by Tomas Valasek

In his first 100 days in the office, Nicolas Sarkozy turned France’s domestic political scene on its head. He trounced and marginalised the far-right National Front in the May presidential elections. In parliamentary elections a few weeks later, he wiped out Francois Bayrou’s bid to form a centrist party. And once firmly installed in the Elysée palace, he emasculated the leading opposition party, the Socialists, by poaching their best minds.

What in the world, one might wonder, will he do to France’s foreign policy when he puts his mind to it?

Well, on Monday we got our first hint. Sarkozy gave a speech to an assembly of French ambassadors from around the world. The presentation was typical Sarkozy. It oozed confidence. The speech showed him prepared. And, in a number of important ways, it showed him willing to depart from policies of Jacques Chirac.

The most interesting part of this speech was about Iran. Before even mentioning the country by name, he notes that France has an obligation to help the rise of emerging states by giving them access to nuclear technology for peaceful use. In saying so, he seems to be pre-emptively addressing Tehran’s accusations of double-standards. But then, when Sarkozy starts talking directly about Iran, he hammers. To France, a nuclear-armed Iran is simply unacceptable. France will support a new round of UN Security Council sanctions (when only last month it was said to be lobbying in New York against it because French companies may be among the most affected). And finally, the coup de grâce: unless Iran respects its obligations it will not escape “the catastrophic alternative: a nuclear-armed Iran or the bombing of Iran”. Sarkozy is effectively laying the blame for possible US intervention at Tehran’s feet. He is making Iran the issue, not the US. He does not condone bombing but suggests that he may not be entirely opposed either. And if it happens, it will be Iran’s fault. This is a significant change from Jacques Chirac’s days.

Washington’s joy at the speech will not be unqualified. Sarkozy is not warm to America. When addressing it directly, he calls for “pragmatic” relations. Sarkozy’s agenda for the French presidency of the EU in 2008 is not particularly US friendly. The emphasis on immigration, energy and environment offers little hope of rapprochement. With the exception of energy these are issues that are either intra-European (immigration) or on which the EU and France do not see eye-to-eye (environment). On NATO, Sarkozy says he wants the alliance to co-operate smoothly on military matters with the EU. But he makes no hint of how to resolve the impasse that effectively keeps the EU and NATO from talking to each other. Worse (from the US perspective) he wants to strengthen the EU’s operational planning capacity, which has been a thorn in the side of both London and Washington.

On the other hand, where Sarkozy talks of issues that matter to the US – China, Iran, the Middle East – he strikes a line similar to Washington’s. That is true not only for Iran but also for the Middle East, Russia and China. Sarkozy comes down stronger on the side of Israel than any other French leader in recent history. He proudly calls himself a friend of Israel. He says peace with Palestine is very important but it will not happen if the Palestinians cannot form a government. Sarkozy called the Hamas takeover of Gaza “the first step toward establishing Islamic radical foothold on Palestine territories” and said that the Palestinian Authority must be rebuilt under its president Mahmoud Abbas.

On Russia and China Sarkozy strikes a realist tone. He ignores their domestic affairs altogether. Their foreign policies come for criticism. Sarkozy chided China for using monetary policy as a power tool, and Russia for using energy as a “brutal” weapon. (Interestingly, nowhere does he raise issues that made his foreign minister, Bernard Kouchner famous: the slide toward authoritarian regime in Russia, or violations of freedom of speech in China. In foreign policy, as in everything else, Sarkozy seems determined to run things directly from the Elysée.)

The overall impression Sarkozy leaves is that he is neither anti-American nor pro-American. He does not take cheap shots: although he notes that France was right on Iraq, he does not gloat. He states in the preamble that “the leaders of the past twenty years failed to construct a workable post-Cold war order”. But he is both right and diplomatic in saying so, so America should not take offence. The speech effectively removes America as the defining issue of French foreign policy. France will not view foreign policy as an opportunity to score points at America’s expense; it will judge the world’s problems on their own merits. Where Sarkozy does so, he finds that he has a lot in common with the US. But he will not go out of his way to restore America’s good standing in Europe; the Americans will need to do that work themselves.

Overall this is a very strong presentation. He clearly thought about foreign policy a lot. We have come to associate Sarkozy’s France with exuberant confidence but it bears remembering that only three years ago, the world looked very different through French eyes. The then-Foreign Minister Michel Barnier, also speaking in 2004 to assembled French ambassadors, lamented the decline of France in Europe (because of enlargement of the EU to include pro-US countries). Sarkozy could not have struck a more different note.

Tomas Valasek is director of foreign policy & defence at the Centre for European Reform.

The EU, the US and Taiwan

by Charles Grant

Taiwanese domestic politics is nasty and messy. The two main political forces – the KMT, which believes in ‘one China’, and the DPP, which leans towards an independent Taiwan – hate each other with venom that is unmatched in most other functioning democracies. But the country is pluralistic, with a free press and fair elections. Since Taiwan’s politics are so much more ‘western’ than those of the People’s Republic of China (PRC), it ought to have many friends in the western democratic world.

But it has few close friends. Both the Americans and the Europeans know that they must be on good terms with China. It is simply too important, economically and strategically, to have as an enemy. Therefore ministers in most western governments are careful not to meet their Taiwanese counterparts on an official basis, lest China get annoyed. And they tolerate the fact that China excludes Taiwan from many international bodies, such as the World Health Organisation. Of course, there are some policy-makers in the West who think that democracies should stand by other democracies. The much-maligned neo-cons, for example, give moral support to Taiwan, as do some idealists of a more liberal persuasion.

American policy on Taiwan is both realist and idealist. The US supports the status quo, meaning that it opposes Taiwanese independence. But the US also promises to defend Taiwan in the event of a Chinese attack. That promise is deliberately couched in ambiguous terms, to discourage the Taiwanese from provoking China, and to dissuade China from taking military action.

Having made no commitment to defend Taiwan, EU policy is much simpler. The EU does not see China as a strategic competitor, since – unlike the US – it is not an Asian power. So it has a clear policy of engagement with China, of supporting the status quo across the Taiwan Straits, and of being friendly towards Taiwan – but not so friendly that China would become annoyed.

The EU and the US agree on the goals of stability and the non-use of force across the Taiwan Straits. But Americans care much more about Taiwan, for the understandable reason that American blood and treasure could be shed in its defence Such emotions explain why the US over-reacted over the EU’s tentative moves towards lifting its arms embargo on China two years ago (there were good reasons why the EU should not have lifted the embargo at that time, but it was hard to have a rational discussion with some Americans over the matter, such was the strength of their feelings; they talked of the Chinese firing French missiles at American troops fighting on the beaches of Taiwan).

European views have shifted somewhat over the past two years, to be slightly more sympathetic to Taiwan. The fact that China passed the Taiwan secession law, which promises the use of force if Taiwan moves towards independence, was good PR for the Taiwanese. And the replacement of Gerhard Schröder by Angela Merkel has made a difference. She is a little more critical than her predecessor of large countries that abuse human rights, and opposes lifting the arms embargo. The departure of Jacques Chirac is also likely to affect EU’s China policy: he has been the leading proponent of lifting the embargo.

In some ways, the status quo is not so bad for Taiwan. The country is rich, successful and free, and many of its people enjoy a good quality of life. The problems for Taiwan are, firstly, its status – it is not allowed to do many of the things that normal countries do; and, secondly, its insecurity – almost a thousand Chinese missiles are pointing at it.

So the US and the EU are right to tell the Taiwanese not to rock the boat. This, along with a sensible US China policy balancing engagement with a promise of a military response to an attack on Taiwan helps safeguard the status quo, probably the best option available to Taiwan at the moment. In time, burgeoning economic ties between Taiwan and the mainland should make each side very wary of taking provocative actions that could threaten the prosperity of both – whatever the nature of the political relationship between the two. Ties between businessmen and politicians in Taiwan and the PRC are growing all the time. China is also democratising, slowly but surely, which increases the odds of peaceful reunification. Perhaps in the long run Taiwan can offer China an example of how prosperity, order and stability can co-exist with liberal democracy.

Charles Grant is director of the Centre for European Reform.

Beware a weak dollar!
by Simon Tilford

When Claude Trichet, president of the European Central Bank, announced yesterday’s increase in eurozone interest rates, he did not even mention the threat a weaker dollar could pose to the outlook for the eurozone economy. At the current exchange rate between the euro and the dollar, his apparent complacency may be right. In trade weighted terms, the euro has only strengthened very gradually over the last 12 months. However, European policy-makers are being too sanguine about the implication for Europe of a sustained fall in the dollar. As a result, they risk repeating the mistakes of early 2001, when they dismissed the threat posed to the European economy from a weaker dollar.

What has changed since 2001 to make European policy-makers such as Mr Trichet so relaxed about the impact of a fall in the dollar on the European economy? One argument is that the eurozone economy has become less dependent on exports for growth. There are at last signs that the German economy could start growing under its own steam rather than depending on exports for external stimulus. However, it is far from clear that the recovery would remain on track if exports took a big hit.

In fact, the trade dependence of most EU economies has, if anything increased since 2001. For example, German exports as a percentage of GDP have risen rapidly in recent years. The proportion of total exports accounted for by the US may have declined, but that ignores the fact that a sizeable proportion of the growth has been accounted for by rising exports to countries whose currencies are effectively tied to the dollar, notably China.

Another argument is that the reforms made by European economies over the last five years have boosted their competitiveness and left them better able to cope with a weaker dollar. The competitiveness (and profitability) of German industry in particular has certainly improved, with the result that German companies will be relatively better able to cope with a weak dollar than five years ago. The same cannot be said of other eurozone economies. The competitiveness of the Italian and Spanish economies has deteriorated very sharply since 2001.

If the Chinese and the other East Asian central banks were to allow their currencies to rise in response to a fall in the dollar, then the European economy would not have to bear the full cost of adjustment of a decline in the value of the dollar. So far, there is no indication the East Asians intend to allow their currencies to rise against the dollar. In the event of a run on the dollar, European companies are likely to experience a loss of competitiveness not just in the US, but in fast growing Asian markets as well as in third markets, where US and Asian companies will be much more competitive.

In any event, a focus on the direct trade impact risks underestimating the scale of the threat. When measuring the vulnerability of the EU economy to a fall in the dollar and downturn in the US economy direct trade flows are a relatively small part of the story. The importance of the direct trade with the US is far outweighed by indirect links. For example, the sales of British and Dutch-owned companies in the US outweigh exports from the Netherlands to the UK many times over. Even in export-dependent Germany, sales from German-owned companies in the US are five times higher than the value of German export to the US. Declining profits from the US affiliates of European businesses would hit business confidence and investment in Europe hard.

The ECB should not rush to raise interest rates further. Of course, a stronger euro will present benefits as well as impose costs. Import prices will fall, especially those of commodities priced in dollars, such as oil. This will lower inflation pressures in Europe and reduce the likelihood of further interest rate rises. However, the European economy is not as resilient as many are assuming. A rise in the value of the euro to €1.50:$1 or €1.60:$1 – a very plausible assumption – would not just be shrugged off. Indeed, it would in all likelihood put an end to the long-awaited eurozone recovery, which is currently not powerful enough to absorb the shock of a much weaker dollar.

Simon Tilford is head of the business unit at the Centre for European Reform.