Cameron’s speech was mainly about the fact that there would be renegotiation of the relationship with Europe and that, following this; there would be a referendum on membership.  This served the purpose of temporarily appeasing approximately a hundred and ten Conservative members of parliament who are particularly sceptical about the European project and indeed apparently anxious to leave the European Union.  It also tempered the approach of the overwhelmingly euro sceptical press at least for a time.

However it raised two essential issues neither of which have been answered since by the Prime Minister or the Foreign Secretary.  The first of these relates to the identification of what precisely the United Kingdom wishes to renegotiate and the second to the details of how this renegotiation (apparently to involve treaty changes) is to be conducted.

As to the former the speech itself and subsequent comments by the Prime Minister focussed specifically only on the aspiration in the Treaty of Rome to a “greater union of the Peoples of Europe”.  This aspirational objective would appear to be unacceptable to the United Kingdom.  Its exclusion, if it were to occur, would have no practical effect.  However it would, if the aspiration were deleted generally or even just for the United Kingdom, change the perception of the essence of the project.  This fundamental objective is the essential element of the undefined destination of the European Project.

We still have a tabula rasa on specific and operational changes.   Apart from this intended deletion, for example, is the Common Agricultural Policy to be included in the list of demands for exclusion or the Common Fisheries Policy or just elements of the common Social Policy? Or is it to something else?  One way or another it seems clear that the whole exercise was launched without any clear roadmap as to where it would end up.  One of the effects of this is to create a prolonged period of uncertainty.

Since the speech was made, a number of events have taken place.  For one thing British departments of State have apparently communicated with counterparts in other Member States requesting their views on the repatriation of competences.  If any substantive replies were received we have not heard of them but in the review of competences being conducted by the departments of state here so far the conclusions seem to be that the EU policies are positive for the UK rather than negative.

We do not know either how such renegotiation as may be thought necessary will be conducted in due course but we do know that any treaty change will require an Intergovernmental Conference and all remaining twenty seven members will be required to agree to any treaty changes.  If such changes amount to anything this will not be easily obtained.  The current strategy appears to be premised upon a belief that an IGC will not have to be called by the United Kingdom because one will be required anyway to agree changes to Economic & Monetary Union and this this could be used also to pin on the British changes.  This scenario may or may not actually happen.  I do not think that it will.

However, whatever transpires on this aspect of procedure it is time that the British issue be addressed here and the British people should make their decision without illusions.  Britain is part of, and if it remains will continue to be part of, a unique undertaking but one which, at the least, has some federal characteristics.  This has implications for national sovereignty which cannot be denied or obfuscated any longer.

The history of British engagement in the European integration project so far gives some idea of the challenges in making the case for staying in.  From the outset United Kingdom has been uniquely sceptical about the whole idea.  Winston Churchill’s speech at the University of Zurich on the 19^th September 1946 is often cited by both sides in support of their case regarding British participation.  He said then “we must build a United States of Europe”.  However, he based this United States of Europe on “a partnership between France & Germany”.  The clear implication from his speech was that Britain would remain apart though supportive of the venture.   He made this absolutely clear, in June 1950, in a speech in Westminster.  In addition Britain never really favoured the idea of a federation even for the others although, as an ultimate objective for the main founders this was the clear objective from the outset.  As Adenaur told the Bundestag on the 3^rd May 1950 the purpose of the Schumann Plan (the Coal and Steel Community) proposed by France was “to create a European Federation”.

Going back through the earlier history of the United Kingdom the seeds of an attitude that resisted entanglements with Europe were evident as long ago as the Reformation.  These grew in the “blood enriched soil of numerous conflicts up to and including the two world wars”.  In the 1830 George Canning expressed a view that has some resonance today.  He delighted in the collapse of the Congress of Vienna and applauded the notion of “every nation for itself and God for us all”.

When the seminal conference that was to create the EEC took place in June 1950 in Messina and Britain played no role in it.  When offered the floor in that conference towards its conclusion in November 1955 the relatively junior civil servant representing the UK said of what was to become the Treaty of Rome.  “The future treaty which you are discussing has no chance of being agreed; if it was agreed it would have no chance of being ratified; and if it were ratified it would have no chance of being applied.  And if it was applied it would be totally unacceptable to Britain.  You speak of agriculture which we do not like, of powers over customs, which we take exception to, and institutions, which frighten us.  Monsieur Le President, messieurs, au revoir et bonne chance”.  (Charles Grant Delors London Nicolas Brealey pg.62).  He then walked out and did not return.

When Britain did join the EEC and the other European Communities it was in truth a reluctant marriage forced by necessity.  Hugo Young who of course had strong pro-European views has written “Britain has struggled to reconcile the past, she could not forget with the future she cannot avoid”.  This is not an altogether unfair comment.

Having regard to this history it is difficult not to feel a sense of déjà vu today.  We have seen this debate before but in the referendum held on the 5^th June 1975 following another “renegotiation” the result was 67% of those who voted opting for continuing British membership.  Every region except the Western Isles and Orkney and Shetlands decided in favour of British membership (Missed Chances Roy Denman Cassell pg.  250).  This result came notwithstanding the great unpopularity at the time of the EEC which is not a new phenomenon.  So the similarities to the present situation abound.   Then, and now, the Germans tried to be helpful and conciliatory (although nothing substantive was in fact achieved in the renegotiation “that could not have been obtained in the continuous negotiation month by month which is a fact of Community life”) (Denman pg.  249).

However the substantial vote in favour of membership in 1975 did not imply enthusiasm for Europe and therefore did not change Britain’s consistent opposition to and indeed obstruction of a deepening of the Union or the provision of resources to it.  Over the years this has impeded the integration process and, ever since, the United Kingdom has been therefore a thorn in the side of those who believe, as I do, in a greater union of the peoples of Europe.  One can conclude that even Britain’s subsequent positivism to enlargement (sometimes cited as a positive contribution) was in part largely motivated politically by an intention to undermine integration by diluting the core.  So, much though Britain’s attributes have been properly admired (and indeed are deeply needed) by the EU the constant background of obstructionism and negativism has created recurring crises between the majority and the United Kingdom particularly regarding its budget.   The United Kingdom has always argued for the principle of juste retour and rails against the very idea of net transfers between the rich and poorer states.   So the concept of solidarity is rejected.

Federalists are an endangered species here.  They are considered by some to be basically unhinged from reality.  Furthermore the illusion that what the British people voted in 1975 for was “a Common Market” and no more is constantly repeated by sovereign States that they were deceived into joining a supranational enterprise.  This has been fostered constantly by Eurosceptics either as a result of ignorance of history or malign intent.

There is still a frightening degree of ignorance about the reality of the extent of the sharing of sovereignty that has already been agreed by the United Kingdom.   Apart from the Treaty of Rome, and the direct applicability and effect of European law that flows from it, Mrs Thatcher agreed by the Single European Act that far more majority voting would be permitted where, previously, unanimity had been required.   Majority voting is, of course, an expression of the sharing of sovereignty and is at the heart of the project.  So no use of euphemisms about only having agreed to “co-operation between sovereign states” should be allowed to continue to distort the reality of Britain’s agreed position as a member of the EU.  It is no longer the case that the supremacy of parliament is the unadulterated expression of the British constitution as it once was.

The object of the European project as Geoffrey Howe famously said in November 1991, is “the taming of nationalism without suppressing patriotism, sharing sovereignty without destroying nations”.  This is the central political objective of an “ever closer union of the peoples of Europe” the objective expressly now denied by the Prime Minister.   It is an expression of Christian principles in essence related to the concepts of the dignity and equality of man.

Jean Monnet in his Memoirs properly wrote of Britain’s great contribution to civilisation.  He singled out “Respect for freedom and the working of democratic institutions:  habeas corpus and Magna Carta and parliament”.  He was absolutely right then and this is equally true now.  Britain’s contribution to global political developments has been and remains of great importance.  Its standing and influence in the world means that if it were to leave the EU it would be immeasurably diminished.  Unfortunately Monnet wrongly concluded in the early days that, on joining, Britain would become as many hoped the foremost champion of European institutions.  He explained the negative British attitudes then by saying with some truth that Britain suffered, paradoxically, from not having its pride broken as others had done.   Britain today remains justifiably proud of its freedom, its democracy and its independence.   It was and is different because of its island history.  It has not been invaded for over a millennium and is a prime example of respect for the rule of Law.   Who can be surprised at its reluctance to change course so dramatically by joining in what at least is a quasi-federalist project?  I think that there is some understanding of this as there should be.   The dilemma though must be that in an increasingly interdependent world Britain itself cannot rationally wish to stand relatively alone.   More than emotion is needed for a proper analysis.   Surely it has to be part of Europe?  Hugo Young wrote, “It is not possible to be a European in any reasonable sense and to be against the EU”.   This dichotomy has to be recognised but there are very few political voices explaining it.   Suspicion of continental entanglements may be understandable but it is not viable as a national strategy.

The debate which must be had now about Britain’s future in Europe should surely rise above the mundane arguments about the economic pluses and minuses.  These arguments need to be addressed but they are secondary to the real debate.  The purpose of European integration was in its early days and still remains far more fundamental than arguments on international trade or access to services.  The basic purpose of the integration process, memorably put as I said was, to tame nationalism.  Behind this laudable aim was something even more fundamental.  It was to create a political entity that was an expression of the Christian values of the dignity of man and the equality of man.  Even the solidarity demonstrated by the transfer mechanisms of Social fund and the Regional Fund were rare expressions of this.  Nationalism is essentially a denial of these values.  George Orwell said that “nationalism is the worst enemy of peace”.  He also said that “nationalism is a feeling that one’s country is superior to another in all respects”.  I think that there is no better way of putting it.  It is sensible and clear.  He may not have been driven by a Judaeo Christian ethic but he was expressing one.

It is no surprise that UKIP, a party of nationalists, expresses its rationale for its own existence primarily in terms of antipathy to European integration and to immigration.  UKIP itself provides the clearest testimony as to why a constructive engagement with Europe is necessary.

It is worth noting that just as the British in Euro barometer polls have been consistently the most reluctant of the Member States populations about integration more Britains see immigration as a problem than other nationalities.   This has been established by a poll across Europe and the United States published a couple of weeks ago (Transatlantic Trends the Times 19^th September).  The figure was the highest among the people questioned in the US, Turkey, Germany, Italy, Netherlands, Poland, Portugal, Romania, Sweden, Slovakia and Spain and is not explained by the extent of immigration here.  It must in part be a response to the level of political criticism of migrants which UKIP fosters.   This is also a challenge to Christianity here.

Monnet, Schuman, de Gasperi and Adenaur, the Founding Fathers of the European integration process were all Christian Democrats.  They had witnessed a terrible European conflict that many of us appear to have forgotten.  They all rejected nationalism and had, from the outset, a moral purpose.  (I referred to it some years ago in greater detail the Cardinal Newman Lecture in Oxford University).  In 1951 Adenaur wrote to Monnet about the fact they were all motivated by a desire to provide “a new constitution of Europe on Christian foundations”.  The Catholic Bishops Conference identified the core motivation of the Schuman declaration of the 9^th May 1950 that launched the process as being “essentially an approval for mutual forgiveness and, as such, a profoundly Christian act”.  But in addition to forgiveness the whole exercise was about, and still is about, harnessing national sovereignty and containing it.   This was to be achieved  by a new system that rejected the old concept of the nation state that has been with us at least since Bodin wrote of it in De La Republique in 1583.  It was of course the Treaty of Westphalia that copper fastened the idea in legal terms of separate sovereignty that played such a role in the malign history that followed.  Jacques Maritain, the Catholic philosopher who played a decisive part in advancing the cause of universal human rights following World War II, wrote that “the concept (of sovereignty) is intrinsically wrong”.

While it would be absurd to expect that the tribalism that unfortunately has scarred Europe so badly will disappear we can surely fashion and develop political institutions that will constrain it.  Pure integovernmentalism, as exemplified by the United Nations system or the World Trade Organisation (both of which I have served), are important elements in ethical governance but, as we know, they have their limitations.  The European Union is an unprecedented attempt to go further through supranational law and governance.  Surely this unique experiment can still inspire us? Surely Christians in particular can still see in this experiment not merely an attempt to provide a new political context for the advancement of Christian principles but also the means to enforce them.  There have been for example in recent times some signs of the possible re-emergence of policies in at least one  new member State from Central Europe which seemed to threaten those values.  The European Union has played a crucial role in inhibiting this development.  So also has the European Union played a central role in the Balkan crisis and in Greece where, without it in the background, the trauma of the economic crisis might have led to even worse political consequences that those that we have witnessed.  The poll of attraction provided by the EU to aspirant new members and the desire of the vast bulk of its Member States to remain tells its own story.

If one can conclude that the motivation and purpose of the integration process is admirable then the question as to whether membership works to Britain’s immediate advantage arise.  Pragmatically in other words has it justified itself? There is an overwhelming amount of corroborative evidence to the effect that it has.

Apart from the positive evidence of the importance for Britain to have influence in the European Union as its neighbours and main trading partners, the question might be asked “what would happen if Britain left the EU?” Clearly it would have to renegotiate its relationship with the EU.  It would, no doubt, be in the interests of the other EU Member States to retain access to the British market and vice versa.  However, the result of this common objective would have to be negotiated and this would not be as easy as it might seem.  Britain would either have to join the European Economic Area (with Iceland and Norway) or agree to a free trade arrangement as Switzerland has done.  If Britain followed the Norwegian example it would still have to pay money to Brussels (in fact Norway pays more per capita today than Britain).  Also it would remain bound by EU regulations.  Having rejected the EU the question would surely be asked here as to what advantage was gained by leaving in the first place.  Surely the British people would be unlikely to accept such an arrangement and the fact that it would have no say in the adoption of future EU legislation.

What about the Swiss example? Switzerland under its bilateral arrangement is forced to comply with EU regulations relating to free movement of goods and it is not part of the free market in financial services.   If this were to be the result for the United Kingdom, as it well might, the impact on financial services here and on the economy as a whole would be terrible.

In summary, Britain will have great difficulty in negotiating a Treaty with the EU on the Swiss Model and in my view much of the City will be at risk of leaving the UK then because even the fear of losing the single Banking Licence that permits banks located here to a function throughout the EU will drive the sector to consider other alternatives.

The conclusion of the Economist of Dec 8, 2012 was that, if Britain left, “the most likely outcome would be that Britain would find itself as ascratchy rightoutside with somewhat limited access to the single market almost no influence and few friends.  And one certainty is that having once departed, it would be all but impossible to get back in again”.   Surely this must be an accurate conclusion.

So, everything may rest on a successful and substantive renegotiation.    To obtain this will pose difficult issues not merely for Britain but for other Member States also.  In my opinion, if the United Kingdom achieves anything meaningful in these negotiations, it will probably be at the expense of the integrity of the integration process itself.   Britain is already semi-detached in various respects (in particular from the Euro and Schengen).  It is only a part participant in the Justice and Home Affairs treaty chapter.  So the concept of a single undertaking shared by all has already been undermined substantially and largely by Britain.  Any more derogations would open up the reality of a Europe à la carte becoming the norm as France has, amongst others, already commented.   Others would be likely to have their own list of possible concessions to seek and this would undermine the whole project even more than has already occurred.

The other alternative would be to undertake general treaty revisions reducing the powers of the EU.  These would be applicable to all and therefore might be argued to avoid a Europe à la carte.   This, presumably would entail removing competences from the treaties for everyone or, at least, substantially reducing them.  This might be presented as the application of the subsidiarity principle in repatriating policy areas that, it will be argued, should never have been given to the EU in the first place.  However, I find it hard to imagine what these exclusions might be.  Unwinding treaties already adopted, in some instances by referendum, is not a task lightly undertaken and for some Member States might itself require a referendum.  I doubt that the required unanimity will be forthcoming for any substantive treaty change.  Contrary to some views this is a matter not simply decided by Germany.  And, for myself personally, I think that any substantial changes are not at all desirable.  It has taken a long time and very difficult negotiations to get to where we are.  We should not now attempt to unscramble the egg.

So the best that one can say is that today we are on a road to a very uncertain destination and not one that looks inviting.  This is evident when one looks to the details of possible repatriations.  One attempt to identify such areas for repatriation has identified twelve.  This is in the Civitas Report recently published.  These include the Common Agricultural Policy and the Common Fisheries Policy (retaking UK fishing waters).   Also it is proposed to install a new voting system creating a double majority voting for all measures affecting the single market so that a qualified majority is needed both from the Eurozone countries and, separately, from the non Eurozones.  Repatriating social regulation to British competence is another idea suggested.  This is the sort of list that many parliamentarians here might seek.  However it is not conceivable that anything approaching these changes will be achieved.

In the light of the foregoing it is clear that we may well be on a collision course.  If the Conservatives are in power on 2017 we will certainly have a referendum on membership, and it will probably be premised upon either a failed negotiation or on one that will have yielded far less than what might be considered acceptable to many Conservative M.Ps.  If Labour wins the next election it is unclear whether they will have committed themselves to hold a referendum but the pressure on them to do so will be great and it is not clear that it will be avoided.

The industry and services sector here should wake up to what is at risk.  Looking at the advantages of membership to be potentially foregone is instructive.  The EU provides about 50% of UK trade.  Far from globalisation reducing this percentage in recent years it has been growing each year for the last decade.  For example since 2004 the annual average growth in this trade has been over 4% (4.46% for exports and 4.32% for imports).  Total trade in goods with the EU has increased from £960 in the first quarter of 2000 to £1756 in the first quarter of 2013.  In addition membership does not interfere with other international trade involving the UK – it helps it.  The financial services sector has an enormous dependence and is the most important contributor to the national economy.  As I said being in the EU is vital for this.

Being within the EU provides a simpler more assured and legally enforceable access internally and externally than could be had outside it.  The strident positions taken by Japanese industry located in Britain has made the point.  (I do not even make the point that Britain exclusion from the proposed transatlantic trade and investment pact with the EU (if it even comes about) would be both ironic and damaging in the extreme).

So I hope that the current debate in Britain rapidly starts to focus on facts rather than emotion.  It should also focus on the broader political issue of the value in principle of the whole experiment.  Other Member States too should put down clear markers that whatever the strength of their wishes to keep Britain in the EU that their own room to manoeuvre is very limited.   For Germany, Ireland, the Netherlands and Sweden to be sympathetic to keeping Britain in as a part of the family is one thing but for this sympathy to be interpreted as being likely to give rise to substantial concessions would be a mistake.   I am afraid that expectations are already too high here and when and if they are dashed the threats to British membership will be exacerbated.

If there is a moral value in what European integration seeks to achieve as I believe there clearly is then Christians have a part to play in this historic debate.

This article was first delivered as a speech at Heyhrop College, The Specialist Philosophy and Theology College Of the University of London on Thursday 26 September.

The post Britain and Europe : From a Christian Perspective A Public lecture appeared first on Peter Sutherland.

Intellectually his interests and influences were famously diverse.  Although not generally known these included an interest in science but also, particularly, in philosophy and theology.

A friend, who accompanied Garret for many years on his intellectual journey, described Garret to me as a “universalist”.  This description has a particular resonance for this evening’s lecture.  The religious terms that particularly inspired this moral universalism are based on the acceptance of universal values and ethics.  I believe that he had in mind the fact that he did not believe in distinction based on race or national identity.

The Catholic philosopher Jacques Maritain, whom he met in his childhood, was sometimes mentioned to me by Garret in this context.  A Thomist, Maritain had been a friend of Garret’s father as a result of their joint connection to Notre Dame University in the 1930s.  Maritain was to be extremely influential in the post World War II period particularly in framing the Universal Declaration of Human Rights of the United Nations (surely the apogee of universalism).  So underpinning moral universalism is the concept of the natural law that interested Garret throughout his life.  He always seemed justifiably wary of nationalism and sought to channel it into a path that rather than being divisive had integration as its aim.

So in many ways he measured his political philosophy against moral principles that he believed to be universal.  The practical conclusions that he drew were ones from which he never deviated.  These were expressed in the autumn 1964 edition of the Jesuit journal Studies where he wrote “we have to look to more universal philosophies and wider traditions, first of all to the Christian tradition from which we derive the basic structure of our thought to such traditions as British liberalism whose emphasis on tolerance provides a new insight into the meaning of Christian charity; and to the socialist tradition which has helped to develop the sense of social consciousness inherent in Christian thought..”  As appears from this quotation, while his ultimate political home was to be within the Christian Democrat party grouping, his political inspiration came from the socialist tradition for which he retained an abiding affection.

Garret’s view on interdependence, European integration, sharing sovereignty and even globalisation were influenced by this belief in the oneness of mankind transcending all other divisions.  At a time of recrudescence of extreme nationalism in parts of the EU his views have a particular relevance.

But first a historic vignette:  throughout the 1960s Garret lectured in UCD on the economic aspects of European integration in particular and, in 1964, when I started my university studies in law, I also took economics as an optional subject.  I was prompted to make this choice because he was to be one of my lecturers.  His enthusiasm for Europe was infectious to young people because it was related to more than mere national interest and this was at a time when Ireland was opening up to the world.  His belief in the process of European integration through the sharing of sovereignty was later to be demonstrated by practical leadership when he was both Foreign Minister and Taoiseach.  It was also illustrated in his writings at an early stage in his political career when he advocated the supranationalist development of Europe. [1]

The “universalism” to which I have referred was reflected also in the thinking of the early leaders of the process of European integration.  For example, at an important meeting, when Adenauer and Monnet met in 1950 under the auspices of the Geneva Circle, they spoke of the forthcoming European construction as having a “general moral purpose”.

So Garret’s belief in European integration was driven by a belief in the cause of integrating Ireland in a Europe based upon shared and universal values, particularly associated in his mind with Judeo-Christian thinking.  This moral case for uniting our old continent sang in unison with his humanity and Christian beliefs and heritage.   This was a sentiment that he shared with many of the Founding Fathers of the European project, most of whom were Christian Democrats.  For example it is more or less exactly what Adenauer wrote in a letter to Robert Schuman on the 23 August 1951.  In Adenauer’s view this heritage provides all Europeans with common values based upon the principles of the dignity of man and the equality of man.  Fundamentally, that is why European integration was and remains a truly noble project transcending economic calculations of its value to particular participants.  Others such as the great German humanist philosopher and sociologist Jurgen Habermas have reached similar conclusions about its moral value coming from a different intellectual base.

In a famous speech in November 1981 in the Westminster parliament, Geoffrey Howe said that European integration was essentially about the “taming of nationalism”.  Thus, at its creation in the immediate post World War II period, it was intended to provide a means to foster the reconciliation between former enemies that had been so strikingly absent in the period following the end of the First World War.  This approach particularly appealed to Garret.

His own family background, though intimately connected with republicanism through both his parents, was emphatically not tribal in the sense of being exclusively Catholic.  He not only opposed irredentism throughout his life but he was even uncomfortable for the philosophical reasons already described with distinctions based in any way on race or religion.  He was much more an internationalist than a nationalist.  This antipathy to a tribalist approach to international relations remained constant in his approach to both Irish and European matters.  This did not reduce his sense of his own national identity but was an expression of it.  He was in this conscious of our differences from our large neighbour and in this he approved of Tom Kettle’s counsel to Ireland, though expressed in a different context, that in order to become deeply Irish she must first become European.

George Orwell wrote that a nationalist is essentially someone who thinks that his people are better than others.  It is as good a definition as any and, if one is truthful, a great many of us harbour such delusions from time to time.  Regrettably this delusion appears to be growing again in its appeal around Europe.  That kind of nationalist however thinks on lines with which a supremely rational liberal like Garret could never agree.  Like Jean Monnet (whom he greatly admired), he saw European integration as a step on the road not merely towards more global governance but also to the defeat of what Jacques Delors described, in an important speech in the European University in October 1989 in Bruges, as “triumphant nationalism”.  Garret did not agree essentially with the Hegelian view that, in principle, sovereignty must be preserved by traditional States.  He saw a brave new world of interdependence partially based on international institutions that had a real role in governance. He did not see such institutions as a threat.  He believed that a small country like Ireland in particular expanded its influence over its own destiny by sharing sovereignty and, by doing so, could also contribute a positive influence in international affairs.  For example, he never accepted the proposition that we had a sacrosanct “neutrality” that inhibited our engagement in European integration in defence or foreign affairs matters in principle.  In the context of Northern Ireland too he looked for institutional means to involve the different communities in sharing influence in which he was ultimately to succeed with the Anglo Irish agreement.  I even remember too advocating with him the concept of all Ireland courts to overcome difficulties regarding extradition in the early 1980s (as recent documentary releases in Britain testify).

As he wrote in Towards a New Ireland in 1972, European integration had for him an additional value and relevance as a means that might help to resolve the conflict in Northern Ireland by bringing both communities together.  The essentially tribalist nature of the divisions there are based of course on perspectives on history and perceptions of identity intimately connected with race and religion.  They are manifestations of forms of nationalism.  Garret believed that just as the sharing of sovereignty, promised at the foundation of the European project by the Schuman Declaration, would help to remove the hatred demonstrated over centuries by wars between Germany and France so too the joint membership of Ireland and Northern Ireland of the then EEC would help to dissipate our differences and transform our relationship on this island over time.  Regrettably in this he was to be proved too optimistic.  It is not irrelevant to this relative failure that both Unionists and Sinn Fein appear to be adamantly and consistently opposed to European integration (albeit for different reasons).  They cleave to their separateness even in the context of Europe.

As it did in the 1930s, the economic turmoil of recent times has provided fertile ground in many parts of Europe for the growth of extremism based on racism.  It is increasingly evident that this has assisted the rise of parties propagating an angry, xenophobic and anti-immigrant message.  No doubt this will be evident in the results of the forthcoming European elections and seasoned observers suggest that over 25% of the vote across Europe may go to such parties.  In the United Kingdom and France UKIP and the Front National both oppose the EU and are finding support in surprising quarters.  (55% of students in France, for example, say that they are considering voting for the Front National).  This rise in support is associated with two interlinking trends:  these are increasing Euro scepticism and anti-immigrant nationalism.   Each feeds off the other.  Recent polling evidence shows the strength of both the EU issue and migration on the rise of extremist parties.  In the Netherlands Geert Wilders the leader of the Freedom Party describes the Koran as “a fascist book”.  In Hungary the emergence of fascism has even given rise to some debate about how its membership of the EU may be at risk.  The True Finns party on the extreme right are gaining significant support in Finland.  Denmark too has its issues with extremism.  On the left the Syriza Party in Greece and the Five Star Movement in Italy are separatist insurgency parties presenting very anti-EU policies.

To its credit Ireland has not yet evidenced any marked degree of similar xenophobic reactions.  Nor have the considerable number of immigrants that have come to Ireland in recent years given rise to significant organised racist reactions.

Even though Ireland has not yet shown opinion poll evidence of tendencies of rising substantial support for anti-European views, it may be said that, over the years, our role in the political process of developing European integration has been curious in its occasional ambivalence on some issues of sharing sovereignty.  Indeed, as a result, our engagement with the constitutional development of the process has not always been a happy one.  We have had nine referenda since 1972 in order to ratify the Treaty of Rome and six subsequent treaties.  Garret FitzGerald fought all of them.  Having failed on two occasions (namely the Nice Treaty and the Lisbon Treaty) to pass referenda on treaties that most others found inoffensive (thereby necessitating a second plebiscite) fundamental questions have been raised across Europe from time to time about our real commitment to European integration.  After all when we joined the European Communities, the preamble to the Treaty of Rome stated its intention to lay “the foundation of an ever closer union of the peoples of Europe”.  It sometimes remains unclear as to whether we believe it.

Indeed we have not often been in the forefront of a debate advocating greater integration.  In the case of the Euro we were in the avant garde however in other cases to which I shall refer we were not.  But briefly in Garret’s time we were.  His appointment of Jim Dooge in 1985, and the report of the Dooge Intergovernmental Committee on Institutional Affairs which he influenced, led to the negotiation of the Single European Act (as Brendan Halligan set out in his excellent FitzGerald lecture in May 2013).  This Treaty was to enact some of the most important constitutional changes in the history of the European project.  Amongst its provisions, which Garret actively advocated, was the introduction of greater majority voting in the Council of Ministers for the passage of important European legislation relating to the Single Market.  This was therefore a significant practical expression of the sharing of sovereignty.  It caused some traditional nationalists, such as Mrs Thatcher, some grief at the time and indeed later.  Importantly the Single European Act also led, as part of a political process that it provoked, to significant increases in the structural funds.  This example of a “transfer union” of funds from richer to poorer states also challenged traditional nationalists elsewhere as it still does.  In particular, it challenges those who see the European Union as being no more than a market.  No doubt the recognition of how much we have gained from the structural funds, and indeed from the CAP, has influenced Irish public opinion positively.  It is worth mentioning also that during his period as Foreign Minister Garret had played a significant role in developing the Regional Fund that came into existence earlier in 1975.

According to Euro barometer surveys over the years, since the late 1980s the Irish people have remained extremely positive in their general views on the European Union and even on economic and monetary union in particular.  (On EMU, 70% are in favour of EMU in Ireland with only 19% in favour in the United Kingdom according to the most recent Euro barometer poll).

On the other hand, attitudes in the United Kingdom have been consistently almost the polar opposite to those in Ireland.  There, the electorate remain the most consistently sceptical of the EU and this is, as we shall see, relevant to our position in the British renegotiation talks.  The genesis of British negativism can be ascribed to various causes.  Hugo Young, the late author, has written that “Britain struggles to reconcile the past she could not forget with the future she cannot avoid.”  The United Kingdom is not alone in this.

I believe that where we have voted against European treaties this it has largely been the result of misinformation and confusion about their effects rather than deep-seated opposition to the whole project.  Who can even remember today the apocalyptic arguments of opponents to treaties on issues like neutrality?  We were told that we were going to have European armed forces conscription for example.  These often grossly distorted interpretations of complicated treaties contributed greatly at the time to people voting “no” in referenda.  Those who advanced some absurd arguments were never held to account afterwards.  Erroneous assessments of the possible effects of a new treaty are sometimes delivered from unlikely and apparently authoritative quarters.  For example, the majority judgment of the Supreme Court in the Crotty Case on Part III of the SEA relating to foreign policy (which, in turn, wrongly led, in my opinion, to a belief that some other referenda were required when they were not) presented a picture of the meaning and effect of that part of the treaty that was quite wrong.  It postulated damage potentially being caused to national sovereignty in foreign policy matters that had no substance.

It is clear yet again that the EU as a whole and Ireland now face serious challenges to the process of European integration.  These include:  firstly, the imminent likelihood of significant votes for extremist anti-European parties in the forthcoming European elections.  This may result in a powerful disruptive and anti-European force in the European Parliament and later in national parliaments.  Secondly, the continuing crisis of the Euro and, thirdly, the attempted renegotiation of the British bargain with the EU to be followed perhaps by its withdrawal and the negotiation of a new relationship.  All of these challenges are connected and are linked by the rise of nationalism.

I will discuss the Euro crisis first because it is the backdrop to and influences public reaction to the other issues.  This crisis has been correctly characterised by Mrs Merkel as an existential threat to the Union (and therefore by definition a major threat to Irish interests).  The crisis is not over.  A number of States, including Ireland, notwithstanding its considerable success in dealing with the crisis, still face formidable challenges.  The debt to GDP ratio of Greece is 182% with that of Portugal, Ireland and Italy between 120 and 130%.  New shocks are not to be discounted in handling these massive overhangs.  Taken in conjunction with the continuing difficulties with the reduction of budget deficits much remains to be done.  Greece is currently a case apart with Ireland already accessing the markets.  Portugal too is proceeding towards the exit from the bailout.   But all three are small economies.  Spain, Italy and even France are dimensionally much larger and more difficult issues to handle should political problems become manifest.  Then market reactions could be considerable to any serious political turbulence.  In this context Italy and France still have to make the necessary structural adjustments to increase competitiveness and these, such as freeing up labour markets, may meet with resistance.  The internal devaluations have been largely made both here and in Spain, and Ireland in particular has been justly applauded by the markets for what it has achieved.  We are undoubtedly the current success story of the EU even though we have some distance still to travel.

Of course the consequences of a failure of the currency would be so terrible that many analysts conclude that it would not at any price be permitted to happen.  A recognition of these catastrophic consequences has been reflected in comments by Mrs Merkel and Mr Draghi in particular.  A failure of the currency would almost inevitably destroy the Internal Market because of the rapid devaluation and revaluations that would occur with the national currency to follow.  But dreadful consequences do not always deter accidents occurring particularly in politics.  The means at our disposal to deal with such events are limited notwithstanding Mario Draghi’s undertaking to “do whatever it takes” to save the Euro.

The fundamental problem is that virtually the only route to the massive debt reductions required appears to be paying them off.  I say virtually because it is worth mentioning that the Programme countries have benefited from a material reprofiling of their central government liabilities that amounts to a present value restructuring through the replacement of maturing debt with long term loans.  I do not believe that this provides an adequate policy without other alternatives.  But the general and simultaneous rejection of inflation, default or debt forgiveness (combined with the impossibility of devaluation) as a means to achieve the necessary debt reduction leaves the highly indebted Eurozone countries with the prospect of years of potential difficulty.  The limited ECB mechanisms now put in place to maintain market stability though vital, have not been truly tested.  I refer to the Outright Monetary Transactions and the European Stability Mechanism.  Reliance on debt reduction alone combined with these instruments is not enough.  Germany (and the Troika) have of course been correct in principle in requiring the national administrations in the Programme countries to take measures to recalibrate their economies both through restructuring to increase competitiveness and deficit reduction.  Countries within a single currency area simply cannot live beyond their means without damaging others in the area.  However both pragmatism and the understanding of history that should influence it, should now prompt the Member States in general, that solidarity must also play an increasing role in solving the crisis.  The use of the balance sheet of the ECB and the systematic intervention that it has provided is only one part of the solution.  More active steps can and should also be taken to expand spending in the stronger economies through the expansion of domestic demand there.  In Germany now the minimum wage and proposed pension increases should raise consumption but perhaps too modestly to have a substantial effect.  Furthermore more fundamentally President Barroso has spoken of the need for “genuine mutualisation of debt redemption and debt issuance” and he was correct to do so.  Of course any such mutualisation may well be subject to conditionality but refusing to even contemplate the issue seems quite wrong.  Full banking union also needs to be concluded rapidly involving not merely a unified regulatory and oversight mechanism but a resolution capacity also.  In this we are moving however slowly in the correct direction but it will require an acceptance of an ultimate funding capacity that is dependent on mutual assistance and not merely national resources.  However this is the adhesive that investors were looking for to become more comfortable with the notion of EMU holding together.

However even though more needs to be done it is clear that we have moved a considerable distance to put in place a system that increases the federal aspects of the EU.  This was absent from the Maastricht Treaty, and should ensure that what happened in the past does not happen again in the future.  As a result the European Commission can now monitor and eventually veto national budgets before they are approved by national parliaments.  If this power were not given, the currency could not be sustained simply on the basis of trust.  We also have new commitments by the Member States relating to the implementation of national policies such as labour markets, pensions and taxation.  We have too the Fiscal Compact with its monitoring and sanction powers.  These various steps and others included in the so called “six pack” and the “two pack” have taken a major step towards an economic union.

An economic union to be sustained also however requires a political union and part of that is a functioning democratic system trusted by the people.  This will entail greater engagement by national parliaments.  Otherwise the resurgent nationalism that we now see will fatally undermine the whole project over time.

The conclusion that one can draw from this is that Ireland’s interests and role in policy formulation in future can best be advanced from the position of being a Member State unambiguously committed to further integration of the EU.  Ireland should maintain the intention of being in the leading group of countries committed to political union.  We have not always done so.  This will require us to argue for more not less Europe in different areas and not just debt mutualisation or other relief to our advantage.  We have to be seen to protect what has already been achieved not merely in this area of economic and monetary policy but more generally across the different policy areas.

Solidarity is of course, as I have said, a key element in a more united Europe but, in order to successfully develop the concept we have to simultaneously advance integration more or less across the board in other areas including foreign policy.  Opt-outs should not be seen as a desirable option.

In this context Ireland’s attitude to developing competences within the EU in the areas of foreign policy, defence and in justice and home affairs has been, to put it mildly, reticent and tentative.  The inclusion of a sub-article in the Constitution prohibiting the State from adopting a decision taken at the European Council to establish common defence including Ireland, in my view contradicts a true belief in political union.  This is now effectively irreversible and I for one regret it.  Ireland’s reluctance on this subject seems to me to result in part from ill-informed debates in the past.  We have been reluctant Europeans it seems even in an intergovernmental process.

In the area of foreign policy and defence the spectre of neutrality as some kind of immutable but ill-defined aspect of our political identity has, I believe, inhibited our legitimate support for cooperation on military matters although efforts have been made successfully from time to time to engage.  When questioned on this before we joined the EEC the government of the day made it clear that, when the time came, we would not be reticent about being part of a European defence project.  But we certainly have been.  In the past an important element of this reluctance was linked to a binary analysis of world affairs.  That world is no longer with us and the very concepts of non-alignment or military neutrality no longer have the meaning they once had.  With whom are we non-aligned?  Between whom are we militarily neutral?  Events over recent years in the Balkans have demonstrated how a united European response as the European Union may be required to avoid terrible events taking place.  The White Paper to be issued on defence is to be welcomed as a basis for informed discussion.

The policy response in Ireland to the area of EU Justice and Home Affairs policy when introduced by the Maastricht Treaty (and developed by the Amsterdam Treaty) was also tentative and reticent.  This exclusion provides another reason for Ireland not being considered in the avant garde or inner core of Member States committed to integration.  Ireland’s special position here (shared by two often reluctant Europeans, Denmark and the UK) has detached Ireland from the main group of countries.  The fact that we have a common travel area with the UK does not provide a complete answer as to why we have opted out from much that others have agreed.  Ireland’s position is described by Laffan and O’Mahony in their excellent book on Ireland and the EU as “detached and conditional” with a complex list of opt-outs in place.  Until Minister Shatter (who has been very constructively engaged) took office moves toward further integration in the fields of internal security and harmonisation of legal systems were “viewed with extreme caution” by Ireland.  [2].  Some other members of our legal confraternity seem predisposed to believe (like their counterparts in Britain) that there is something inferior in the Continental position although this may be based more on prejudice than actual knowledge.  We must not allow this policy to provide another signal to other Member States of a reluctance about integration that undermines our protestations of support for the process or indeed our demands for greater federalisation in other areas.  Hopefully the current policy review in this area of Justice and Home Affairs will be positive in its outcome.

The gradually unfolding drama of the British demand for “renegotiation” of its relationship with the EU is a further threat that we now face.  In policy terms this question may raise a conflict between two national objectives namely, keeping the United Kingdom in the EU on the one hand, and avoiding any steps that might be taken that would damage the character, essential competences or rights and obligations of membership of the EU on the other.  One such is the free movement of people or rights enjoyed by EU migrants but no doubt there may be others that will only become apparent when we have a fuller disclosure of the British position.

To amend any element of the treaties will require unanimity.  This in turn may necessitate a referendum in some countries including Ireland because taking something out from an adopted treaty may be as problematic as putting something in.

I do not believe that any further treaty change is desirable at this time but clearly, from what the Chancellor of the Exchequer said two weeks ago the British most definitely do.  He said then that the treaties were “not fit for purpose”.  But only the United Kingdom knows what treaty change in its opinion is necessary to make the EU “fit for purpose”.  In principle, there is unlikely to be much support for any treaty change but in this the Germans have been unclear.  The new Coalition agreement there does state “we will adapt the Treaty bases of the Economic and Monetary Union” but of course this, whatever it means, is related only for the Eurozone.  In any event Germany is not Europe.  All twenty eight Member States will have to agree.  Also even if treaty change is agreed by the twenty eight Member States to British demands it is hard to believe that whatever is agreed will be enough to resolve the British problem.  For one thing whatever happens is unlikely to assuage the 95 declared Eurosceptic Tory MPs.  Their objective clearly is to either so change the character of the EU as to destroy its essence and legal authority or to leave it altogether.

As to Ireland’s position on this as yet unclear situation, on the 16^th January the Minister of European Affairs, Paschal Donohoe, in an excellent speech delivered in London to a eurosceptical audience, put down a clear marker.  He referred to the Irish view of the great value of the Union as it is.  He said that it offers “the best chance for us to create a more prosperous, secure and open Europe”.  He also said that our desire to improve the Union is “explicitly based within existing treaties”.  The message was clear.  The United Kingdom is our friend and we share a great deal of common interests with it but there is a fundamental difference in our position on the EU.

Consistent with this position I believe that our national policy should compel us to oppose treaty changes which weaken the European project or undermine its core competences, its institutional prerogatives (such as the power of initiative of the Commission) or the values reflected in the rights that are central to its character.  We must however seek to constructively engage where possible with proposals intended to improve the efficiency of the institutions or European competitiveness.  One change that some argue for in Britain is the reduction in the size of the Commission that we opposed at an earlier time.  Then others including Germany were prepared to accept rotating membership.  I think that we were wrong in our position then.  The Commission is now too large to function as a College as it should.  In any event it should not be comprised of individuals who see themselves as national representatives as our earlier position implied.

Unfortunately my fear is that the United Kingdom has an unchanging and unchangeable perspective on sovereignty and that this may precipitate a crisis.  Its prevailing political position has constantly been to reduce the EU to little more than a free trade area and, even then, one with an essentially intergovernmental character.  By this I mean specifically an entity that merely entails cooperation between sovereign nation states.  For example the competences and authority of the European Commission and the European Court of Justice which are supranational are now being put in question by many parliamentarians even more vociferously than ever before.  This is particularly clear from the position of the 95 Tory rebels but it is more general than that and there are few voices expressing a different view.  In addition, and consistent with this, the United Kingdom has generally sought to diminish the budget of the EU and attack the Common Agricultural Policy.

I regret therefore that it has a radically different position to Ireland’s on the EU and its development.  While Europe badly needs all the qualities that the United Kingdom brings to the table such as its profound democratic credentials, its devotion to the rule of law and to an open market trading position, the price for its retention should not be the undermining of the very essence of the EU as it is.  We have to be clear on this.  One aspect of this relates to the concept of free movement of people that is particularly in the sights of eurosceptics.

The basic silence of other Member States regarding this British debate is being interpreted by some in the United Kingdom– wrongly in my view – as a willingness to move further by way of accommodation than will prove to be  the case.  The relative silence is because there is as yet nothing to debate.

If the British fail in the negotiation then it is hard to see any referendum on membership being passed.  Nor should anyone take consolation from the assumption that Labour, if elected, will not hold a referendum.  They have been studiously silent on the matter.

This is not the place to consider how matters will develop if Britain decides to leave the EU.  Suffice it to say that in such an eventuality negotiations under Article 50 will be conducted regarding the post membership situation.  It seems inevitable that Britain will adopt a model on Swiss or Norwegian lines that will retain market access to the British market and vice versa.  I feel sure that the mutual interest of keeping this access to markets reciprocally would mean that our export markets would not be damaged by a withdrawal.  It is less clear that the financial services in the City would emerge unscathed as they certainly have not in Switzerland.

In conclusion let me say that this uncertain future now demands approaches that go beyond short term self-interest.  The Irish Commissioner, Máire Geoghegan-Quinn, has accurately described Ireland as being “conditionally integrationist”.  We need less of the “conditionally” and more of the “integrationist”.  We cannot simply pick and choose the bits of the EU that we like and discard others.  If we can do so, then others can do the same.  Ireland should be part of the group that sees Europe as the answer rather than the problem.

[1] On which he commented in his autobiography

[2] Laffan and O’Mahony

This article was first delivered as The Garrett Fitzgerald Memorial Lecture at The National University of Island Galway on 31 January 2014.

The post European Integration and the Taming of Nationalism: The Garrett Fitzgerald Memorial Lecture appeared first on Peter Sutherland.

I. Origins of the WTO’s new Challenges

The multilateral trading system, most recently epitomized by the establishment of the World Trade Organization, is without doubt the most precious tool of global economic management and development we possess. Its record – in the form of the old GATT as well as its successor, the WTO – outshines that of any other economic institution. Over the past 50 years, it has created wealth in its industrialized members, brought poor nations from backward, rural economies to super-competitive commercial giants and moved the prospects for today’s poorest many steps forward.

To say that the WTO is in crisis is an exaggeration. The laws of economic gravity have not been rewritten because of the failed ministerial meeting in Seattle. The institution has already shown itself to be a success, and it has much more to offer. If there is a sense of frustration it is rather a reflection, on the one hand, of a perception that the WTO has not – and will not – resolve every problem facing the global economy and social development and, on the other, that the machine is out of gear, idling, and failing to tackle the new challenges presented by the process of globalization.

The WTO looks embattled and unpopular. Many governments appear to believe that they, and the institution, are best left to digest what has already been achieved. That has left other key constituencies displeased with the WTO’s performance and led some to be openly hostile. Some developing countries, which now comprise the overwhelming majority of the organization’s members, claim it is inherently biased against their interests and produces asymmetrical agreements. They are also disappointed by the level of trade-related technical support they have received from donor countries and other multilateral institutions in order to cope with the pressures of implementing WTO commitments. Lacking either the courage of their own convictions or confidence in their ability to prevail over domestic opposition, the chief financial backers of the WTO have failed to provide adequate funding for a WTO Secretariat (by far the smallest of all the major multilateral institutions) that is already overburdened by technical assistance demands as well as by dispute settlement cases and new accessions.

Industrial governments, sometimes acting as proxies for powerful civil society interests, are frustrated by the stubbornness of developing countries in opposing new measures or discussions on labour standards, environmental standards, and the transparency of WTO operations. Furthermore, there are growing indications that parts of the business community are growing impatient with the slow pace of WTO decision-making and dissatisfied with negotiating results that appear to them to be least-common-denominator solutions.

The organization is subject to a nearly unmanageable array of conflicting pressures. Some civil society groups are lobbying for its powers and mandate to be expanded. They want trade sanctions to be used to enforce agreements on labour, environmental, or other standards. Other civil society groups are pushing in the opposite direction. They want the WTO’s authority to be pared back in ways that they believe will strengthen existing social and environmental standards or protections.

At the same time, the WTO also is suffering from an alarming lack of leadership on the part of most of its largest members. The major industrial countries, whose unity has traditionally been essential to progress on substantive issues or institutional reforms, are divided. These same countries have done an extremely poor job of making a public case for more open trade and the continuation of economic liberalization upon which much of their current wealth is based. Several of them also have failed to provide adequate income and training support for those workers, primarily the lower-skilled, who have been adversely affected by trade liberalization. Follow-up to the electoral motto “Education, Education, Education” can be summed up in most instances as far too little, far too late. As a result, public support for open trade has been further undermined.

The breakdown of the Seattle Ministerial was an indication of the disturbing state of affairs in the trading system. Not that the picture is wholly black. Important work is taking place now in Geneva on the two key sectors – agriculture and services – designated for further work at the end of the Uruguay Round. This work is progressing well, if quietly, and has the potential to provide a significant boost to global trade expansion. But the conclusion of these negotiations – in some eyes at least – is wholly dependent on the launching of a broader trade round. And that, as Seattle demonstrated only too vividly, is not going to be easy.

In seeking to drive the process of trade reform further forward, the WTO faces one set of problems which relate to national politics – especially in the US – and which should be transitory, and another which could be called structural. Here we focus on the structural issues. Solutions to the problems of the WTO can be envisioned – and several promising ones have recently been proposed – for some of the organization’s problems. But, several of the more serious challenges the WTO faces are the consequence of much broader trends and developments. These challenges can ultimately only be addressed in the course of renovating the current system of global economic governance, of which the WTO is but a part. The WTO and the multilateral trade system it oversees are in trouble, in other words, less because of their own flaws, but because of more fundamental failures of global economic leadership.

This paper sets reform and strengthening of the WTO in the context of the emerging debate over global governance and proposes reforms in WTO structure and decision-making that respond to several of the organization’s key problems. The final section shifts to the challenges of global governance, particularly international economic governance. It argues that the WTO’s mandate must be adjusted simultaneously with the mandates of other international economic institutions, and that the issue of the coherence of the current multilateral system of institutions need to be addressed in a systematic way at the highest political level.

II. Suffering from Success

This is not the place to recite the history of post-war trade negotiations. Nor must one grasp all of that history to understand how the WTO arrived at its current predicament. It is important to underscore, however, that the WTO, in many ways, has been a victim of its own success.

For instance, the success of the WTO, and its predecessor, the GATT, in bringing down traditional tariff and non-tariff barriers to trade during the eight post-war global trade rounds was remarkable. In the five decades between the establishment of the GATT and the conclusion of the Uruguay Round, average tariff levels on manufactures in the industrial countries declined from around 40% to less than 4%. The value of world merchandise trade increased eighteen-fold during that same period, an average annual increased of 6%, or almost three times the average annual growth rate of per capita GDP.

The dismantling of border barriers during successive post-war trade rounds ultimately brought trade negotiators face-to-face with a variety of domestic regulatory, institutional, and structural influences on trade flows. Convinced that many of these trade-related factors impede the free flow of goods and services, trade negotiators began to tackle some of them in the Uruguay Round. Because they are closely linked to domestic business practices, cultural preferences, and political arrangements, some with deep historical roots, negotiations on these matters have tended to be more sensitive and complex than negotiations on traditional tariff and non-tariff barriers. Finally, the increasing ambition of multilateral trade negotiations in areas which had previously been regarded as the prerogatives of domestic policy-making has prompted a correspondingly wider range of civil society stakeholders to take an interest in what the WTO does.

The impressive record of the GATT and WTO in reducing trade barriers has profoundly influenced the calculations of developing country governments, trade negotiators, and civil society institutions. The drawing power of the GATT and WTO for developing and transitional economies is underscored by the existence of a thirty-country accession queue throughout the past decade. More than 100 of the WTO’s 138 current members are developing countries. Moreover, as many observers have pointed out, the performance of the WTO’s dispute-settlement mechanism has attracted the attention of a wide range of social and political activists, who wish to see the WTO’s enforcement authority put in the service of their favored causes.

But the achievements of the GATT and WTO only partly explain what is happening to the WTO today. Three relatively new critical trends go a significant way toward explaining the challenges now facing the WTO and the multilateral trading system. They are: 1) the increasing participation of developing countries in the GATT and the WTO; 2) the growing attention of multilateral trade negotiators to barriers to trade behind national borders; and, 3) the increasing influence both over the multilateral trade agenda and over the trade policies of key industrial countries of networks of civil society groups. Each of these trends merits more detailed consideration.

1. Developing Countries and the WTO. If the key international economic story of the first two post-War decades was the astonishing transformation of Western Europe and Japan from devastated recipients of reconstruction aid into first rank industrial powers and competitors of the United States, the story of the three succeeding decades has been the equally remarkable emergence of developing nations as significant players in the global economy. One measure of this trend is the share of developing nations in world exports, which has increased from 17% to nearly 30% since 1970. Another measure is the massive increase since the 1980s in investment by industrial country firms and portfolio investors, and increasingly by investors from emerging market countries, in developing countries. The ratio of the stock of foreign direct investment to GDP nearly tripled for developing countries, from 5.9% to 16.6%, between 1980 and 1999. Aggressively seizing export and investment opportunities created by the expanding world economy, a number of poor nations turned themselves into major industrial powers in just three decades.

These aggregate figures hide a tremendous diversity in the developing world, however. It is now necessary to distinguish clearly between the emerging economies and the middle-income developing countries, on the one hand, and the poorer countries, including those classified as least-developed by the United Nations. The latter have their own unique set of concerns about the trade system and the WTO, motivated by the fact that they are effectively isolated from the global economy. Contrary to the overall developing country trend, the share of international commerce of the world’s four dozen poorest countries, whose population exceeds one billion, is shrinking. Since 1980, the exports of least-developed countries have grown only one-fourth as fast as the developing-country average. The participation of the poorest nations in world commerce is limited in scope as well as depth. Unprocessed raw materials account for 75% of their exports. Most generate more than 70% of their export earnings from their three top exports. This dependence on a narrow range of exports also makes poor countries more vulnerable to external shocks, and primary commodities have lost half their value relative to other products over the past two decades.

The growing stake of developing countries in the world economy has both strengthened their claim to a role in its management and increased their confidence in asserting that claim. Historically, the poorest developing countries have been slow to assert themselves, even in the GATT and then the WTO. In both institutions every member country formally enjoys an equal say in the development of consensus decision-making – a feature that would appear to offer less powerful countries some leverage to achieve their aims. Until recently, the developing countries’ strategy appears to have been largely defensive. They have sought to ensure “special and differential treatment” and a series of concessions and exceptions from certain internationally-agreed disciplines on the grounds they were at a lower level of development to other WTO members

The Seattle meeting of the WTO demonstrated that the politics of developing country participation in the WTO has changed. While the media paid great attention to the protests in Seattle’s streets, these were not the cause of the meeting’s failure. Rather, it was the virtually total lack of consensus among the industrial countries, joined with the refusal of the developing countries to agree on the new round agenda and other issues which led to the breakdown of the discussion. The unified front presented by developing countries was not a surprise to many close observers of the WTO: many of the concerns raised by developing nation delegations in Seattle had figured prominently in ministerial preparatory sessions for more than a year prior to the event, and some have been staples of WTO discussions since the conclusion of the Uruguay Round. But the unprecedented unity of developing countries, and their willingness –faced with the refusal of industrial members to treat seriously the “implementation” issues they were insisting upon – to stand in the way of a consensus in favor of starting a new round, were surprising to many ministerial participants and observers.

The negotiating positions of some developing countries were made more difficult because of dissatisfaction over what was seen as a selective, exclusionary system of decision making in the WTO. The traditional so-called “Green Room” process, in which a group of up to forty member countries, including many developing countries, tries to reach preliminary agreements on matters under negotiation, and then present them to the rest of the delegations, came in for sharp criticism in Seattle. It would be wrong to exaggerate the problem, however. The Green Room approach has been used for decades and, for the most part, was able to accommodate all countries with a significant trade interest in the issues under discussion. What has changed is the number of countries able to participate in these smaller gatherings and wishing to participate even if their trade interests are non-existent or negligible.

Ironically, in Seattle, WTO Director-General Mike Moore and U.S. Trade Representative Charlene Barshefsky, the co-chairs of the ministerial, made a concerted, good-faith effort to broaden the participation of delegations in the negotiations. They divided the ministerial agenda into several sections, created working groups for each, and invited all delegations to participate in all the working groups. Their goal was to keep Green Rooms to a minimum. But developing country delegations, in particular, had difficulty covering all of the working groups, and as the ministerial week proceeded and agreements remained elusive, the temptation to pull together smaller groups of countries for harder bargaining – Green Rooms, in other words – understandably grew. In communiqués released towards the end of the week, large groupings of African and Latin American countries denounced the ministerial’s exclusive and non-democratic negotiating structure.

The governments of the so-called “Quad” countries (the United States, the EU, Canada, and Japan) made considerable efforts in Seattle to build winning coalitions between themselves and like-minded developing nations. But the growing numbers of active developing countries – a sign perhaps that technical assistance is finally making a mark on the capabilities of poor nation delegates – had transformed not only the politics but the math of bargaining in the WTO. Events in Seattle clearly suggest that the WTO is testing the limits of its consensus-based decision-making system, which would appear to be ideally suited for an organization of no more than several dozen active members.

Poorer developing countries have long complained that WTO discussions are dominated by a handful of powerful member countries. Many developing nations simply lack the Geneva-based staff and resources necessary to cover the WTO effectively, some have no representatives in Geneva at all. In addition to an extensive weekly schedule of formal meetings, WTO members come together in various groupings for a large number of informal gatherings, during which many of the organization’s most important decisions are hammered out. A group of influential developing countries are routinely invited to these meetings (e.g., Argentina, Brazil, Mexico, Egypt, India, South Africa, ASEAN members), but the majority do not participate. Even if they are aware that a meeting is taking place, some delegations argue, they are rarely invited to participate; even if they are invited, many lack the staff or expertise to participate effectively. According to some developing country representatives, they are frequently confronted with “take-it-or-leave-it” decisions which they had little role in shaping.

Before and during the Seattle Ministerial, developing countries also aggressively pressed concerns on the “implementation” of Uruguay Round agreements. They argued that industrial countries had failed to implement – in the spirit, if not the letter – some of their commitments faithfully, particularly in the crucial textile and agriculture sectors and in the anti-dumping agreement (with the United States singled out for special criticism). Dozens of countries also demanded additional time and technical assistance for their own implementation of the TRIPS, TRIMS, Customs Valuation, and Government Procurement Agreements. Many countries believe they should have been given “credit” for unilateral trade liberalization measures taken pursuant to structural adjustment and other economic reform programs.

In order to avoid marginalization, the LDCs have sought two additional measures in recent years: technical assistance from the WTO and aid agencies that will enable them to participate more effectively in the WTO and in multilateral trade negotiations, and duty-free access to major export markets. Both matters were discussed at length prior to and during the Seattle Ministerial, and further negotiations have taken place since then. But a worthwhile LDC package has yet to be approved by Quad countries, leaving these poorer nations deeply disappointed in the WTO.

Reasonable people can disagree about the legitimacy of each of these developing country complaints about the WTO. Some of the criticisms are overstated, some are made for bargaining purposes, and developing countries can sometimes be faulted for failing to acknowledge the gains from the Uruguay Round and other trade liberalization initiatives. The important point here is to recognize that these concerns are sometimes strongly felt by developing countries, that developing countries have come to dominate the WTO numerically, and that they are increasingly willing to use their numbers to thwart the negotiating objectives of the WTO’s more powerful members. The economic emergence of developing countries thus poses a significant – though, we would argue, healthy – challenge for the governance of the multilateral trading system.

2. The Changing Character of Trade Negotiations

The evolving character of multilateral trade negotiations poses the second major challenge confronting the WTO. Many observers have argued that the relatively “easy” work of multilateral trade liberalization had been completed by the end of the Tokyo Round in 1979. The Uruguay Round together with many regional and bilateral liberalization initiatives have, since, completed the elimination (in certain industrial sectors) or dramatically reduced most tariffs, quotas, and other border barriers to commerce. Outside the very high levels of protection maintained by industrial countries in sectors like agriculture and textiles and the still generally high tariffs in many developing nations, the chief obstacles to increased international commerce and the rapidly expanding electronic delivery of goods and services, are now said to lie elsewhere. Domestic regulatory measures, business practices, structural impediments, competition policies, and other features of domestic economies, whose purposes are often not directly related to the regulation of trade, are now the focus of attention.

Two analysts have aptly described this change in the predominant focus of trade negotiations as a “paradigm shift”. This is not a theoretical proposition, however. A number of significant liberalization initiatives, and several more presently under discussion, have grappled with these new “trade-related” issues. Prominent examples include the Uruguay Round’s services, TRIPs, TRIMs, and government procurement agreements, as well as parts of the agricultural trade deal, the investment-related provisions of the NAFTA, and any number of the EU’s single-market initiatives.

Not surprisingly, negotiations on these new paradigm issues have proven extraordinarily complex and contentious. The policies and practices targeted in these negotiations are often far less transparent than traditional border barriers. They sometimes have deep roots in national history, culture, government-business relationships and institutions. As in most trade talks, trade ministries typically lead national delegations in these negotiations, and trade ministers are jealous of their turf, but expertise and authority over new paradigm issues often reside in other ministries and with other officials, with different agendas.

It is often the case with the new issues that a wide variety of domestic constituencies — constituencies with little or no direct connection to the trade sector — perceive themselves to have a stake in the policies and practices affected by these liberalization initiatives. But the challenge for trade negotiators does not, of course, only come from the defensive efforts of domestic stakeholders seeking to protect policies, practices, and values-linked trade. Increasingly, in recent years, non-governmental groups have taken the initiative in insisting that certain values (e.g., labour and human rights, environmental protection) are in fact linked to trade and should therefore be addressed in trade negotiations. And the stakeholder groups concerned about these linkages — both defensive and “offensive” — are often as interested in the implications of trade for policies and practices in other countries as they are about conditions in their home countries.

The trade/labour and trade/environment issues have proven especially contentious for at least two reasons. First, the stakeholders that take an offensive posture on these issues (mainly industrial country NGOs and trade unions) want environmental and labour standards to be enforced with trade sanctions. Those that take a defensive posture (developing country governments that view trade-linked standards as a disguised protectionist threat, but also industrial country environmental NGOs concerned that certain kinds of trade liberalization will undermine existing standards) tend to be equally highly motivated and do not want these issues discussed as part of trade negotiations. Second, as the first point implies, industrial country and developing country stakeholders tend to be on opposite sides of both sets of issues. To be precise, in the WTO, as elsewhere, the relationship between developing country governments and industrial country civil society groups is emerging as a key source of tension.

One must be careful about making excessive generalizations about the labour and environment issues, however. Multilateral discussions on the trade/environment link are much further along than are discussions on trade and labour issues. Several WTO agreements directly or indirectly address environmental matters, and the WTO’s Committee on Trade and the Environment, although criticized by many for failing to find solutions to key outstanding issues, has served as a useful focal point for discussion and analysis – two prerequisites for consensus. On the labour standards issue, in contrast, there is nearly unanimous opposition to the creation of a trade and labour standards working group inside the WTO. It is worth noting that, in contrast to the WTO’s discussions on trade and environment issues, which enjoy broad multilateral support, the case for a formal WTO program of work on trade and labour standards has been made principally by one country, the United States.

Although the concerns that motivate them are extremely diverse, those who seek to address these new paradigm issues through trade negotiations often share a common aspiration: the harmonization of regulatory standards, laws, and business that vary from nation to nation. Collectively, their efforts raise fundamental questions about global governance: should the harmonization of standards be a goal of international economic bargaining? Will it occur even without deliberate efforts by governments? Can the global economy achieve its full potential without significant further harmonization of standards across nations, just as successful national economies required the unification under common standards of constituent political units (e.g., states or provinces)? Or can national differences be maintained without substantial losses of efficiency? Can and should a variety of national approaches to the regulation of the economy be maintained simultaneously, or will globalization inevitably lead to convergence between nations? To the extent that harmonization is pursued, how should nations decide which standards to apply? Does the political sustainability of global economic development require the adoption of common social and economic safeguards (e.g., protection for rights and the environment, social safety nets) analogous to the kinds of safeguards that have proven critical to the success of national economic systems?

It is clear from these preliminary questions that the WTO as an institution, and the trade ministers principally responsible for guiding its work, are not equipped to address such issues. This is not to suggest that the WTO should not take up new challenges. A plausible case can be made for discussion of many new issues in the WTO. The question that needs to be asked of each issue, though, is whether it is ripe for WTO treatment. Is there agreement on what part of a particular issue is affected by trade and is therefore a legitimate concern of trade negotiators? Is there something like consensus on the question of whether there ought to be a common international standard in a given area, against which national measures can be judged in violation? Introducing new issues into multilateral trade talks before they have fully ripened risks damage to open trade, to the values motivating the advocates of the new issues, and to other values.

In the absence of greater international consensus on the broader governance challenges noted above, most efforts to introduce new paradigm issues into the multilateral trade system have been highly contentious. The record in the WTO during the past several years confirms this, and the damage to world trade – so far mainly in the form of lost opportunities for further liberalization – has been sizable.

3. The Role of Civil Society in the Multilateral Trade System

Although many besieged trade officials in national governments and the WTO might not agree, the involvement of civil society groups in trade policy debates can be a positive development for the multilateral trade system. Some of the perspectives and concerns that these groups are bringing to bear on governments and on the WTO are a valuable counterweight to the industry perspectives that, in some countries, are still the dominant external input into official trade policy discussions. But the growing involvement of NGOs in trade policy often is not as constructive as it should be, and figuring out ways to make it so is the third major challenge facing the WTO and the multilateral trade system.

Several issues need to be addressed. First, there is a need to devise mutually acceptable mechanisms for coordinating the input of civil society groups in the WTO and in the preparation of multilateral trade negotiations. The principal burden of managing the contributions of civil society must continue to be shouldered by the government of the country in which a given NGO is located. However, some NGOs have become large global institutions and others have forged international alliances. This together with the supra-national character of many of their concerns may argue for additional measures to be taken at the multilateral level.

Many WTO members will oppose steps that appear to give NGOs a formal role in an inter-governmental organization. For their part, some NGOs might regard any formalization of their contributions to multilateral trade discussions as a form of co-optation. Both sets of concerns can be overcome, as long as the role of NGOs remains an advisory one and national governments retain the sole right to negotiate within the contractual framework which the WTO represents.

If NGOs were to be given an informal advisory role in the multilateral trade system, though, they must accept additional responsibilities. In particular, NGOs must become more accountable to the public and to governments. Too often in recent years, NGOs involved in trade debates have made questionable claims about the scope of public support for their positions. Information on sources of financial support has also often been hard to come by. Ironically, corporate participants in trade debates tend to be more transparent in both respects, often because the laws of their home nations require them to be.

Without additional information on NGO membership and finances, it will be difficult for governments to make well-informed judgments about their work or, in cases when it is not possible to consider all relevant views, to make decisions about which groups should be given an opportunity to address a particular issue. In exchange for any role in trade policy debates – largely at the national level – NGOs will be constrained to accept new standards of disclosure for membership and financial data.

III. A More Agile WTO

The long-term viability of the WTO, and of the multilateral trading system, requires action by governments on two levels: the first is within the WTO itself; the second concerns the governance of the multilateral system, of which the WTO is a part.

This first step is to address the problems and challenges described in the previous section in order to make the WTO a more agile organization. These include the knotty issue of trade and labour standards, increasing “transparency” within the WTO, and improving decision-making within the institution.

Defusing the Labour Standards Debate

The relationship between trade and labour standards has been a highly contentious issue in the WTO since the United States first proposed the establishment of a WTO working party. After some fifteen years of unresolved debate, one may wonder whether time will ever be ripe for dealing with them in the formal part of the WTO’s work. Now, as before, the question is not about the intrinsic importance of labour standards, about which there is no doubt: it is, rather, about the most relevant and effective way to promote the observance of internationally agreed labour standards.

The majority of developing country governments question the sincerity of the labour rights concerns expressed by advocates of a formal trade-labour link in the WTO. These governments believe that a desire to protect high-wage manufacturing jobs from lower-wage competition is the primary motivation for industrial country pressure on this issue. Developing countries are also convinced that any discussion of the trade-labour nexus inside the WTO is bound to evolve into formal negotiations that will, ultimately, culminate in the use of the WTO’s enforcement authority to curb their exports. As a result, developing nations — the countries whose labour practices would, presumably, be subject to the most intense scrutiny — refuse to support the creation of a trade-labour working group within the WTO, let alone the incorporation of labour standards in the institution’s legal provisions – the so-called “social clause”. Indeed, developing country attitudes on the issue seem to have hardened over the past few years.

The result of the campaign to make labour a formal part of the WTO’s work program has poisoned the negotiating environment for a variety of other important WTO issues, including some that matter a great deal to the United States. Before and during the Seattle ministerial, a large number of developing countries appeared to support a negotiating strategy under which their agreement to support the launch of a new global round would ultimately be contingent upon agreement by the United States and others to drop the labour rights issue. Although there were, of course, other preoccupations on the part of poorer nations, no other single issue has acquired this “make or break” status in developing country calculations on a new trade round. From this point forward, unless it is taken off the WTO docket and moved to a different venue, the labour standards issue will pose a major obstacle to further trade liberalization, in which all WTO members have a stake.

In the near term, multilateral discussions of labour issues probably can be more productively and effectively addressed outside of the WTO. Even if differences in labour standards and practices are believed to confer certain unfair competitive advantages, those standards and practices will ultimately much more likely respond to development policy than to trade policy. Even if the WTO can enforce its agreements through a dispute-settlement system that can authorize the imposition of compensatory trade sanctions the system is likely to be more effective in changing trade policy than as a tool of economic and social reform.

There are only two reliable long-term ways to help developing countries improve wages, labour standards and their enforcement. The first is to help them to achieve higher and more equitable growth, which will lift wages; and the second is to provide technical assistance and financing to trade unions to strengthen their organizing efforts, and to government labour authorities to bolster legal regimes and enforcement capabilities.

Labour rights do indeed belong on the international agenda, both in their own right and because it is not possible to argue that labour practices and labour standards do not impact trade, and vice-versa. But they need to be handled by an institution with the competence and mandate to address them with the seriousness they deserve. The ILO is the obvious candidate. It should be strengthened, and receive the support necessary to carry out this task.

Tackling the trade-labour issues would clearly benefit from a coordinated program of research and multilateral dialogue among key stakeholders. Such a process need not take place in the WTO for it to be effective. During the Seattle ministerial, the EU had proposed the initiation of trade-labour discussions in a forum that would have been jointly supported by the secretariats of the WTO and the ILO but would not have a formal constitutional tie with either institution. Developing country governments had expressed some willingness to consider the EU proposal before the ministerial collapsed. That proposal should be revived.

Discussion of trade and labour issues outside of the WTO would stand a better chance today of narrowing gaps in the understanding of key facts and building common ground on potential multilateral steps than would talks within the WTO, where developing countries remain in a defensive crouch. A discussion of trade-labour issues outside of the WTO appears to be all the multilateral traffic can bear at this point, in any case, and advocates of a WTO trade-labour discussion should be willing to settle for it. If their arguments have merit, they will make headway with their opponents. One can even imagine that, over time, the protagonists in this debate will be able to agree on the scope of a subset of trade-labour issues that would be appropriate for formal WTO negotiations.

Increasing “Internal” and “External” Transparency

Some developing country governments and non-governmental organizations are concerned about the “transparency” – the openness of decision-making – in the WTO. Their dissatisfaction has become a point of controversy within the organization.

It must be said that a considerable number of developing countries – large and small – have long been at the heart of GATT and WTO decision making. In many cases, involvement has been a simple reflection of the skills and engagement of their Geneva representatives. Nevertheless, there are too many, for the most part least-developed countries, that see themselves partially or wholly excluded from key WTO activities through deficient “internal” transparency. They believe that, notwithstanding the WTO’s extensive schedule of formal committee and working group meetings, important matters are routinely discussed and decided in small, informal gatherings to which they are not invited or in which they lack the staff or expertise to participate. For some developing nations, the WTO often has the appearance of a “black box”, an institution from which decisions affecting their interests emerge in a mysterious and unaccountable fashion.

Civil society groups also consider the WTO opaque. But their focus is on so-called “external” transparency – the ability of the public to obtain information about, and comment on, the WTO’s deliberations. NGOs object to the remaining restrictions on the public circulation of secretariat background papers, meeting agendas and minutes, and submissions by governments and others to dispute proceedings. They want dispute panel rulings to be distributed more rapidly – as do some governments – and some propose that NGOs be permitted to submit amicus briefs to dispute panels.

The WTO has taken modest but useful steps over the past few years to expand the scope of information about its activities available to the public and to give civil society groups opportunities to exchange views with secretariat officials and national delegations. But the chief transparency demands of the NGOs have been staunchly opposed by developing country governments, principally because they view the interests of many of those stakeholders, particularly with respect to environmental or labour matters, as inimical to theirs. They are concerned that influential civil society groups are more effective than they are in working the WTO system. Many developing country WTO delegations are, indeed, outnumbered by the Geneva-based staffs of a number of NGOs, and some NGOs have closer links with industrial country WTO delegations than do developing country delegations.

One key to advancing both the WTO transparency concerns of civil society, and the effectiveness of the WTO as an institution, is to take steps to strengthen developing country capacities to participate in the WTO’s proceedings. If these countries felt themselves better able to promote their interests in the WTO they might be more comfortable granting external stakeholders increased access to the organization. Enhancing developing country confidence in the WTO, therefore, may be a prerequisite for enhancing civil society confidence in the WTO.

This argument reinforces the importance of Director-General Moore’s campaign, launched after the Seattle ministerial, to substantially boost budgetary commitments for technical assistance to developing country WTO members. Developing countries need assistance in a wide variety of trade-related areas. They already benefit from substantial programs organized by the WTO and a wide range of other multilateral and regional institutions. But they clearly need far more. Further assistance geared toward improving capacities to formulate trade strategy, to negotiate, to coordinate with like-minded countries, and to understand WTO rules and obligations would be especially useful in changing developing country perceptions of the balance of influence within the organization. Unfortunately, the response of industrial country WTO members to the Director-General’s appeal so far has been disappointing.

Improving Decision-Making in the WTO

Significant changes will be needed in WTO decision-making procedures, not only to address developing country grievances but to enhance the organization’s ability to conduct its business efficiently.

During the press conference announcing the failure of the Seattle meeting, U.S. Trade Representative Charlene Barshefsky put the matter quite bluntly, saying “the WTO has outgrown processes appropriate to an earlier time”. Chief EU trade negotiator Pascal Lamy blamed the Seattle collapse on the “procedures and structure of the WTO”. These sentiments were echoed by comments from many other senior trade officials.

The crux of the problem is that the consensus-based decision-making system unofficially adopted at a time when the GATT had just a couple of dozen members has become unwieldy in an organization of almost 140 members. So, if consensus is to remain by default the preferred mode of decision-making – and there is no reason to believe that WTO governments will accept any other approach, especially one involving the wider use of voting – new mechanisms for improving the effectiveness and speed of consensus-building must be adopted.

Some variant of an executive committee arrangement could be the most promising mechanism for balancing decision-making efficiency and the requirement of consensus. The collapse of the Seattle ministerial has prompted several proposals for an executive committee system. They deserve a careful consideration and discussion by WTO members.

Under such a system, the majority of WTO members would delegate to a group of roughly two dozen governments authority to work on their behalf on matters before the General Council, both between and during ministerial meetings, and other formal sessions. The executive committee’s role would be strictly limited to consensus-building on negotiating frameworks and solutions to specific problems.

The executive committee would not have authority to make final decisions on behalf of other WTO members. All WTO members would still need to discuss and sign off on executive committee agreements. But if it were balanced in its composition, accountable, and trusted by WTO members, the executive committee should be able to expedite decision-making by the full membership.

The membership would have to be representative, and should reflect a combination of geographical balance, importance to the multilateral trading system (as measured by trade volume), and caucus size (as measured by the number of countries in a particular income grouping). A handful of major trading nations would have individual seats on the executive committee. Most nations would be represented by countries with which they have regional or economic ties. The members of these groupings would decide amongst themselves which delegation would assume the grouping’s seat, a choice that might vary from meeting to meeting, depending on the subject matter.

One recent exercise came up with a roster of twenty country and regional members. If a plausible executive committee can be designed with just 20 members, the challenges of finding a workable formula should not be insurmountable. Indeed, there are real world models for this sort of arrangement. Over the past two years, a geographically and developmentally diverse group of finance ministers, the so-called “G-20”, has held out promise of productive discussions on reform of the international financial architecture. It may offer a helpful starting point for a discussion of a WTO executive committee.

Why should either developing country WTO members or Quad governments support an executive committee arrangement? The answer is simple. The interests of both sets of countries are not served by the status quo. Recent events suggest that, without some improved means of building consensus, future WTO negotiations are likely to be, at best, less productive and slower than they have been in the past, and deadlocks are likely to be more common.

The industrial countries will not be able to dominate trade discussions as they have in the past. An executive committee would provide Quad countries more assurance that trade liberalization could move forward. And for the poorer developing country members, an executive committee would offer something that the current Green Room system does not: more hope that their concerns will be weighed in the WTO’s most sensitive deliberations.

At present, the influence of this large group of under-represented poor nations over WTO affairs is almost exclusively defensive or negative in character; it derives largely from their scope to be difficult and oppose consensus. Countries wishing to advance a positive negotiating agenda need to engage with other WTO members in a more intensive and sustained manner. An executive committee offers a mechanism for that kind of engagement.

The final step that member governments must take to strengthen the WTO is to increase the institution’s budget and the size of its staff. When the WTO agreements were being negotiated, nobody anticipated how active the dispute-settlement body would be, nor how large would be the demand for technical assistance. The WTO is by far the smallest of the Bretton Woods institutions. Its overburdened staff is unable today to respond to all member country requests for information or assistance. Rhetorical support for the WTO by some of its richest members has not been matched by resource contributions. The WTO staff does an impressive amount with very little; several million dollars more funding would enable it to offer an even more impressive program of research, consultation, and technical assistance. It should do so under an effective and efficient “integrated framework” with related institutions

IV. The WTO in the System of Global Economic Governance

There is clearly much that WTO members can do, acting largely through their trade ministries, to make the WTO a more agile decision-maker and to give key government and civil society stakeholders more confidence in its work. But there is just as clearly also a limit to what WTO members can do within the organization itself. If the challenges that face the organization are to be understood and fully addressed, the WTO’s place in the larger system of global economic governance will have to be considered.

It is obvious to many observers that the development of the world economy is outpacing the capacity to govern it, both at the national as well as the international level. Inadequate global management makes it harder for governments and countries to take full advantage of the opportunities of globalization. It also threatens political support for an open world economy. More effective management, in turn, will require new policies, institutional reform, and a leadership strategy consistent with the challenges ahead.

Governments currently have to deal with the challenges of the 21st Century through a set of institutions designed for the world that emerged after World War II. It is important to recall, however, that there was an underlying logic to the design of the post-World War II economic system. What we might call the “logic of 1945″ was no less essential to the success of the world economy than were its formal institutions and rules.

The key institutions established after World War II were each given a distinct role in a single overarching mission: to promote growth and stability through the progressive liberalization of economic activity. The International Monetary Fund’s task was to promote commerce by helping to maintain financial stability. The World Bank was responsible for financing the reconstruction of war-damaged economies and the development of capital-constrained countries. And the GATT, an agreement that ultimately evolved into an institution, was designed to expand trade through the elimination of tariffs and other trade barriers. Each of these key institutions responded to a specific perceived failure in the management of international economic relations between the wars.

Postwar leaders were convinced that a liberal international order would maximize international economic stability and growth. But they were concerned that the domestic impact of liberalization could undermine political support for a liberal international system. The logic of 1945 emerged from this concern. It held that, to be successful, international liberalization had to be “embedded” in social compacts in which governments provided for the social welfare needs of their citizens in exchange for public support for an open world economy.

At the heart of the logic of 1945, then, lay an historic compromise between international liberalism and domestic interventionism. Examples of this compromise could be seen in national measures to cushion the impact of the open world economy, and in international rules that permitted countries to opt out of selected liberalization commitments. The GATT, for example, permitted certain “safeguard” actions to protect domestic welfare goals, such as current account stability. Controls on cross-border capital flows were commonplace, as national governments sought to defend the autonomy of domestic macroeconomic policy. The balance of payments support provided by the IMF — international intervention to stabilize national economies — also consistent with this historic compromise, as was the establishment of the World Bank as the source of lending initially for reconstruction and then for development. (The ILO, which had been established after World War I, was already responsible for labour conditions and employment).

Two other convictions were shared by postwar leaders. One held that a sound international economy required the widest possible inclusion of nations from the ranks of the war-damaged and former enemies. The other held that national governments were the only international actors of any consequence, and that, therefore, economic diplomacy would be reserved for them and for the international economic institutions they controlled.

The impact of globalization has made the “logic” of the post-war period obsolete. This is not the place to argue the pros and cons of globalization. The important point is that it is now obvious to most analysts that, in a variety of ways, the political authority of governments no longer corresponds to the geography of the markets and production networks in which firms and workers now operate.

When looked at from this perspective, it is apparent that the WTO is suffering from governance deficits and leadership deficiencies at the global level – and that it is not alone in that regard. The weakness of other multilateral institutions, and the inadequacy of existing decision-making fora, has increased the demands on the WTO to deal with issues not heretofore within its mandate.

Labour and environmental issues are the two most notable cases. As noted earlier, pressure for the inclusion in trade agreements of provisions on labour standards and the environment has been firmly opposed by developing country governments. The resulting tensions have damaged the WTO’s effectiveness and played a significant role in stalling further liberalization efforts. These pressures have been brought to bear on the WTO not only because of the attraction of its unique enforcement power, but also because the institutions that might be expected to deal with labour and environment issues either do not exist or are weak.

On paper, the ILO should be the preferred institution in which to pursue discussion, research, and action designed to improve labour rights protections worldwide. It has considerable staff expertise on these issues, a unique tripartite governing structure that includes representatives of each of the main stakeholder groups on labour issues (trade unions, business, and government), and an established program of technical assistance on labour rights enforcement. Contrary to what many believe, the ILO even has enforcement power, although its system is certainly not as strong as the WTO’s if only because it does not have the power to impose trade sanctions.

But governments and trade unions generally view the ILO as an ineffective institution, and the ILO has, it must be admitted, not done enough to earn their confidence. This has prompted labour advocates to turn their attention and their hopes to the WTO whose only means of addressing the enormously complicated challenge of improving labour standards would be the threat or application of punitive trade sanctions.

Similarly, environmental activists have looked to WTO trade agreements for help in enforcing environmental standards that are not otherwise covered by environmental agreements. This pressure has prompted the proposal for the creation of a world environmental organization, a global institution with the power to enforce a range of environmental agreements. On the other hand, doubts that negotiations on such an institution could ever succeed, have led to calls for the adoption of international agreements covering individual environmental problems, each with its own enforcement mechanisms, possibly even providing for the imposition of trade sanctions. Several such agreements already exist, but pressure to put the WTO in the service of environmental enforcement has not diminished.

As noted previously, pressure from environmentalists and others also is pushing the WTO in precisely the opposite direction, further complicating efforts to chart a course for the organization. In the view of some activists, as well as some of the most committed free-traders, the WTO has already been given excessive jurisdiction over issues that would have been better left to other multilateral institutions or decision-making mechanisms, or to national governments. Environmentalists worry, for example, that WTO dispute panels are setting international environmental policy through their rulings. Some free trade advocates believe that intellectual property rights issues should not have been introduced into the WTO through the TRIPS agreement. In these and other areas, however, where there is a demand for multilateral policymaking, competent alternative institutions to the WTO do not exist.

The political pressures on the WTO, and the weaknesses or absence of institutions to deal with these issues highlight the need for a political process to allocate institutional responsibilities. Many issues can plausibly be described as “trade-related”, but unless its mission is radically changed, the WTO will only be well-equipped to deal with some of them, or certain portions of some of them.

Where, then, is the decision to be made about what issues should be the business of the WTO (and the national trade ministries that guide its work), and which should not? Certainly, the WTO itself cannot make those decisions, because these are ultimately matters of institutional competence, and, as in any well-managed system, effective decisions on institutional role and missions can only be made at a higher political level. But those discussions are not taking place and decisions are not being made. That has given well-organized advocates of various issues or causes ample opportunity to engage in “venue shopping”. Because of its ability to levy trade sanctions, the WTO frequently has been the venue of choice.

Other key international economic institutions are suffering from the same deficiencies in multilateral governance. Over the past decade, the IMF and the World Bank have each come under simultaneous pressure both to expand and contract their mandates. The Fund has been given a steadily expanding role in the prevention and management of financial crises, but it is also being pressed by a number of thoughtful critics to hand over some of its development-related lending to the World Bank. The World Bank has been criticized for taking on too many issues (often with the encouragement of its major stockholders), and the division of labour between the World Bank and its regional counterparts is coming under increasing scrutiny. The current mandates of the institutions overlap in a variety of areas, wasting resources and perhaps undermining the effectiveness of both institutions. Every couple of years, the leaders of the Bank, the IMF, and the WTO pledge intensified collaboration on development-related matters, but their work with each other and with other organizations (e.g., UNCTAD or the ILO) has been disappointing. In June 2000, for example, the three institutions themselves concluded that a high-profile collaborative effort to deliver improved trade-related assistance to the world’s least developed countries – the so-called “integrated framework” – had performed well below expectations.

Weak or non-existent institutions, overlapping and ill-defined mandates, inadequate organizational cooperation, and the absence of a mechanism for deciding who does what — these are the global governance problems that are burdening the WTO and undermining the effectiveness of other important multilateral institutions and policy initiatives. But the impact of this “global governance deficit” is being felt even more deeply. The globalization of economic activity has outpaced the efforts of national and international policymakers to redraw the rules and standards necessary not only to ensure the stable and equitable expansion of markets, but also to deal with the economic and social dislocations that are inevitable in a globalized world economy. This gap between globalization and policy can be seen in the difficulty with which global financial authorities responded to the financial crises of 1997-98 and the ongoing struggles of governments to adapt trade, intellectual property, and other laws to electronic commerce.

A Globalization Summit

If the promise of a global economy is to be realized, and the perils of globalization minimized, the existing economic, social and political institutions will need some renovation, redirection, and a clearer division of labour. They also will require much more financial and political support than they now receive from some countries, notably the United States.

There is currently no supra-institutional decision-making process guiding such an effort. There is a need, therefore, for some high-level process to determine the appropriate division of labour among existing multilateral institutions, to decide when new organizations or capacities need to be created, to supervise the strengthening of existing institutions, and to assign issues or problems to particular institutions, adjudicating jurisdictional disputes, or enforcing cooperation among organizations.

These tasks clearly require concerted, broad and high-level political leadership. Central bankers and ministers of trade, finance, labour, environment, and development must all play advisory roles, but only heads of government possess sufficient authority and prestige to make the necessary decisions. Existing mechanisms for organizing high-level economic leadership are inadequate. The G-8 is too narrow in its membership. The annual meetings of the World Bank and the IMF bring together the world’s finance ministers and central bankers, but their discussions are preoccupied with narrow finance issues. WTO ministerials are devoted solely to trade issues. The yearly gathering of heads of state for the opening of the UN General Assembly is too ritualized.

We propose a new mechanism for marshaling global economic leadership: a carefully designed summit meeting of heads of state — a Globalization Summit. The Globalization Summit would be dedicated to addressing the key governance challenges associated with globalization. The meeting would not be a negotiating session and would not supersede or replace any existing forum. It would involve a structured but informal discussion.

The goals of the summit would be to identify areas of common concern and to try to reach consensus on how to respond to them. The discussion would include an assessment of the adequacy of existing multilateral institutions and agreements. At the conclusion of the summit, the participating heads of state would decide whether to reconvene again. We believe they would find such a meeting sufficiently useful that they would choose to meet again. But the widest possible participation in the initial meeting requires, we think, that no government be asked to make a long-term commitment to a process of unknown value.

To be successful, the countries invited to participate in the Globalization Summit must be broadly representative of the world economy. While it might be desirable, in principle, for the leaders of all the world’s governments to take part in the summit, a gathering of that size would be a logistical nightmare. Two dozen heads of state would perhaps be the ideal size for such a meeting: large enough to allow broad international representation, but not too large to prevent genuine give-and-take. In addition to heads of state, it would probably also be useful to include the heads of the World Bank, the IMF, the WTO, and the United Nations.

Which countries would participate in the Globalization Summit? Several selection schemes could be explored. One approach might be to use the memberships of the Development and International Monetary and Financial Committees of the World Bank and IMF as a guide. These include most of the major economic powers, plus constituency representation for smaller economies. Another option would be to include three groups of about eight nations each: all or most of the major industrialized countries; leaders of emerging market nations; and leaders of least-developed countries. Priority must simultaneously be given to ensuring roughly equal participation from the world’s five major geographic regions: Africa, Asia and the Pacific, Latin America and the Caribbean, North America, and Europe.

The precise agenda of the summit would be determined by the participating governments, but a committee of independent experts would be charged with preparing background material and a proposed agenda. The material prepared by the experts group would be used to structure the discussion. It might also include recommendations for action. This structured approach to discussion has been used successfully before, most notably in the APEC context.

We are realistic about the prospects for a gathering of this kind. A single meeting of a couple of dozen heads of state will not be able to make decisions on all of the difficult governance issues discussed here. But we also believe that a meeting of this kind would call forth an immense research and analytical effort on the part of specialists and institutions worldwide. Some of that work would feed into the preparatory process for the meeting. We also would expect that the run-up to the meeting and the meeting itself would generate intense media interest and public discussion, improving global public understanding of economic governance challenges. And if, as we expect, the summit initiates an international debate over how to reform the system of global economic governance, the first summit will probably not be the last.

The main message of this chapter is that the WTO is very important but that changes need to be made to increase its effectiveness in order to meet the challenges posed by globalization. It is important to understand, however, that the WTO is only one part of a system of global governance that now needs refurbishment and a clear definition of the functions of the various multilateral institutions. Only a combination of internal reforms and changes in the patterns of global governance will ensure that the WTO will achieve its full potential.

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Ladies and Gentlemen, good afternoon and thank you for that very generous introduction.

I feel very honoured by the invitation to speak at this event.

It is also a pleasure to perform on home territory… When Mary Lawlor first mentioned this event she reminded me of my own involvement in the ratification of the two major UN Covenants which support the Universal Declaration of Human Rights; the covenants on Civil and Political Rights, and on Economic, Social and Cultural Rights.

Since then the Berlin Wall has fallen. The world, with minor exceptions, shares one economic system. Capital moves freely around the world. And news moves just as freely and even more quickly, thanks to global communications. Many countries of the world which were inaccessible to companies from Europe and North America have now been opened to western businesses. Trans-national companies find themselves in new places with new issues to manage. And they also find themselves under scrutiny, in the media, and by an active ‘civil society’ of Non-Governmental Organisations and agencies.

We have also seen, in Vienna in 1993, 171 States reaffirm the Universal Declaration at the World Conference on Human Rights. In his opening address at that conference, United Nations Secretary-General Boutros Boutros-Ghali reminded us that “equality of opportunity for development is a prerogative both of nations and of individuals who make up nations”, and that “the right to development is a human right”. This is a key role of Business.

Business provides the economic vehicle to provide the fundamental human right to development, for nations and individuals. Business, in other words, is essential to the development and protection of human rights for the 5 billion people on this globe. Without development, and without business, I believe fundamental human rights cannot be secured. Far from being in conflict one is dependent upon the other.

 So business has a key role to play. But it must do it responsibly. With economic development must come environmental stewardship and social responsibility and there must be a new acceptance of this responsibility. This is all very well in theory. In practice business finds itself faced with new, complex, and challenging situations.

Business finds itself having to deal in a practical way with human rights issues. This is not a matter of choice but a reality in this global environment. And getting it right is not only a matter of ethical behaviour and moral choice. Enlightened business people have realised that good business is good business. Good business is sustainable, is part of global society not at odds with it, and reflects values which are shared across the world.

“I see it as a question of responsibility”

I see it as a question of responsibility.For example, a company which abuses its workforce, or a company which employs forced labour, is not only in breach of the Universal Declaration and the Vienna Declaration, but is flying in the face of civilised thinking all over the world. Such a company is acting irresponsibly in an area over which it has direct influence. And in a world of increasing transparency and global communication, such a company is also foolish if it thinks such behaviour will not attract attention. Even if moral imperatives are discarded self interest should dictate responsibility.Companies have direct control over their own staff policies in their own operations, and must be held responsible for ensuring their performance meets international expectations.

Codes of conduct lay down the expected behaviour, but are not in themselves enough. Codes must be backed up by an assurance process within the company and a way to verify that assurance process for shareholders, customers, employees, and society. Verification must also be done to accepted standards. In the same way as Financial and, increasingly, Environmental reporting is verified by objective professionals in the field.

Assuring and examining those operations over which a company has direct control is relatively straightforward. And if it is not yet common practice throughout the world, I expect it will not be long before it is. Consumers, shareholders, staff, and good managers will make it happen. But business interacts with society around it, and deals in many areas over which it does not have direct control. In these areas, such as suppliers and contractors, and joint-ventures, companies have varying amounts of influence.

Influence varies according to the nature of the deal, the competitive situation, and the business environment. Good business practice for many years now has been to build close relationships with suppliers, distributors, and partners. This practice will increasingly raise standards through competitive forces. Such forces don’t just drive down costs, they also raise standards as leading companies demonstrate the benefits of responsible behaviour.

We are seeing major developments in this area. Non-Governmental Organisations and industries, have been working together to establish standards. Leading companies and NGOs have been working towards common goals. Last year Christian Aid, for example, published its “Global Supermarket” report, and Sainsbury’s initiated its ethical monitoring programme. Another example is the Council for Economic Priorities in the USA, working with manufacturers, human rights groups, labour groups and certification/audit firms in addressing child labour in the production of sports goods. Initiatives such as these have not, yet, extended to the capital-intense industries but the principles must surely be the same. We must always remember that we are not in the business of satisfying our own consciences, but we are in the business of global development. Early attempts to stop the use of child labour in Bangladesh resulted in child unemployment, child prostitution, and children working in dangerous metal smelting works rather than the safer conditions of a football-stitching factory. We now understand that the eradication of child labour requires the provision of schools, education, and development.

 Approached in this way, business is truly contributing to the securement of human rights in the course of global development. As I said earlier, relationships between companies and contractors vary according to the nature of the deal, the competitive situation, and the business environment. In some industries, in some countries, progress will be slower than in others. But the general principle of building closer relationships based on shared standards is good business practice and will raise standards across the world.

I have talked so far about business dealing with human rights issues in its own operations, where it has direct control, and promoting standards in suppliers, contractors and partners, where it has influence. But business has increasingly been asked in recent years to exercise influence in a broader arena. To influence governments. Let me say straight away that I do not subscribe to the view that companies do not have influence with governments, or, if they do have it, do not exercise it.

Business has, quite rightly, always argued its corner. It is appropriate for companies to describe the commercial impacts of the fiscal environment, to governments and to consumers and to shareholders and staff. And in engaging that debate, companies are inevitably having an influence. The real question is not whether companies have influence, but do they use what influence they have responsibly.

We must remind ourselves that business influence in politics can be a force for bad as well as good. It was business that helped Adolf Hitler to power in Germany in the 1930s. And in the 1970s, society was rightly concerned about multinational companies exerting political influence. We must be cautious about encouraging business to take a political role.

So yes, business has influence. But it also carries huge responsibility. And the way in which business influence manifests itself is very different in different countries. Some in business say ‘Why should business stand up and lecture Governments on human rights? Our business is to look after our shareholders”.

Well, I don’t believe that business should stand up and lecture governments on human rights. But I also believe that it is part of building good sustainable businesses to help establish safe, secure, stable and peaceful societies. Business thrives where society thrives. We don’t have to look far for an example of this. Look at the investment confidence in Northern Ireland during the first cease-fire and after that cease-fire broke down.

It is appropriate for companies to point out to governments the impact of social or environmental policies on commerce. Just as it is appropriate for companies to point out the impact of fiscal policy on commerce. This is not a call for lectures or public posturing. But it is a recognition that it is legitimate for companies to engage in discussions about the commercial impacts of unsustainable development.

In practice, this must be managed in different ways in different situations. Sometimes publicly, sometimes quietly. I realise this approach does not satisfy those who have a deep-seated distrust of corporations. It is seen by some as a way of avoiding dealing with human rights issues. I think it is essentially a matter of trust or mistrust of corporations.

Trust is established through relationships and track record. In South Africa during apartheid there were companies who crassly profited from that system. There were also foreign companies who, driven largely by consumer pressure, withdrew from South Africa. There were however also companies who did not withdraw because they believed they could make significant contributions to the transformation of South Africa, by engaging the ANC and other groups, by being exemplary employers, and by having the courage and conviction to act as islands of normality in an abnormal society. These companies also faced pressure from consumers and others who perhaps were not aware of the positive contribution such companies were making. That positive contribution did not escape the attention of leaders such as Nelson Mandela. And let me say it again – such companies were acting not only ethically but in a fully commercial manner.

So businesses sometimes need a tough skin to deal not only with human rights issues but also with the attention of a media which is not interested in a ‘business does good work’ story. I have talked about only a few aspects of business and human rights. I have shared with you my view that responsible companies see human rights issues as part of their business environment, that responsible companies are dealing with their own operations through standards and openness, that they are increasingly building relationships with suppliers and contractors to raise standards. And yes, business has influence. But that influence must be used with great care, and will be exercised in different ways in different situations.

Responsible business is playing its rightful part in global development and in social development. Business must re-establish trust with society. That will be done by example, not just talking as I have been doing. It is right that business is scrutinised and that good business is rewarded with praise while bad business is punished with exposure. I believe that business is a fundamental force for good, for economic development, and for environmental and social improvement.

And for the rights of 5 billion humans. It has been a privilege to be here today. Thank you for asking me, and thank you for listening.

This speech was delivered by Peter Sutherland to Amnesty International.

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My purpose today is to link Ireland’s strategic interests to our engagement with the European Union and the current turmoil in markets surrounding the Euro.

The Euro itself is in many respects a great success. Even in recent times it has increased in value against the dollar. It has helped to deliver growth in the Euro area in its first decade at a rate per person that is more or less equal to that of the US. Within the Euro area there has been an increase of 50% in trade volumes over the first years of the Euro and Ireland has been a great beneficiary of this. Average inflation for the first 12 years was 1.97% which is far better than any Euro member had achieved over preceding years (including Germany). Also looked at collectively, the budget deficit of the Eurozone is 6% as against over 10% in the US. The success of the EU itself and the Euro in particular is vital to our national interest because we are a small open economy depending overwhelmingly on free access to European markets.

Ireland therefore has a vital interest not merely in managing our own affairs properly but also in contributing as best we can to sustaining the European project as a whole and sustaining the Euro in particular.

The successful conclusion of the European Summit on the 21st July last underlined the reality that, as Angela Merkel put it; a break-up of the Euro is for her and many others “unthinkable”. She has used other words such as “inconceivable” in the past but this constant expression of confidence in the durability of the common currency has not inhibited many familiar critics particularly in the United Kingdom and the US from voicing again their conclusions that the Euro is doomed. Indeed the risk of political accidents is very evident whatever Mrs. Merkel may say. The next period of weeks will be of great importance and potentially dangerous not least because many countries including Germany still have to adopt the legislation necessary to give effect to the agreement of the 21st July increasing the funds of the European Financial Stability Facility to €440 billion. Greece is of course another reason for concern.

If Greece were to default on its obligations, other than through an agreed restructuring programme, the likely effect in my opinion will be contagion not merely to the other “programme” such as Ireland but possibly even to Spain and Italy as well. This would threaten the whole edifice. So also would what Philip Rosler the German Economics Minister and Leader of the Free Democrats has described as an option (which certainly should not be one) namely – “an orderly bankruptcy of Greece”.

We in Ireland have a brief opportunity now to put clear blue water between ourselves and others and perhaps to surprise the markets with the demonstration of our resolve. In fact I agree with Jurgen Starks conclusion that the Government should capitalize on improving market sentiment towards Ireland by front loading cuts outlined in the bail out plan although I recognize how politically difficult this would be. But the prize would be great indeed if we did so because it would indirectly help to open up credit again in the economy through the funding opportunities that would result.

The improvement in the way we are viewed is the result of our economic and political responses to the demands of the EU institutions and the IMF. These have properly been considered exemplary to date and the external perception of our position has stabilized as a result. Part of the reason may be that Ireland’s global companies are better placed to by-pass the difficulties in the banking sector than elsewhere in Europe. The spread between German and Irish bond yields have reduced significantly. They can invest as a result. However, we continue to maintain a substantial and unsustainable budget deficit. In 2010 the deficit was 12% of GDP which is equivalent to €11,164 per head of population. The public debt to GDP ratio was 96.2% (equivalent to €33,121 per person). Two days ago the IMF projected a fiscal deficit for Ireland of 10.3% for 2011 and 8.6% for 2012. (With Greece running at 8.2% for 2011). The bottom line is that our deficit is the highest in the EU (the third programme country Portugal was at 9.1% last year). So the basis for the trust that is developing is fragile and it is the key responsibility of the government to increase this trust if it can. I recognize that this is not an easy task because global growth – and European growth forecasts are being reduced. But there is no avoiding what we must do. We must deliver a budget deficit reduction of €3.6 billion at the very least and preferably more. In this context it is worth noting too that since January of this year our international funders have agreed to release to Ireland €30.5 bn. This is a startling demonstration of the current dependence that we must reduce and deserves to be recognized in internal debate.

I do not want to recite verbatim what Professor Philip Lane amongst others has written recently but his logic is unimpeachable. The bottom line is that taking account of various factors not recognized in our programme we must look again at the €3.6 billion to establish if it is enough. The factors included the following:

Our GDP growth forecast for 2012 will be reduced. On the other hand we have the advantage of improvements in the interest rate on European official funds so our debt servicing costs will be significantly reduced. But the really important conclusion is that the external environment is much worse and the government should seriously consider what additional measures could be taken to bring our spending into line with the revenues it can now expect. The confidence that this will evoke in those who may lend to us (and indeed in those domestic consumers and investors) will be considerable. Lane has correctly concluded, “The next few weeks should be pivotal for Ireland’s economic prospects”.

Let me turn to another point. Some commentators have been particularly critical about the Eurozone Member States response to Ireland’s case. Much of this criticism has been unfair although some aspects of the behaviour of our partners has left much to be desired. However, on the other hand, it should be underscored that the interest payable to the ECB for the €89 billion currently advanced to our banks has been incredibly low at 1.5%. Also the core countries which maintained reasonable discipline over their own finances have their own political problems about what are easily (if inaccurately) described to their electorates as handouts to countries which have lived and still live beyond their means. The question is legitimately asked why countries with large fiscal deficits continue to maintain costs in their economies that are far higher than in the donor countries who are bailing them out? President Van Rompuy said in the London School of Economics last week ‘Without the fiscal irresponsibility of some countries we would have no crisis.’ It is impossible to dispute this and we are one of them.

Some here have also been highly critical of the negative comments made by people like Jurgen Stark. It would be better to answer his points of criticism (if we can) than in railing against them. Most of what he said was fair.

So, assuming the eurozone passes through the next weeks relatively unscathed and the system holds together what is required to sustain the future of the Euro in the medium-term? It is clear that the Maastricht Treaty failed to protect the currency because it did not go far enough. It created, in the Growth and Stability Pact, limits on budget deficits and debt but it did not provide the means to keep under surveillance, and ultimately control national budget policy (or even to really influence it). As a result The Growth and Stability Pact was first breached by Germany and France with apparent impunity and then, we and others breached it much more seriously. The Euro Plus pact has already been effectively agreed. To provide for future discipline correctly its adoption will be necessary to maintain the continued support of Germany and indeed others, such as The Netherlands, for the whole project. It is clear that the European currency requires substantial powers of oversight and influence over, national economies and their budgets to ensure that national policies conform to European obligations. Without this the Euro cannot survive. This should include the power to fine recalcitrant States on the initiative of the European Commission. The final adoption of the so-called “six pack” of measures for the future is, as Commissioner Olli Rehn has put it “a fundamental element” in Europe’s response to the debt crisis. The core countries not merely can but should insist on it. So should we. None of this requires tax harmonisation but it does demand the means to ensure national fiscal prudence. In recent days the Dutch Premier and his Finance Minister have spoken about the need to anchor what has been agreed more firmly and to take tougher action to enforce discipline in the future. This must include gradually increasing sanctions against those who breach agreed obligations and less freedom of action at domestic level to transgress agreed parameters. This may involve requiring of us more tax or less expenditure (But not by defining precisely where or how. That is for national parliaments). I believe too that Member States should be required to include a balanced budget provision in their constitutions or in a superior form of national law that cannot simply be overridden at will. We should be absolutely firm in our support for the increases in integration required by these moves.

So, we have no alternative but to pursue difficult policy options and the commendable resolve of the government should not be undermined by those who apparently fail to recognise how serious our position remains.

This is the text of speech Peter Sutherland delivered to the Institite for International and European Affairs, Dublin on 22nd September 2011

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One of the most common myths about Ireland is that we have a superior education system. In fact, we do not at any level. However, as we have seen over the last couple of years, the deficiencies in our system are increasingly commented upon by well intentioned Chief Executives of major foreign companies that have invested in Ireland.

The deficiencies in our educational system are particularly evident in the second and third levels. At second level we have a dysfunctional school year with substantially fewer teaching hours devoted to our young than elsewhere. Our school holidays too make no sense and are duplicated no-where else. In mathematics and science the results are relatively poor. This is hardly surprising as fewer than half our secondary school teachers of mathematics are specifically trained to teach mathematics. We are nowhere near the top quartile in our performance generally and the absence of accountability and autonomy in secondary schools is deeply worrying for the future. The OECD’s Programme on International Assessment scores us badly for mathematics and science. In science we rank just above average. The result has been lower points required for admission to university courses in science and engineering. John Herlihy of Google has commented on the adverse affect this has had on Ireland’s capacity to attract a large engineering centre for Google.

Here, as with just about everywhere else in the Western world, we are told that our future depends on our success in having a first rate third level system. The National Development Plan 2007-2013 states, ‘…that the quality of Ireland’s higher education system is vital to our social, cultural and economic well-being.’ In one respect we have done well: we are one of the better performers in the OECD in terms of graduation output and this is no small achievement but this should not give us much consolation if the quality of our degrees decline relative to similarly advanced economies.

Let me be clear: I recognize that our current straitened circumstances will preclude dramatic advances in funding. I accept the priority that the government must give to reducing the budget deficit which literally threatens the future of our state. But I think there are other areas of great waste in the public services that should be the main focus of government attention. Even before the current crisis it had been established by the OECD that investment at the top level would require us to increase our spending by 47%. To achieve parity with Finland which has a widely admired knowledge based economy would require us to increase our spending by 23%. This is particularly regrettable because Ireland, even before the crisis, was spending less than the average on education and more than the average on other areas, (for an example, health). The core Exchequer funding to the seven universities in Ireland in 2010 will be 24.5% lower than in 2009 levels. Whilst this will be offset by some additional income mainly through the ‘free fees initiative’ the overall reduction will be 6-7% over 2009 levels. This is the case notwithstanding the fact the Irish universities student/staff ratio for 2008/09 was 19.6 : 1. In Warwick University it is 13.6 :1 and York 13.1 : 1. This ratio is likely to get much worse with the continued expected surge in student numbers from 160,000 it is today to 200,000 by 2020. Even if we cannot in the short term hope to emulate our peers in other developed economies we should not let things get worse.

Accepting, therefore, that our main focus should be not just reform of the system but also supplementing the income of the universities from other sources, to where can we turn for more financial support?

First of all let me turn again to the question of fees. This has been effectively removed from public debate because political parties refuse to face up to the issue. They cannot be allowed to do so. The fundamental issue is that we can either refuse to have student fees and suffer the serious decline in the standing of our universities which will take effect virtually immediately or we can look at what has been done elsewhere and follow the recommendations already provided by independent analysis from the, OECD, Royal Irish Academy, the Higher Education Authority, the university heads and the National Competitiveness Council. Are all of these to be summarily dismissed by our political system? Our young deserve better. We should explain that fees do not necessarily mean an actual payment by students.

Look at the British system. The British system is based on student loans. These are only to be repaid when the borrowers are earning £15,000 or more and the amount one repays is directly related to earnings: borrowers repay 9% of their income above £15,000. Borrowers are charged an interest rate equal to inflation which is, of course, less than the government’s cost of borrowing. I need hardly add that those who have third level education have a substantially increased likelihood of earning power beyond those who do not have third level education. In addition there are various schemes to help the disadvantaged.

The British Higher Education Authority has established that since the introduction of the fees scheme there has been a significant increase in the participation of young people in higher education. Furthermore Higher Education Funding Council for England research shows that in the last five years there has been, ‘a significant and sustained increase in the participation rate of young people living in the most disadvantaged areas (representing 20% of young people)’. The research doesn’t attempt to analyse what might have happened without the 2006 reforms but the results are still telling. And this is just one example. There are many others.

Apart from the absolute necessity to revisit the decision not to proceed with fees I would like to touch upon a couple of other issues that have to be taken on frontally. First of all I would like to correct a headline which has been cited to me numerous times since it appeared in the Irish Times. It was alleged in a headline that in a speech I gave I spoke of reducing the number of seven Irish universities. I never said anything of the sort. What I did say was that Ireland should not have seven full service research universities. I repeat it today. Nor do we need every degree in every university. Nor should we have scientific research in each of our universities in every area. In addition, we badly need a policy for rewarding excellence not merely in research, where there has been some real progress (through Science Foundation Ireland and now latterly PRTLI – Programme for Research in Third Level Institutions) but also in teaching. The progress in research funding is evident from the latest government funding figures for PRTLI which appear to significantly differentiate on the basis of ability to deliver. I congratulate the Taoiseach, the Minister for Education and the Department for having a robust but fair process to lead to this conclusion.

In most other places there is a clear tendency to seek out excellence and to have institutions of third level in leadership positions – France, Germany, Australia, China, India and the USA provide examples. The French have granted increased autonomy to twenty universities and President Sarkozy has spoken of creating, ‘the best universities in the world’. Similarly Germany’s, ‘excellence initiative’ seeks to support leading research universities. Denmark too has been moving. It reduced from twelve to eight the number of universities and created three national research institutes. In both New Zealand and Scotland the core grants from the state for universities contain a portion that recognizes the quality of teaching and research performance. In Ireland the Higher Education Authority does not formally award separate teaching and research elements of the core grant made to universities. About 5% of this grant is distributed on the basis of research performance but this is largely based on PhDs, student numbers – and is too small to have an effect. So, in core funding we do not really differentiate and should do so here also and not merely in the grants under the PRTLI.

In England and Wales the Higher Education Authority in its Strategic Plan notes, ‘that there are some things that other universities can do better, and that limited resources would be better concentrated where they will be most effective.’ In Ireland we often appear to prefer to duck the political issues involved in a differentiation. If we continue to base the bulk of our funding on the number of students we will ultimately end up in a position where because of the huge numbers of students relative to teachers there is no way that students have direct contact with their professors, lecturers or tutors.

Another point that deserves comment is the fact that, currently, we invest substantially more per student in Institutes of Technology than in universities. Now I am a believer in the institutes. Massachusetts Institute of Technology and Georgia Tech are amongst the very best third level institutions in the world and we need similar excellence here. A national higher education system must meet diverse social and economic demands; it must address the needs of the academically accomplished and those with limited prior educational attainment. It must accommodate those with extensive social supports and those with few and it must serve the complex technical demands of the knowledge and the equally complex requirement to better understand ourselves and our society and conserve and contribute to our cultural heritage that is the particular but not exclusive remit of the social sciences and humanities. So we need highly autonomous institutions with different missions, objectives, strengths and capacities which together meet national needs. We need first class institutes of technology and these too should specialize and differentiate themselves.

We have 7 universities and 14 institutes of technology with a total of 165,000 students. New Zealand, with a population of 4.4 million has 8 universities and 20 institutes of technology. Scotland has 15 universities serving 205,000 students (having converted the polytechnics to become universities post 1992). The funding models in Scotland and New Zealand are similar: institutions receive a core grant from the State some of which is awarded for volume and quality of teaching activity and some of which is awarded for research performance. This latter allocation is an important differentiating factor with research universities receiving significantly more funding than other institutions.

In Ireland the core grant per student (which should include an amount that is research related) is greater in institutes of technology than in universities. The total figure for this undifferentiated funding is €710million and is approximately €5,000 per full time equivalent student for the universities compared with €7,000 per student for the institutes of technology. There is no rational explanation that I can find for this.

The conclusions to be drawn from the evidence are therefore clear. We need more funding for our universities in particular. The grants for research are moving in the right direction and the government is to be commended for the development of Science Ireland. However, core funding cannot be ignored and remain undifferentiated on the basis of quality. This core funding urgently needs to be strengthened and also needs to be changed from a system that simply rewards numbers to one which rewards performance. In addition, we absolutely cannot run away from the issue of fees. Others have not done so and have recognized that graduates earn more and should be in a position to repay loans. The earnings premium for 30-44 year olds with tertiary level education relative to upper secondary education is, after all, 59% in Ireland.

Our duty now must be above all to our young. At all levels our educational system needs to be prioritized. This is not all about money either. It is more than anything about empowering schools and third level institutes – but empowerment linked to clear accountability.

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There has never been a more interesting, and indeed challenging period in the recent history of our continent or the world. This period began with the collapse of the Iron Curtain. From a divided world, often on the verge of major conflict, we were transformed by the acceptance of the former communist states that they could no longer function as they had in the past. Indeed even before the fall of the Berlin Wall, in 1987, to be precise, the Chinese government had written to the GATT Secretariat in Geneva and the memorandum contained an explicit recognition that, in economic terms at least, the command economy had failed. Only free markets could provide the impetus for growth and innovation. Later, Central and Eastern Europe and Russia itself were to follow.

As President Havel once said “it all happened so quickly we did not have time to be astonished”. At this same time the European Economic Community, conscious of the malaise (commonly called Euro sclerosis) for the period since the oil shock of the early 1970s, took a new and serious step forward in the integration process which was directly linked to the effective functioning of the market economy. The “1992” project to provide free movement of goods, services, persons and capital by the 1st January 1993 was launched. So also was the project to create a single currency. Both were to succeed beyond the expectations of those of us who were in the Delors’ Commission. These projects in turn enhanced the capacity of Europe to play a fundamental role in the creation of the World Trade Organisation that came into existence on the 1st January 1995. This organization thereafter provided a foundation stone for significant aspects of the process of globalization. This fundamental role was demonstrated by the fact that the WTO became the lightening rod for those who also opposed globalization, a fact that was graphically illustrated by the riots in Seattle and Cancun at meetings of the WTO.

This brave new world has not been in existence for very long but is now facing a challenge that virtually no one really expected. The tsunami like effects of the financial crisis that have hit the world has not merely brought recession in it’s wake, but has raised even more fundamental questions about values, about individualism and about society. The advocates of the thinking of Friedman and Hayek are in retreat and J.M. Keynes is back in fashion. If the market has failed as a result of excessive reliance being placed upon self-regulation rather than a more intensive kind of external oversight, the argument goes that greed has had a part to play in the taking of risk. The realities of government responsibility for the creation of unsustainable imbalances in the global economy and property bubbles has however been made clear in many serious reports such as the Turner Report in the United Kingdom. Whatever the realities of responsibility, the fundamental questions on the nature of our enterprise system are on the table now and the answers will greatly influence the world in which you will all live and work in the future.

What are these issues? Part of the debate is around the question of fairness. The Anglo Saxon model is contended by many to create greater and greater divides between rich and poor in society. It is contended, on the other hand, that some societies particularly in the Nordic region have perfectly viable economies that function with far greater redistribution through higher taxes. Now, suddenly, there are some reversals. The British marginal rate for high income earners has jumped to 50% whereas in France, for example, it is 40%. Some of the former Communist states lower marginal rates of tax. There are many cultural and perhaps religious factors that influence these differences. In my opinion whilst changes in attitudes to egalitarianism will occur, as they have in the past, this is often a cyclical phenomenon. However, it is a good thing that we have been provided with a catalyst to examine our values. Europe, in particular, has needed to do so.

As graduates today you should not look at these uncertainties as creating a question mark around the process of globalisation or the market economy as a whole. The painful lessons of the past (including the very recent turmoil) in my opinion have not called into question either of these concepts. Whilst the World Bank has indicated that 17 of the G20 which met in November 2008 and expressed this rejection of protectionism have in the interval introduced such measures and there are numerous other example these do not suggest as yet a rethink of the fundamentals. Nor does the regrettable failure to conclude the Doha Round. The overall tenor of international debate and the statements of virtually all government leaders have rejected protectionism and attacks on globalisation. The disasters of the 1930s are not going to be repeated. So we are in the midst of a traumatic time and one which is challenging but the world is not falling in on us all. Governments have to respond not by avoiding the problems but by taking up their responsibilities to create competitivity in the societies that they govern. They will not do so with short term palliatives or diversions.

In a sense, the modern era of globalisation has repeated on a larger scale the experience of earlier waves of economic modernisation. For example, a hundred years ago about 150 children in every thousand in the US or Germany died before their first birthday. In a poor and unstable country like Mozambique or Sierra Leone today the infant mortality rate is about the same – it is more dangerous to be a baby than a soldier in such war-torn places.

The promise of globalisation is that all countries can make progress towards the rates of four or five infant deaths per thousand we see in the rich countries today. Infant mortality worldwide has dropped by two-thirds worldwide since 1950.

The point is that globalisation can’t be written off as just an opportunity for big business or for international finance. For all the problems and instabilities it involves it also offers the potential for fundamental improvements in the quality of people’s lives. Those improvements during the past two or three decades are reflected in the dramatic declines in poverty in China and India, for example.

But of course it would be naive to pretend that, particularly at this time, the economic benefits should make globalisation uncontroversial. There are competing interpretations of some of the economic evidence, so we are not dealing with matters of hard scientific fact in any case.

Any structural change in the economy causes upheaval. We are undergoing a severe one at present. Some jobs disappear and others are created. Some skills become redundant and new ones are needed. People naturally tend to be anxious about what changes will mean for them.

What is more, amongst many young, idealistic people, and amongst many scholars, there is a deep mistrust of the political or cultural aspects of globalisation. It is seen as a vehicle for the extension of power by those who are already powerful, whether that is multinational businesses, the big banks or even the United States as a whole.

Many also fear its effects on their way of life and their traditions. For all of us, our sense of identity is shaped by living in a particular time and place. It is easy to suppose that these specifics will be drowned by the tides of globalisation.

The modern process of globalisation has ebbed and flowed for the past two centuries. But the ebb tides, decades like the 1930s and 1940s, have always marked times of upheaval and violence. We should be prompted to ask now how fragile is the globally inter-dependent economy? How can we best take advantage of the opportunities it offers?

I sincerely hope all those who claim to speak for the poor people of the world have finally understood the intellectual poverty of a strategy of disrupting the international meetings which offer the governments of poor countries their opportunity to shape international policy.

It can be hard to defend globalisation robustly without sounding wilfully optimistic, and these are hardly times for excessive optimism. Even at the height of the turn of the century economic boom, in 1999 and 2000, many thoughtful people felt uneasy about the apparently inexorable process of global integration, about the financial instability and social disruption it seemed to involve. How much more uneasy about the state of the world do many feel now.

But that is all the more reason for taking globalisation further, for extending its benefits as widely as possible. There is no other route to reducing poverty or improving health and life expectancy. Like any meaningful opportunity, it involves risks. But the examples of the past suggest that the alternative, a retreat from this controversial process of creating deeper and stronger links between the peoples of the world, would be riskier still.

One of the most dispiriting aspects of our time has been the division that is increasingly evident between those in business and those in politics. You must surely engage in political debate and influence change. The advantages that you have been given demand no less.

This is the text of a speech first delivered to the IESE Business School at the University of Navarra

The post The Future of Globalisation appeared first on Peter Sutherland.

Introduction

Globalisation has come to mean many things but to most minds it is an economic phenomenon. Indeed, a lot of people would define globalisation as the relentless march of markets to cover all areas of the globe and all aspects of life.

Many go on to ask whether this ever-wider domain of economic motivation is consistent with social justice, and whether good governance can ensure that it becomes so. Unfortunately, I think that the answers to these two questions in Germany and elsewhere would often be ‘no’ and ‘perhaps’ – certainly here in Germany.

It will come as no surprise to hear that I would answer ‘yes’ to both. After all, that compatibility is inherent in the very concept of Ludwig Erhart’s social market economy. I am an advocate of the mutual benefits of growing trade, of the gains developing countries make from investment by multinationals, of the potential offered by access to integrated financial markets. In short, I believe that economic globalisation, appropriately managed, can and does improve people’s lives. The billion people, largely in Asia, that have escaped from extreme poverty in the last 15 years testifies to this fact.

My aim today is to consider why so many others are unpersuaded of these benefits, which is after all why we are having this discussion. Then I want to offer some thoughts on how we should respond to the challenges of globalisation, and specifically to the moral challenges. How can markets help to deliver global justice?

And to give you a preview of the punch line, the answer lies not in more regulation but rather in the quality of our institutions, which must be built on strong moral foundations. That includes the effectiveness with which markets operate, because markets are institutions too.

Globalisation in Context

To read some of the critiques, you might imagine that globalisation began in 1981, courtesy of Margaret Thatcher and Ronald Reagan. In fact, it is as old as history, with deep roots in human psychology. The evidence is clear that we evolved to trade. As Adam Smith memorably put it, we have a “propensity to truck, barter and exchange one thing for another.”

Over the centuries this fundamental propensity to trade has extended the scope of organisation in human society from family groups, to villages, to vast cities. This growing social complexity, and the increased specialisation of work which Adam Smith was first to identify as the root of economic growth, has gone hand in hand with the greater scope and depth of international trade.

Modern information and communication technologies have taken this much further than was possible in the past, and have woven the astonishing web of global economic activity which we all rely on now.

It is less poetic than John Donne’s observation that each of us is “a piece of the continent, a part of the main,” but the example of the humble shirt has come to stand for the extent of modern globalisation. The different origins of the raw cotton, the woven fabric, the buttons, the thread, the machining, the packaging and shipping, the advertising and retailing – mean that a simple basic like the shirt on your back connects you to a host of other people in many other countries. All this is co-ordinated through markets.

In the modern global economy we depend on each other’s efforts to a far greater degree than ever before. Almost every product or service we buy involves this social miracle of being able to depend reliably on strangers around the globe. One economist, at the University of Toulouse, has described this everyday globalised production as humanity’s “Great Experiment”.

The experiment has been millennia in the making. What’s new is the scope and complexity of the connections today.

A lot of attention is paid to the internet which certainly accounts for the way supply chains in services as well as manufacturing have been sliced up and relocated around the globe. But we should not forget the extraordinary Impact of other new technologies.

Satellite TV is one which has spread rapidly in poor countries since the early 1990s. What is the impact on, say, a labourer in West Africa of seeing western TV programmes on the set in his local bar? For me the answer was summed up by a photograph of a man who had bought a battered pair of second-hand shoes in the local market – and drawn his own Nike ‘swoosh’ on the front.

Everybody now sees into each other’s lives, lives which could not have been imagined in earlier eras but have become commonplace images. Similarly, the ubiquity of mobile phones in even very poor communities has plugged everyone personally into a mass of information about life elsewhere.

What does this mean for global justice?

These everyday links have stirred many emotions – hope, ambition, envy, anger, compassion. They pose an acutely difficult question. What boundaries matter now? When we talk about the common good, who’s good do we mean?

To see why this is such a difficult question, think about one of the aspects of globalisation many of its critics see as particularly iniquitous, namely inequality.

You will often hear it said that inequality is greater than ever before. After all, the gap between the incomes of Bill Gates and a sub-dollar a day Bangladeshi or Tanzanian is unprecedented. So too is the gap between the incomes of the average American and the average inhabitant of the Democratic Republic of Congo or Zimbabwe. Indeed the inequalities within the United States itself are growing.

Yet this kind of comparison measures the experience of a few individuals, those at the very extremes of income distribution, rather than others. Give equal weight to the many members of the new middle classes of India and China, in the middle of the global income ranking, and the picture is different: the world has seen the biggest decline in inequality ever recorded.

Digging further into the figures complicates matters even more. More than a third of Brazilians have a higher income than 5% of the inhabitants of France, which some might argue translates into a 10% probability that development aid from the French government to the Brazilian will transfer income from the poor to the rich.

Most of us might agree that global justice requires less inequality, and certainly not more. In which of the three ways I have sliced the figures should we assess inequality? At the level of countries or individuals? How do we weigh the well-being of poor Tanzanian farmers, middling Chinese factory workers, rich Brazilians and young unemployed men in a French suburb?

The example of trends in income inequality is just one instance of the fact that globalisation involves benefits and costs which affect different people whose interests will probably conflict. The benefits and costs may anyway simply be incommensurate.

What are the benefits? Trade and growth in many countries, even including parts of sub-Saharan Africa, have dramatically reduced poverty. The share of the world’s population living on virtually no cash income fell from 40% to 21% of the world population in the two decades after 1981, which corresponds to a decline in the number of people in absolute poverty from just under 1.5 billion to 1.1 billion people.

One of the little-remarked benefits of globalisation is that it increases competition, which boosts efficiency and innovation. The extraordinary impact on China, or on Brazil and India, or moving from economic planning to competitive markets open to trade, speaks eloquently of these benefits. In 1980, living standards in China were barely any higher than they had been a thousand years earlier. Since then, they’ve been doubling every few years.

That is just the gains in incomes in the countries which have embraced competitive markets. There have been even greater improvements in more fundamental indicators of well-being such as health, longevity (at least where HIV/Aids is not epidemic) and levels of education. Tragically the Millennium Development Goals will not all be met but there has nevertheless been measurable progress in many indicators of human development.

Why there is a backlash

The costs of globalisation are often harder to quantify, and perhaps all the more alarming for it. International travel means epidemics can spread easily. Terrorists and criminals can make use of the global communications networks to organise their activities more horribly effectively. Carbon emissions have become an even more urgent global problem due to the growing scale of economic activity – especially in Brazil, Russia, India and China, designated the BRIC group by the economists at Goldman Sachs.

Perhaps the most intangible of all the costs of globalisation, people in all kinds of places and walks of life feel that their culture and way of life is under threat. This fear was shared by the equivalents of today’s anti-globalisation protestors in the first age of industrialisation. William Blake’s dark satanic mills would have featured on the pages of left of centre newspapers, and he would no doubt have been a prominent blogger.

John Ruskin, the influential critic, regarded the 19th century’s attachment to political economy as a mass delusion, and decried the effect of market transactions on traditional social relationships. How could profit-making transactions create a just society? He wrote that it was simply not credible. He was without doubt the Naomi Klein of his day.

This objection to conducting life in the economic mode, with markets as an organising principle of society, resonates with many people today. This is especially so in Germany and France, where opinion polls show startlingly little support for free enterprise.1 But free enterprise should not be equated with greed. Nor should it be seen as a denial of solidarity.

The fear that cultural and historical traditions are being fatally weakened also inevitably grows at times of great change. The perception, it seems, is that markets, the vehicles of change, are in some way “disordering” society.

And so we have a backlash against globalisation, and dangerous nonsense about the ‘clash of civilisations’ has gained traction too.

Indeed, if I were in a pessimistic frame of mind, I might conclude that nearly twenty years after the fall of the Berlin Wall, the ‘great experiment’ of a global market economy, is looking somewhat fragile.

Some seem eager to exhume the Cold War. Once again there appears to be a scramble for resources in Africa, the kind of expansion of trade which in the past occurred at the barrel of a gun.

Nationalism, economic and political, is resurgent in other areas.

The Doha trade round has been progressively choked by a tangle of bilateral deals and growing protectionism in trade policy and, increasingly, in investment policies

A narrow conception of national interest is threatening to disrupt energy markets, when in reality the effective operation of markets is the only long-term guarantee of stability of supply.

Nationalism has emerged as well in political reactions to the growing presence of sovereign wealth funds and even to cross-border takeovers, which have been so much the bread and butter of the huge success story of EU economic integration.

The backlash has also taken the less overtly nationalistic form of growing regulation of markets. This is understandable perhaps in response to frauds such as Enron or Parmalat. The credit crunch has likewise raised some good questions about the regulatory framework in credit markets. There’s little doubt that a serious stock market crash and recession now, after more than a decade of global growth, will add more momentum to the calls for tougher regulation; financial crises always do.

But the impulse to regulate more heavily business activity in other areas ranging from private equity investment to product labelling will in the long run damage the ability of businesses to create jobs and prosperity. Good regulation is essential but more regulation for the sake of doing something will do more harm than good.

In defence of global markets

Unfortunately, then, the political pendulum has swung firmly away from the liberalisation of markets which was one of the factors driving globalisation.

Those underlying trends are not going away: information and communications technologies are here to stay; the communist regimes did collapse under the weight of their economic and moral failure; we do face dramatic demographic and social change.

As I indicated earlier, globalisation does pose some difficult philosophical and political challenges. But markets are part of the solution, not part of the problem. Markets, in fact, are essential to a just society. They are themselves important institutions of freedom, and one thing visible in the rubble of the collapse of communist societies was the existence of some kind of link between the different forms of freedom.

What is more, markets are also fundamental to building the prosperity needed for freedom to be meaningful.

In the global context, that means trade remains absolutely fundamental to growth and the reduction of poverty. One thing I have learnt during the years I hve spent advocating the liberalisation of trade rules is that the argument for the mutual gains from trade has to be made over and over again. The tyranny of so-called common sense insists that exports are good, imports bad and the balance of trade should preferably be in surplus.

Economists since David Hume have pointed out the illogic of the commonplace notion that the strength of the nation depends on a constant current account surplus. The logic of the case for freeing trade is compelling, to the extent that it is the one thing the great majority of economists seem to agree on. What’s more, the experience of many decades tells us that growth in trade and economic growth have indeed gone hand in hand.

Sadly, despite the power of logic and experience combined, trade liberalisation always was and still remains a hard sell. But that does not alter the reality. And anybody who cares about global justice should care about preserving and improving our multilateral trade rules which apply all countries, large and small.

So-called fair trade is a sideshow in terms of reducing poverty. It makes people feel virtuous when they buy their coffee, but what poor countries need is more trade, full stop.

The WTO is an imperfect organisation, and I have been involved in recent discussions on reforms to make it more manageable and effective. But it is the fairest and most effective framework for governing global trade we have ever had. I am dismayed by the lack of political support for the WTO: we allow it to be weakened at our peril.

Protectionism could gain real momentum, there have been periods in the past when governments have restricted trade and increased tariffs.

But in their magisterial new history, Ronald Findlay and Kevin O’Rourke show that using trade for political ends has often had disastrous results. The last great globalisation, a century ago, was put into reverse by political choices. We all know the horrors that followed.

The economic devastation of the 1930s, and all that followed in the wake of that cataclysmic collapse of international exchange, should stand as a warning about the consequences of any retreat from liberal trade policies. I wonder if 21st century voters would actually permit that to happen, despite the short-term appeal of protectionist measures?

It may be that unpicking the global web of production has become next to impossible. In many areas of manufacturing, international specialisation has gone so far that it is hard to conceive how it could be reversed. The skills, the management know-how and the specialised capital equipment for each small step in the chain of components and services all have their specific locations.

It would certainly be undesirable. Going back to the example of that symbolic shirt, restrictions on imports from China would only divert production and logistics to Chinese-owned factories elsewhere in Asia or Africa. Production would be less efficient and less profitable. European consumers would pay higher prices. There are few European textile producers left to fill the gap; our industries have moved into the much higher value-added areas of design, speciality fabrics, and marketing. Nobody would benefit.

It is worth remembering, too, that a huge proportion of the cross-border trade and investment which define globalisation have occurred within Europe. Last year for example the EU accounted for two fifths of FDI inflows and nearly three quarters of outflows. These figures were even higher in the past. To an enormous degree, globalisation in terms of the trading and investment links between national economies has been and remains a process of European integration.

The share of developing countries in FDI has of course expanded significantly. A third of the $1.5 trillion last year went to non-OECD countries. It is investment by European companies in developing countries which arouses fear here at home, fears of job losses or relocation. Yet it is hard to make the case morally, never mind logically, that cross-border investment is good for us in the EU but undesirable when it involves poorer countries.

I would go further, and argue that we in Europe have a particular need for this kind of investment to go much further, because of our demography. At any time, those who are not working must be supported by the people who are working. Perhaps we can in the EU – despite all the setbacks and failures of our structural reforms so far – make a great leap forward in productivity growth which will enable young Europeans to support the growing number of pensioners.

It is much more likely that we will also need to need to rely on productivity growth elsewhere in the world. The effect of growth in FDI and trade is equivalent to the impact of a new technology. It is the means by which we get more choice at lower prices, at no more effort to ourselves.

The future challenge

What prospects does globalisation offer us now?

For more than ten thousand years, human beings have adapted to a growing dependence on distant strangers. The benefits we reap from institutions which allow us to engage peacefully in commerce have increased over time.

Markets are prominent amongst those institutions. It’s worth emphasising that markets are institutions. The ‘free market’ is an intellectual abstraction, like the supposed opposition between state and markets.

In reality every market consists of a web of social connections, which take place in a framework of rules set by governments, ranging from basic laws to specific regulations. The phrase ‘social market economy’ concisely captures this.

Institutions, their rules and how they are governed, are central to any response to the challenges of globalisation. The question is whether we have the ability to shape the institutions we need.

The answer depends on three underlying issues. First, is there a set of universal global values to underpin global institutions? Secondly, is there agreement about what outcomes will satisfy those values? And thirdly, can we work out the details of practical reforms which will achieve those outcomes?

On the first, I do believe a core of values is now widely shared by people of a range of cultures and beliefs. It can be justly claimed that many of these values emanated from and were advanced through Christianity. These include the value of human life, the concept of equality itself and the importance of fairness and solidarity. Of course, different cultures weigh and interpret these fundamentals differently. It is all too obvious that people can and do inhabit different moral worlds.

Nevertheless, core values have been codified in important international treaties, and the number of signatories has been growing. An underlying Rawlsian morality has been implemented through international law. Of course these core values are not always observed, but we should not underplay their symbolic importance.

Ideals such as fairness and freedom have such wide currency that there has, I believe, been a decisive shift in the intellectual climate away from moral relativism, and towards a reaffirmation of fundamental values. This has, paradoxically, been hastened by extremist attacks on our ideals.

It is harder to be confident that we have a shared understanding about how to evaluate the outcomes of globalisation. On the one hand, the ubiquity of modern communications means everyone has become more aware of other perspectives and interests. It is hard to recall any time in the past when a strong sense of international solidarity would have brought tens of thousands of demonstrators onto the streets of our countries demanding their governments act to tackle global poverty or climate change.

On the other hand – as my earlier question about how to weight individuals in the world income distribution illustrated – that is not the same as deciding whose well-being we should be caring about. Without answers, we can not shape effective institutions to deliver global justice.

These questions about how to implement our shared values are difficult. Let me give another example which presents day-to-day ethical dilemmas for multinational companies.

As investors in developing countries, we can maximise our favourable impact on the local economy by sourcing supplies locally. That will create more jobs, more tax revenues for public services, transfer more lasting know-how.

However, local suppliers might operate with lower environmental or labour standards than we expect at home. Sometimes it is easy to see that their standards are simply unacceptably low. Often, there is a grey area where we have to choose to implement one value judgement rather than another. Which horn of that dilemma best serves social justice?

The example goes to the heart of the question raised by the backlash against globalisation – can we trust markets and the profit-motive to deliver the kind of just world we all want? I think the example also shows that it will depend on the quality of the institutions we have for deliberating and tackling dilemmas of this kind.

That takes us on to my third question, practical reforms, there is no doubt that we still have a lot of work to reform and develop institutions – both market institutions and institutions of government – which implement the detail of our moral and political judgements.

The agenda is potentially enormous. I have already touched on the WTO, and the need to safeguard while making it more effective. There are large reform agendas for other international institutions.

I have mentioned too the latest question mark over financial market regulation. The credit crunch has highlighted the lack of adequate information about credit risk in an important set of markets. We are in the throes of the third significant financial crisis in less than a decade. As the financial markets innovate constantly, I suspect the regulatory authorities will have to do a lot of work to ensure true transparency in global financial markets.

There are also many other aspects of the governance of global markets which will need detailed attention. A lot of concern has focussed on the activities and decisions of big companies. I have no objection to the scrutiny.

I do, however, urge there is equal scrutiny of the rest of the market economy: competition policy, contract law, stock exchange disclosure rules, tax exemptions, and so on. If markets do not seem to be working well, this is likely to be because there is too little competition, or because counter-productive regulations are distorting business and consumer decisions.

I know that sorting out the plumbing of the global market is hardly a rallying cry for those who care about social justice, but surely we should realise from our own achievements in building the European market that all this dull detail has a big pay-off in terms of the well-being of citizens? There were many who opposed it including here I Germany.

Again, I emphasise that this is not a call for more regulation. Rather, the aim should be to ensure the broad framework of rules in the market economy give business and consumers the incentive to behave in ways which deliver the desired results. We should always ask ourselves what the underlying aims of regulation are and how those aims – consumer protection, financial stability – can best be served. A new regulation on top of the existing ones will hardly ever be the best solution.

So above all, I hope that any programme of institutional and political reform will have what the philosopher of pragmatism William James described as “the richest intimacy with the facts”. The path to global justice will be paved by a close attention to detail and a strong sense of realism.

Conclusions

We have been experiencing a period of transition between two worlds.

We are leaving behind us the era of nation states. Heaven knows, this period had its dark times. The solidarity of shared identity was often gained at the expense of others, at terrible cost. But from some perspectives, the world of nationalism offered greater certainties. In the economic sphere, it meant prosperity was combined with relative security. Welfare states could operate affordably within strong borders and with little immigration.

We are entering an uncertain future, with a world economy linked by ever-denser thickets of communication and information but as yet only a dim sense of how this world will be governed. The constitutional historian Philip Bobbitt describes it as the era of market states, although whether the world does take the shape he foresees will depend on the strength of the backlash and the political response.

The overlap between two eras is probably the time of greatest uncertainty. Many people are negotiating a collage of overlapping identities even as they enjoy the greater freedom and variety of the modern world. It is all too obvious that many young people growing up in European cities are struggling with the psychological burden of having to live in two or three overlapping moral universes, with different sets of values at home, at school, in the streets.

What is more, the characteristics of the new technologies which are driving globalisation are also showing us so much more of the whole world’s problems and uncertainties. Fears about globalisation are understandable.

Yet the benefits of globalisation have been extraordinary. The economic outlook for 2008 is not favourable, but up to last summer the world economy had experienced its longest sustained period of growth since the early 1970s. Hundreds of millions of people in China and India have left absolute poverty behind them.

One of the benefits of globalisation has been increased competition, fostering efficiency and innovation. The extraordinary impact on India or Brazil of moving from economic planning to competitive markets and openness to trade and investment speaks eloquently of these benefits.

Nor is it just a question of economic gains: on one count the number of democracies has quintupled in recent decades. I believe there has been a genuine advance in freedom around the world.But that is in the past. Now is the time to invest for future dividends. We – European political and business and community leaders – must prove that in our different spheres of action we will govern globalisation in line with our own fundamental values. Europe has essentially shaped globalisation so far, and it is our responsibility to ensure it is well-governed in future.

We can take at least a bit of inspiration from the success of European institutions. They are far from perfect and as we have seen this past year or so, the EU faces enormous governance challenges. But who could have been confident, 20 years ago today, that we would have got to this point? As the 20th anniversary of the fall of the Berlin Wall approaches, we should take pride in what we have achieved and see it as an inspiration for building effective institutions for the globalised world we will be facing in future.

Economics is often seen as the rationale for globalisation – just as the EU is often been seen as a means of delivering on bread and butter issues; after all, its origins were practical and we used to describe it simply as a common market.

I think this emphasis on the practical benefits and costs – although absolutely valid, as the benefits of globalisation have been enormous – has in one sense been counterproductive. For many people, it is hard to apply that kind of calculus to their innate moral sentiments.

What I have been arguing today is that the two approaches are aligned, as indeed they were in the minds of the visionary architects of Europe in the 1950s. The practical results of globalisation, the outcomes in terms of poverty and well-being, are not in conflict with our desire for social justice. Globalisation offers us the means to make progress towards our common purposes.

This is the text of a speech Peter Sutherland delivered at the Konrad-Adenauer-Stiftung Symposium

The post Markets, Good Governance and Justice in the Globalised World appeared first on Peter Sutherland.

Introduction

One word, globalisation, has come to stand as shorthand for the whole range of rapid and radical changes taking place in all aspects of life – economic, political, cultural. This means there are many possible perspectives on globalisation, but it’s important to keep them meaningfully distinct in order to consider policy realities and priorities.

What’s common to all facets of globalisation is that the same underlying forces are driving change:

The pervasive spread of information and communications technologies enabling economic actors to operate more speedily on a truly global scale;

The adoption of policies everywhere broadly oriented towards market forces and open borders;

And, to a lesser extent, demographic and social change.

To state these trends is to make it plain that failure to respond is not a viable option. The focus must be on how to adapt.

Not surprisingly, given its extensive nature, globalisation poses a variety of specific policy challenges to all governments at every level, from local & regional to national & supra-national, and in industrialised and developing countries. In Europe, it also presents the European Union with some specific institutional challenges.

I want to offer some thoughts and raise some questions about two areas, namely the impact of policy reactions to globalisation at every level of government in Europe on the business environment; and what institutional responses to globalisation might be needed at the EU level.

My underlying message is that the EU has every reason to feel confident about the implications of globalisation. European integration has been the key trigger for the growth in international trade and direct investment for at least 20 years. That other nations are now joining us in taking to heart the mutual advantages of economic integration should be a cause for celebration, not for concern.

First, a few reflections on the political and economic context.

What do Europeans think about globalisation?

Business executives are not so naïve as to believe it is possible or sensible to ignore public concerns about aspects of globalisation. Big companies have obviously been subject to tremendous scrutiny in recent years and vehemently anti-business sentiments have been voiced by activists in a manner unparalleled since the 1960s.

Nor do I dismiss these as fringe views even though some of the groups expressing them are clearly extremist. Everyone should take corporate responsibility, climate change, fair trade and related issues very seriously, and that includes business leaders.

Public concern about such issues is part of the reaction to globalisation – to the growth in trade and foreign investment, to energy and environmental challenges which cross borders, to the sheer flow of information about what is happening in the rest of the world. Whether asked about the phenomenon of globalisation in general or specific aspects of it such as migration, or foreign investment, European citizens express concerns, to varying degrees.

Globalisation has become the scapegoat for all kinds of troubling developments. For a sense of increased job insecurity. For greater income inequality. For the ‘dumbing down’ of European culture by American influences, or, more generally, the homogenisation of culture. For decreasing civility in urban life. For poverty, debt and disease in developing countries. Not to mention the illegal drugs trade, people trafficking and international terrorism, the dark side of globalisation.

What’s more, public perceptions are becoming increasingly negative, according to some surveys.

The polling evidence needs to be interpreted with a little care. According to the Euro barometer surveys, majorities in most EU countries have said the economy was too closed rather than too open; and said they were in favour of globalisation rather than opposed.

However, the more specific the questions, the more negative the replies. On trade liberalisation versus protectionism, or the positive versus negative contributions of immigrants, for example, there are majorities on the ‘anti-globalisation’ side.

Recent surveys also express an extraordinary degree of pessimism in general. Asked whether things are going in the right direction in their country, those saying no outweigh those saying yes in all but six member countries, with Ireland the only one of the pre-enlargement member states with a positive majority. In France and the UK, pessimists outnumber optimists by two to one.

Most tellingly, almost two thirds of Europeans think life will be harder for the next generation.

In short, there is a sentiment of fearfulness present to some extent in every member nation.

This at a time when we should have so much to celebrate:

the accession of formerly communist countries to a peaceful and united European polity;

the success of the Euro and the ECB – and to have created a new currency of global status, and a respected central bank delivering low inflation and a stable economy is a huge success;

a growing Euro zone economy, albeit with long-term structural challenges which we still tackle too slowly.

Looking at the evidence, many Europeans clearly don’t appreciate these achievements. There is a dispiriting sense of a need to turn away from the rest of the world, to safeguard what we have in a walled garden, sheltered from the forces of change ‘out there’.

This is one of the possible, plausible reactions to globalisation identified by the scholar Philip Bobbitt in his magisterial study of the evolution of the nation state (The Shield of Achilles), and it is not a scenario for which he could predict a very positive outlook in his analysis of the market states of the future. Bobbitt labels this alternative ‘The Garden’, which rather brings to mind the formal garden of a Loire chateau, orderly behind its walls yet ultimately vulnerable to the chaos of the wider world.

Even if this sense of a desire to retreat is a media construct not firmly based on how citizens actually feel, there is certainly no spirit of European optimism or engagement, still less leadership, in the world.

Why is this a problem? For at least three reasons:

Staying aloof does not evade having to make choices. Change does not stop when you close your eyes. India and China will continue to grow, with repercussions for European economies, whatever we do.

Secondly, in practice it would mean a failure to respond to pressing European challenges such as the ageing and in some cases shrinking population, or the slow rate of productivity growth. Hostility to globalisation to which some politicians have resorted only cements into place the sclerosis which unfortunately does characterise some EU economies.

Thirdly, the linkages between Europe and the world are so extensive that it wouldn’t be desirable to disengage given the extremely serious repercussions that would have.

To understand the potential damage, even of a failure to participate wholeheartedly in current trends, let me turn to what globalisation means in practice to European businesses.

The globalisation of EU businesses

To understand the global context for businesses, let us cast our minds back to the mid-1980s. Work on building the Single Market was getting under way, to the great benefit of the European economy. With strong growth and tumbling internal barriers to trade, American and Japanese companies invested heavily in the EU from the mid-80s.

Amongst those seeking a firm foothold in the flourishing EU market were the major Japanese car manufacturers, who built plants and established relationships with European partners.

It is hard to remember now just how contentious this inward investment was at the time, with frequent rows about whether there was enough local content and controversy about new employment practices. Now, global partnership is the norm for European, Japanese and US car makers: Nissan and Renault have merged; Suzuki is partnered with GM and Mazda with Ford. Behind each of these global automotive partnerships lies an extensive web of alliances and joint ventures between suppliers all the way upstream to the initial research and design.

So a product could not be more transnational than today’s automobile. Car manufacture is increasingly clustered in a few countries but auto components are produced all over the world. The engine might come from Hungary, the transmission from Poland, the fabrics, fittings and electronic components from a variety of sources in Asia. The metals will probably have been processed in East or South Asia too. Meanwhile in their home bases, the western European or Japanese parent companies have specialised in research, and in design and marketing, the higher value activities in the production chain.

What’s true of cars is true of many manufactured products. Virtually any finished consumer good is no longer really ‘made in’ anywhere, as its components will typically have been designed, manufactured, processed, assembled and distributed in numerous countries. Take aircraft production, for an example, each Airbus or Boeing aircraft have such an extensive amount of both US and European content with many suppliers providing components to both.

Even simple products like a shirt: the design, fabric, thread and trims almost certainly have different national origins, even if the label says ‘Made in Italy’ or ‘Made in China’ for that matter. And most of the value added comes in the distribution and marketing stages anyway.

The combined expansion of both trade and FDI reflects the process of splitting up production chains and the global re-location of the individual links in the production process.

This has been under way in manufacturing for at least 20 years, and manufacturing output is therefore radically globalised compared with the early 1980s. A third of merchandise trade now consists of trade in components, rather than finished goods, with the proportion still rising.

This process of international specialisation is driven by multinationals which are making use of new technologies and taking advantage of policy liberalisation. And it has become increasingly fine-grained.

Individual countries possess a range of sometimes surprisingly narrow specialisations. The statistics cover very broad categories of goods, and don’t give a clear impression of the extraordinary extent of this specialisation, down to individual components out of the thousands or tens of thousands that make up the finished products. The fabric of the world economy truly has an extremely fine weave.

And the benefits are clear in the lower prices and vastly increased quality of the goods we use. Whether it is clothes or high-end cars and computers, consumers have very clearly benefited enormously from the global re-ordering of manufacturing production. Globalisation has both made it possible for multinationals to operate much more efficiently and also provided the more intense competition which ensures those efficiencies have been passed on to consumers.

The idea of cross-border operations is familiar but few people fully appreciate the scale of the switch from national to multinational production. Even fewer are aware of the extent to which this is largely an EU phenomenon.

Investment into and within the EU due to the Single Market programme was the most significant driver of the substantial cross-border investment growth we have seen since the late 1980s. Cross-border direct investment has been growing even faster than world trade – it was up by an annual average of 22% from the mid 80s to the mid 90s, and by nearly 40% a year since 1996.

In the latest year for which we have the figures, the EU accounted for nearly half of FDI inflows and nearly three quarters of outflows. Of that EU portion, 72% consisted of intra-EU investment. In earlier years the intra-EU element was even more dominant. The vast majority of inward investment in European economies comes from other EU member countries; it is more than a half of the total even in the UK, with its extensive links with the United States.

To an enormous degree, globalisation in terms of the trading and investment links between national economies has been and remains a process of European integration.

Of course, foreign direct investment overall has expanded substantially since 1985. Developing countries have been the destination for a rising share of total FDI: the developing country share of FDI inflows has risen to over a third in recent years and so the share of the OECD economies in the global stock of FDI declined from 75% in 1980. But the OECD share was still 70% in 2005, and the European share 51%.

The same process of switching from a national to a multinational form of business is starting to get under way in services too. Exports and imports of commercial services have been growing at 10% a year since 2000 and accounted for just under a fifth of total world trade in 2005.

This is a highly contentious area. Many services are politically sensitive, those in areas such as healthcare or utilities. However, the advantages of specialisation will prove just as compelling in services as in manufacturing, and after all services account for at least two-thirds of the developed economies so the potential welfare gains are enormous. I predict there will be controversy now, just as there was about FDI in the car industry in the 1980s, but the likelihood is that the benefits will steadily ease people’s concerns.

The key point is that as globalisation gets into gear in services, intra-EU and intra-OECD activity will be key drivers of the process. For all the hype about off shoring in India, Ireland is just as significant a destination for outsourced services. Developing country workforces even in India and China are some way from having the capacity to undertake the full range of activities which OECD countries can supply.

Already the great majority of intra-EU investment flows consist of service activities – hardly surprising when services form more than two-thirds of our economies. When we talk about completing the single market, cross-border delivery of services is what it will mean.

I do not believe we have anything to fear from this continuing process of cross-border investment and trade. This is our mutual investment in our joint future.

Europe has been at the forefront of globalisation, with tremendous success for EU companies and benefits for European consumers.

Many European companies are amongst the most successful multinationals in the world. Of the top 100 multinationals ranked by Unctad, 12 are EU-based, five American and two Japanese.

I would go further and say internationalisation is coded in the DNA of the European Union. The essence of George Marshall’s plan for the post-war reconstruction of Europe was that American aid should depend on Europeans’ willingness to co-operate with each other in the project. In his Harvard speech Marshall said: “The remedy seems to lie in breaking the vicious circle and restoring the confidence of the people of Europe in the economic future of their own countries and of Europe as a whole.”

My fear is that European hesitancy about the merits of a continuing process of weaving the fabric of the economy through removing barriers to trade and investment would undermine the moral and philosophical foundations of the EU’s institutions, even if that hesitancy is only supposed to apply outside the boundaries of the Union.

Challenges and questions

Either one believes in the merits of openness and the mutual advantage of trade – or not. It is essential for the health of the Union that we have clarity and commitment to the continuing process of economic integration.

The European Union is by construction internationalist. It offers the prime example of how international governance arrangements can manage the sometimes conflicting interests of individual states. The members of the EU have a head start in managing effectively the processes of globalisation, as so much of it has consisted in fact of Europeanisation.

But we have a growing credibility gap. Our own governing institutions are not currently held in high esteem by the European public, and according to Euro barometer surveys trust in the institutions has been diminishing.

Although history bears witness to the extraordinary economic success of the EU project, Europe is still constrained by an absence of European ambition and vision. Too often we debate issues and interests from a prism of economic nationalism that bears no relationship either to European and global realities. Is it surprising that public scepticism begins to take root when member state representatives do not make the positive case for European decisions and instead present Europe as the negative originator of actions which all have agreed to in the common interest? Moreover, the EU’s leaders have failed to update the principal institutions in the face of eroding legitimacy.

The institutions of the EU, like all other institutions of governance today, need to learn the virtues of transparency and engagement with a wider range of audiences than in the past.

Clearly, the debate about institutional reform is an active one and goes well beyond the issues I am raising here. However, the question of governance is important in developing a coherent policy response to globalisation not least, for an example, in international relations with, for example, Russia.

The purpose of economic integration is ultimately to deliver improvements in well-being to European citizens and ensure the benefits and costs are shared in a way which commands consent. If people do not trust their governing institutions, it cannot come as a great surprise that they are also turning away from further global integration. Having effective EU institutions is a key part of developing effective mechanisms of global governance.

This is an important time to see some decisive political leadership in shaping governance for a globalised world economy. The failure to achieve a breakthrough in the Doha Round, the lack of effective political support for the WTO, and an increase in bilateralism as a substitute does not augur well for the capacity of the international community to manage globalisation.

We should not for a moment forget the huge institutional achievement embodied in the WTO, a rules-based system for economic co-existence in which the powerful are significantly constrained. It is not an unrestrained charter for free trade, but an institution which, to the mutual benefit of its members, offers a structured way to expand trade predictably and fairly. It embodies what Keynes called the “healthy rules of mutual advantage and equal treatment”, principles he regarded as fundamental to the system of international economic management being built after the war.

The same principles remain fundamental, inside and outside the EU, and it is to affirm our commitment to them in future that we must as a matter of urgency press ahead both with reforms of the WTO and also with the ambitious global trade agenda.

I would also like to see a clear commitment to extending the single market and ensuring a healthy business environment in the EU. This will require us to address the disconnect in public opinion between the economic success story and the creeping pessimism about the future. What will this take?

Europeans must recognise that in globalisation we see our own reflection. I would hope responsible politicians can manage to resist the temptation to demonise multinationals or whatever aspect of business or financial markets happen to be catching the headlines.

The future of the single market will also require a firm commitment to integration in services. The path so far has not been an easy one. Many areas of services are highly sensitive. They are close to people’s hearts. They’re often in the public sector, although with different configurations in different countries. Most EU citizens work in services so the employment implications will be a major concern.

This means we will need to accommodate more diversity of approach within the EU – something desirable anyway in a larger Union. What needs to be uniform for the single market to operate effectively, what can vary?

Getting to grips with limits beyond which national choices undermine European markets will require some careful, detailed work. The broader point, though, is that we will have to accept there isn’t a single right way to arrange markets, or a single, European Social Model, but a plurality.

The final point I would like to make concerns the issue with which I started, the climate of opinion. The political debate sets the tone for how optimistic or pessimistic people feel about the future. I don’t want to fall into the trap of being too pessimistic in my accusations of pessimism on the part of others.

But sentiment matters. It affects decisions.

In particular, people who have no confidence in their economic future are unlikely to invest or make plans to expand, making pessimism a self-fulfilling prophesy. There is an important strategic role in expressing confidence about Europe’s capability not only to react to global economic trends but also to shape them.

This is not just management-speak. Modern growth theory in economics recognises that one of the key roles of policy lies in determining through its impact on expectations whether an economy is on a virtuous circle or a vicious spiral. The future, as well as the past, determines our capabilities today.

What is more, I think a failure by the EU to step up positively to the challenge of globalisation would be an abdication of leadership by the world’s largest economic power. While some certainly recognise this, it is rather shocking to see how little part these towering moral and political challenges play in many EU countries. They are hardly on the radar in the French election debate, for example.

We have benefitted tremendously from globalisation. It has been shaped on our terms. Europeans do have a responsibility to take a lead in addressing global issues such as climate change and poverty. The message we in business have been getting from our customers and employees is that they take this responsibility very seriously, and just as we must respond, so too must the policy process.

This is still in effect a post-Cold War challenge. Globalisation was in part a result of the end of the Cold War, the unfreezing of international barriers, the general acceptance of the mixed market economy.

The benefits have been extraordinary. The world economy has experienced its longest sustained period of growth since the early 1970s. Hundreds of millions of people in China and India have left absolute poverty behind them. Trade and investment have grown. Nor is it just a question of economic gains. On one count the number of democracies has quintupled in recent decades.

But that is the past. Now is the time to invest for future dividends. We – by which I mean European political and business leaders – have still to demonstrate that in our different spheres of action we will govern globalisation properly. Europe has essentially shaped globalisation so far, and it is our responsibility to manage it in future.

This is the text of a speech first delivered by Peter Sutherland at the Informal Council on Competitiveness, Würzburg

The post The Current Status and Future of Globalisation appeared first on Peter Sutherland.

It is striking how the assessment about the German economy has changed over the last 2 years. Even one year ago, many investors regarded Germany as a hopeless case viewing it a rigid economy, unable to compete in the world economy given its expensive workforce.

Weak growth since the bursting of the tech bubbles seemed to confirm this pessimistic view of the German economy. From 2002 until 2004 the German economy barely contributed to growth in Euroland.

However, a closer inspection of the German economy during that difficult period ought to have shown that the ‘bad news’ coming out of Germany was in some respects masking a more positive evaluation ‘good news’ in disguise. The reason for this was that growth was hampered by a difficult adjustment process that weighed on the economy in the short-run but also sowed the seeds for a fundamental improvement that would eventually translate into stronger growth.

Structural change on many fronts. The deep restructuring of the corporate sector that took place in the German economy was a reaction to a change in the financial system and the effects of globalisation/European Union enlargement. The change in the financial system meant that the cost of capital increased while globalisation/EU enlargement meant that the bargaining position of German unions was weakened significantly.

Rising costs of capital. In the past German companies were implicitly subsidised by the banking sector. The position of the state owned bank sector meant that German companies could lend in the past at lower than market rates. The introduction of the Euro, the loss of the state guarantees for the public sector banks and the new Basle II regulations meant, however, that banks were required to increase their lending margins and demanded higher interest rates. The higher cost of capital meant that companies had to cut back their investment until they become profitable enough to borrow at the now higher costs of capital.

The end of Germany Inc. Another important change in the German financial system refers to the inevitable end of the cross-shareholdings among the big German companies with banks playing a major role in corporate governance. This network of cross-shareholdings has ceased to exist and capital markets are now, as elsewhere, vital for the German corporate sector. This change in ownership implied higher cost of equity as capital markets in general demand a higher return than banks.

Inevitably employees were (and still are) bearing the burden of the adjustment. Part of the adjustment process necessitated a prolonged period of wage restraint. As the return on capital had to be increased, employers put pressure on wages demanding more work for less money in many cases. Given the (real) threat to shift production abroad, unions and employees in general accepted a freeze or even decline in wage.

Adjustment complete. The German corporate sector has now finished its adjustment to the higher cost of capital as reflected by the sharp increase in investment spending. Gross fixed investment has risen now by 10% over the last 2 years. Employment is also rising strongly: more than 500,000 new jobs were created last year.

A new growth engine in Euroland. The German economy is growing strongly and even the VAT hike has not caused any serious damage to the economy. In 2006 Germany contributed more to growth in Euroland than France and Italy combined. Interestingly, the German economy has grown more strongly than the US economy over the last 3 quarters.

Germany a globalisation winner. The pressure on wages and the rebound in productivity has led to a dramatic decline in unit labour costs. Unit Labour Cost in the manufacturing sector are now almost down to the level right after unification. The continuing success of German exporters should therefore not be a surprise. Germany is also benefiting in particular from the strong growth seen in the BRICs. Exports to China, for example, have risen by more than 300% since 2000, exports to Russia have even risen by around 500%.

The right mix of products. Germany is not only benefiting from an improved competitiveness but also from the right mix of products. In many industries German exports are complementary to what the BRICs are producing.

But labour is so much cheaper in Central Europe/China? True, wage costs in Central Europe and other emerging economies are still significantly lower than in Germany. However, wage costs are only one factor that dictate where to invest and produce. Infrastructure, the legal framework, the pool of educated workers are all also important factors. Moreover, the sheer size and the sophistication of industrial clusters on Germany means that productivity of the average worker is much higher in these clusters than if certain production processes are shifted abroad. Germany still has many very excellent industrial clusters that are well equipped to hold their ground in global competition. The fact that companies are now investing and hiring strongly is proof of this. Moreover, the increasing interest in Foreign Direct Investment into Germany is another indication of the German industrial renaissance.

There will always be change. As impressive as the turnaround of the German economy is, the structural changes and the adjustment to the globalised economy will have to continue, albeit not in such a disruptive way as in the past couple of years. However, all other industrialised countries will have to adapt as well to the continuous changing environment. What the German example has shown is that it can be successfully done.

This is the text of a speech delivered by Peter Sutherland at The Wurzburg Conference – Informal Council on Competitiveness

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