best strategy, both internally and internationally, is to devote their considerable resources and energy to strengthening China’s rule-of-law institutions, even though such reforms will invariably curtail the CCP’s arbitrary power.

Ana Palacio, a former Spanish foreign minister and former Senior Vice President of the World Bank, is a member of the Spanish Council of State.

Ana Palacio: In Europe We Distrust

MADRID – For decades, critics of the European Union have spoken about a democratic deficit. I never accepted that reproach of the EU and its institutions, but I do see a new and dangerous deficit within the Union – a trust deficit, both among governments, and among the citizens of various member countries. Indeed, if today’s euro banknotes included a motto, as dollars do, it could well be, “In Europe We Distrust.”

This lack of trust has brought the eurozone to the cusp of implosion, and is calling into question the very future of European unity. The arc of EU history seems to be bending to catastrophe – the sort of periodic European disaster that integration was intended to prevent. Grandiloquent as it might sound, the disintegration of the euro and the disarray that would engulf the European project, not to speak of the global repercussions, would unleash comparable devastation.

But few official pronouncements, let alone policies, are addressing Europe’s deficit of trust and credibility. The current crisis has exposed the original lacunae and widening cracks in the compact between Europe’s citizens and EU institutions, between Europe’s north and south, and between its peoples and its elites.

Indeed, a dangerous emotional discourse has emerged, reflecting – and feeding – the worst stereotypes of the “lazy South” and the “despotic North.” It is indicative that the latest Pew Research Survey in late May reveals unanimity about who the least hardworking Europeans are: southerners, especially Greeks. Likewise, polls and elections signal the ascent of populists across Europe, while financial markets’ vulture-like behavior stems from the cynical calculation that the EU lacks the wherewithal to restore its credibility.

That, after all, is the point of Europe’s straightjacket of austerity, which hampers its growth prospects, and thus makes little sense in economic terms. The ultimate aim of austerity is precisely the restoration of trust – among northern Europeans that the money transferred to troubled economies will not be squandered, and among the peoples affected by painful spending cuts that their efforts are recognized and supported.

Speaking from the heartland of the troubled South, I can attest to the fact that the need for austerity has been the leitmotif of Spanish Prime Minister Mariano Rajoy’s government, a course that gained explicit popular support in the recent elections. Reforming Spains’s cajas (savings banks), labor market, welfare provisions, and how its autonomous regions function top the national agenda (though unfortunately only at the insistence of the European Commission and Germany).

But restoring trust and credibility requires more than southern discipline. Northern Europe must hold up its side of the bargain. Germany, in particular, must acknowledge that, far from being an innocent victim, its economy is the eurozone’s biggest beneficiary – and has been since the euro’s inception. That, together with the counterfactual – the economic calamity that would befall Germany following a collapse of the euro – implies a unique obligation to maintain it.

German Chancellor Angela Merkel has been a favorite target of opponents of austerity for some time now, and it is understandable that, after months of being a bystander to the EU’s painful inability to govern, Germany has reluctantly – indeed, insufficiently – taken charge. Looking ahead, as the threat of disintegration looms larger, the need for German leadership will be even greater. But, once the crisis has passed, EU institutional reform will be a critical element in restoring trust.

The EU’s supposed democratic deficit is a corollary of the “technocratic imperative” that has emerged as a favorite scapegoat in the ongoing European drama. According to this view, European integration was flawed from the outset, more than six decades ago, because it was conceived and developed as an elite project. But, for as long as the European project delivered prosperity, no one bothered to question its rationale.

Today, however, the EU is the last point of reference as far as prosperity is concerned. According to the Pew survey, EU favorability is down almost everywhere since 2007, having dropped 20 points in the Czech Republic and Spain, 19 points in Italy, and 14 points in Poland.
If EU institutions are to regain trust and relevance, they need to articulate concrete policies and deliver on issues that bear directly on citizens’ interests – youth unemployment, urban planning, health care, bio-tech research, energy conservation, transport, and aging. All of these issues were an integral part of the EU’s ambitious Lisbon Strategy (which in 2000 promised to make Europe the world’s most competitive economy by 2010), and all were quickly hijacked by national political agendas. That cannot be allowed to happen again.

In fact, there is nothing inevitable about the euro's failure. The dismal image that Europe projects to the world nowadays does no justice to reality. Europe has the world’s healthiest and most educated population, its largest economy, and huge stores of soft power, owing also to its commitment to human rights and democratic values.

And yet Europe is facing a calamity. Discipline and morality may well be key to reinforcing trust and credibility to Europe’s social fabric – a point that northern Europeans never tire of making. But, unless all Europeans accept responsibility for saving the euro – and, with it, the EU – everything else is shallow rhetoric.

Ana Palacio, a former Spanish foreign minister and former Senior Vice President of the World Bank, is a member of the Spanish Council of State.

Ana Palacio: Opening Europe’s Mediterranean Window

MADRID – One year after the fall of Hosni Mubarak, with popular upheavals continuing to roil the Arab world, it is increasingly clear that Europe can no longer sit still and do nothing. The ongoing protests have exposed an urgent need for renewed engagement by the European Union with the region in general – and, in particular, with the countries of the southern and eastern Mediterranean that are the Union’s neighbors.

Until now, the European Neighborhood Policy, born as an afterthought of the EU’s successful policy towards Central and Eastern Europe after the fall of the Berlin Wall, has governed the Union’s actions in the southern and eastern Mediterranean. Over time, however, the ENP was largely hijacked by immigration and security considerations. Moreover, it provided an economic lifeline to the region’s autocratic regimes.

On the Mediterranean’s southern shore, a panoply of grievances, from corruption to a desire for liberty, has motivated the unrest. But the one underlying theme has been the absence of viable economic opportunities for the region’s growing population of unemployed, and underemployed, young people.

One year after the Arab Spring erupted, however, economic opportunities are even fewer. The economies of Egypt, Libya, and Tunisia have all contracted sharply. National budgets are strained, and foreign-exchange reserves are dwindling. Instead of foreign investors jumping in, capital is flooding out.

Given the scale of the challenge facing Europe’s southern neighbors, the EU must forge a far more effective Euro-Mediterranean partnership than anything attempted thus far. The first challenge is to reestablish trust, which requires Europeans to reconsider their attitude towards “political Islam,” in general, and Islamists in government, in particular.

A relevant litmus test is Morocco. Even though it has not followed the region’s revolutionary path, Moroccans’ perceptions and aspirations mirror those in neighboring countries. The EU welcomed the country’s recent constitutional reforms, as well as the election results that brought to power an affiliate of Egypt’s Muslim Brotherhood. But the EU also called for a strong commitment to pluralism, the rule of law, and equal rights for minorities and women – key areas in which Islamists everywhere need to prove themselves.

This conditionality – the “more for more” principle – suggests that the EU has hit upon a viable way to influence developments in the region. But there is also a need to dispel the idea that Europe, supposedly in decline, cannot be a useful interlocutor and partner in fostering regional prosperity. On the contrary, the EU remains the Maghreb’s top trading partner, accounting in 2010 for 70% of the region’s exports.

Europe, though cash-strapped, can also facilitate engagement by multilateral institutions, from the International Monetary Fund and the World Bank, where the EU is the biggest shareholder (close to 37%, compared to the United States’ 16% share), to the European Investment Bank, which recently raised the region’s loan ceiling by €1 billion ($1.3 billion). Likewise, the European Bank for Reconstruction and Development (EBRD) recently announced the start of donor-funded activities in parts of the region, including Morocco, in 2012.

A good example of this sort of EU engagement is the €37 million Ouarzazate Solar Power Plant and Drinking Water Efficiency Program, sponsored by the EU Neighborhood Investment Facility, which was instrumental in securing loans amounting to more than €600 million. It is this leveraging capacity that the EU needs to use more effectively.

Beyond challenges of perception, the success of renewed partnership with Europe requires the region to undertake vital structural reforms. First, the region’s countries must consolidate a sound regulatory and institutional framework that will foster efficiency and legal security for investors, both local and foreign. Such a framework is central to attracting not just big companies, but also to nurturing small and medium-size enterprises, which in Europe, for example, generated 85% of all new jobs in 2002-2010.

It is equally important to frame EU policy as a matter of co-localization, rather than de-localization, and to overcome the zero-sum mentality that is pervasive today. An encouraging illustration of the co-localization approach is the launch of a Renault project in Morocco (which, unfortunately, prompted a public backlash at the height of pre-election fever in France).

Infrastructure is another vital concern, not only for linking the EU and the southern Mediterranean, but also for boosting the much-needed regional integration. Today, most of the Maghreb’s economies are virtual enclaves, cut off from each other for reasons that are often political in nature. Here, too, Morocco is a good example: the Western Sahara conflict looms large behind the closure of the border with Algeria, at an annual cost to both sides that is conservatively estimated at 1-2 percentage points of GDP.

More broadly, the Maghreb countries have the lowest intra-regional trade in the world, accounting for less than 5% of GDP, compared to 70% in the EU and 50% in North America, owing, in large measure, to a “spaghetti bowl” of preferential trade agreements and non-tariff measures within the region. The EU should use its array of bilateral agreements with southern Mediterranean countries to promote a viable regional trade framework.

The Arab revolutions have given everyone the chance to look at the Mediterranean world with fresh eyes. Instead of the old patron/client relationship, an EU/Maghreb partnership, as part of a transformed Neighborhood Policy founded on trust is needed.  Only such a partnership can boost economic opportunity and increase prosperity – the demands that ignited the Arab upheaval. If well managed, moreover, such a partnership could also contribute to buoying the European economies in their current time of trouble.

Ana Palacio is a former Spanish foreign minister and former Senior Vice President and General Counsel of the World Bank.

Ana Palacio:The Perils of Europe’s Navel Gazing

MADRID – While the world anxiously awaits the climax of the eurozone drama, its leaders’ behavior resembles the political equivalent of what physicists call “Brownian motion,” with officials bouncing randomly from one crucial bilateral consultation and vital European summit to the next. The impact of make-or-break declarations that are supposed to solve the monetary union’s problems dissipates almost as soon as they are issued.

Meanwhile, a plethora of diagnoses and prescriptions are competing for attention – and in their gloominess. But their overwhelming focus on the economics of the euro crisis is itself part of the problem because the crisis is, above all, a reflection of deep-seated weaknesses in European institutions and the fabric of European society. Otherwise, what began as a marginal debt crisis, aggravated by political indecisiveness in Greece and in the European Union as a whole, would not have grown into an existential watershed moment for the European project.

Europe is plagued by three distinct problems. First, it remains incapable of adjusting to the realities of a world whose center of gravity has irrevocably shifted eastward to the Pacific, pulling with it the attention of the United States. Second, more than ever, Europeans are looking inward, as a sense of entitlement meets pervasive skepticism – a combination that permeates to the highest echelons of the Union and EU national governments.

Meanwhile, at a time when the EU’s basic law, the Treaty of Lisbon, needs to be reformed, the entire Union is paralyzed by the navel-gazing attitude of a Germany beset by 90-year-old memories of the doomed Weimar Republic. Therein lies the problem: the decision-making process that has underwritten much of the EU’s construction, while highly effective during the Cold War, when the Union’s institutional and legal foundations were laid, has remained largely intact, leaving Europe unable to address its current challenges.

Founded on the stability of the Cold War era’s bipolar international order, the EU had the luxury of time as it deliberated on each successive building block of its growing edifice. No sooner would a new block be set in place than agents of further integration would infiltrate the existing structure and establish the bridgeheads from which the EU would evolve further.

Indeed, some of the Union’s major undertakings – European Monetary Union being a fitting example – were contemplated for years before seeing the light of day. The EMU, implemented in 1999 with the launch of the euro, bore the DNA of the Delors Committee, which laid out the fundamentals of the common currency in 1988. Critics have been quick to dismiss the incomplete nature of the euro’s original structure, which remains unchanged to this day. But these critics forget that the greatest miscalculation was the assumption of stability while on the verge of a systemic transformation impregnated with volatility.
Europe’s current crisis is rooted in loss. Untethered from the mooring of Cold War-era bipolarity, Europe was swept off its feet and cast adrift in the currents of a globalized world, unable to find either its place or direction. Most critically, Europe’s old instincts and modus operandi persisted long after the new contours of global affairs had taken shape.

They still do. That is why, in facing its gravest test so far, Europe seems oblivious: its leaders project confusion and indecision; its citizens exude a mixture of complacency, indifference, and self-doubt; and its institutions are locked in turf battles and remain hindered by laborious procedures and protocol.

It is also part of the reason why markets are besieging the eurozone so incessantly. What investors sense is not weak economic fundamentals, but Europe’s weak political fundamentals – the absence of a governance structure with real power and the will to use that power to resolve problems. If Europe is to adjust to the requirements of the new “Pacific world,” it does not need fine-tuning; it needs a new design.

The EU is a political structure based on the rule of law. As such, it cannot afford to disregard the vital tasks of updating its procedural components. On a deeper level, Europeans need to replace their melodramatic, and entirely groundless, self-doubt with the pride and determination befitting their example of democracy and prosperity. And, most immediately, Germany must stop singing solo and start playing its part in the European choir.

Ana Palacio is a former Spanish foreign minister and former Senior Vice President and General Counsel of the World Bank.