by Katinka Barysch

Angela Merkel can be content with the outcome of the G8 summit in Heiligendamm which she chaired with her by now characteristic mix of modesty, determination and pragmatism. Many people had predicted that the meeting would end in acrimony because of US-European disagreements on climate change and because of mounting tensions between Russia and the West. Instead, Merkel brokered a couple of impressive-looking headline agreements. Moreover, the meeting has proved those people wrong who say that the G8 is an irrelevant talking shop. Heiligendamm showed it is an important tool for global governance.

This meeting will be mainly be remembered for the US U-turn on climate change. In the run-up to the summit, the US officials had said that there was no chance that the Bush administration would sign up to ambitious numerical targets, such as those endorsed by the EU summit in March 2007 (also headed by Merkel). But at Heiligendamm, George W Bush backed, at least in principle, the objective of cutting greenhouse gas emission by 50 per cent by 2050. The US still insists that binding targets will need to involve China, India and other emerging powers. But it is nevertheless significant that he agreed to the start negotiations on a post-Kyoto regime in the framework of the United Nations.

The G8 countries also reconfirmed their aid commitments made at the Gleneagles summit in 2005, namely to write off multilateral debt worth $60 billion, to raise annual overseas development assistance to $50 billion (of which half should go to African countries) and to provide universal access to HIV treatment by 2010. But NGOs said this ‘recommitment’ did not amount to much, given that the G8 countries are already falling behind on their objectives and still oppose annual spending targets. Similarly, although the G8 leaders promised to spend $60 billion over coming years on fighting HIV, malaria and other diseases in developing countries, they did not add a timetable.

The summit agreements are big steps towards longer-term goals, but they leave the most controversial questions to be resolved at a later point in time. Neither was there much progress on other issues on the G8 agenda, such as the Doha trade round, Kosovo, Iran and the regulation of hedge funds.

What the summit did do, however, is provide a very useful snapshot of global politics at a time of leadership changes in many of the key countries.

Well done Angela!
Merkel has cemented her role as Europe’s leading political figure, and she has now added a global dimension. Previous achievements had already earned her a reputation as a skilled mediator and negotiator. Her tireless pre-summit diplomacy on climate change appears to have paid off. Her strategy was also smart. Knowing that failure to reach a climate deal would be blamed on the US (and not damage her popularity at home), she was in a strong position. She had played down expectations of a deal ahead of the summit while still leaning heavily on President Bush. Although the G8 agreements owe much to Merkel’s political skills and convictions, they are also evidence of a longer-term trend towards a more self-confident Germany which is not afraid to shoulder global responsibilities.

The new George W
Bush’s apparent U-turn on CO2 targets was partly motivated by the fear to antagonise or embarrass Merkel – a sign that she has successfully mended US-German relations after the falling-out over Iraq. Bush also wants good ties with Merkel as part of his broader efforts to strengthen US-EU relations. Some observers spotted a belated turn towards multilateralism. Having long been dismissive of multilateral organisations, Bush has now agreed that the UN should be the framework for post-Kyoto negotiations. On other issues too, Heiligendamm saw a more co-operative and conciliatory US president. He was friendly to Vladimir Putin, despite the latter’s aggressive hectoring ahead of the summit. He also promised that the US would cough up half of the $60 billion committed to healthcare initiatives in Africa.

Russia is back
Putin’s belligerence in the run-up to the G8 had fuelled fears that Heiligendamm would be the chilliest East-West encounter since Russia officially joined the G8 in 1998. Putin had threatened to re-direct Russian nuclear missiles towards Europe if the US went ahead with stationing parts of its missile defence system in the Czech Republic and Poland. Having failed to drive a wedge between the US and the Europeans, Putin then suggested that the US should station missile defences at Gabalan, a Russian-operated base in Azerbaijan. Security experts say that the proposal, first muted in 2004, is unattractive to the US not only because it implies shared control over a key US military installation, but also because Gabala is too close to Iran to intercept a potential attack from there. If Putin knew that the US answer would be No, his prime aim must have been to set the agenda – to first raise tensions and subsequently defuse them. Such behaviour is becoming typical of a resurgent Russia. Putin’s shrewd mixture of harsh statements followed by statesman-like conciliation is also meant for home consumption, ahead of the parliamentary election in December and the presidential changeover in early 2008.

Bye bye Blair
Heiligendamm was Blair’s last international summit but one (he will still attend the European Council on June 21st and 22nd). It should have been a grand finale for him, given that it made progress on climate change and poverty alleviation, his two top foreign policy priorities. But any sense of triumph Blair may have felt must have been dampened by the absence of public recognition. Blair has always argued that his decisions to send troops to Iraq and not criticise Bush in public were paying off in terms of the private influence in Washington. Diplomats say that Blair worked hard to mediate between Merkel and Bush before and during Heiligendamm. But in the end it was Merkel who received the credit for having persuaded Bush. At least Blair’s imminent departure from the political scene allowed him to talk openly about differences with Putin.

Welcome Sarkozy
For Nicolas Sarkozy the G8 meeting was the first opportunity to mingle with the leaders of the world’s biggest countries as French president. With parliamentary elections imminent, Heiligendamm was the perfect opportunity for Sarkozy to show his skills as statesman. He did so by putting forward a compromise proposal for the final status of Kosovo (rejected by Putin) and by calling for more international attention to Darfur (vaguely accepted). Sarkozy’s conciliatory language after a long private meeting with Putin raised concerns that he would follow Jacques Chirac’s uncritical stance on Russia. But Sarkozy made big efforts to distance himself from his polished predecessor by talking very openly, by not trying to steal Merkel’s show and by being nice to Bush.

A bigger club
The other G8 members – Italy, Canada and Japan – played a more marginal role, whereas some non-G8 countries got a lot of attention. Leaders from emerging Asia, Africa and South America have long taken part as observers in G8 meetings. It is now clear that the eight current members cannot fix any global priorities – whether climate change, Doha, global imbalances, terrorism or poverty – without the co-operation of other emerging powers. China’s economy is already much bigger than those of Italy and Canada, and China is also on course to overtake the US as the world’s number-one emitter of greenhouse gases. Both China and India have more than twice as many people as the US or all the European G8 members together. And the legitimacy of many G8 initiatives will depend on African or Latin American countries having a say.

Nevertheless, the Heiligendamm meeting decided against broadening the club’s membership. Instead, a new ‘Heiligendamm process’ will regularly bring together ministers from the G8 and the five ‘outreach countries’ (China, India, Brazil, Mexico and South-Africa), to discuss issues ranging from energy to intellectual property rights.

Some say that taking in China would destroy the democratic credentials of the G8 (although that argument is a lot less potent given Russia’s slide towards authoritarianism). Others fear for the club’s effectiveness. Merkel said, for example, that if the poorer nations had already been part of the G8, a compromise on climate change would have been impossible. But neither are the newcomers in a hurry to become full members. India and China – while keen to make their voices heard – insist that their status as developing countries does not allow them to shoulder the same global responsibilities as the current G8 countries.

Heiligendamm showed that the G8 is not just a talking shop as some of its critics have alleged. There was real drama as the sherpas haggled over the final communiqué until the last minute. And the results are important milestones in long-term fights against climate change and poverty. But the meeting also showed clearly that to remain relevant in the future, the G8 will eventually have to include China, India and other emerging powers.

Katinka Barysch is chief economist at the Centre for European Reform.

The world in 2020
by Mark Leonard

By 2020, according to the Economist Intelligence Unit, the Chinese economy could overtake the US to become the largest in the world, at least when measured using purchasing power parity (PPP) exchange rates. India is expected to grow rapidly to become the third biggest economy. Alongside these Asian giants, a series of smaller powers – such as Iran and Russia – will increasingly be able to exploit their nuclear weapons and energy to increase their say in world affairs.

This shift in economic power could be all the more significant, as it is overlaid with an ideological struggle over the shape of world order. Many of the new poles of 2020 will not simply be great powers pursuing their national interest, but networks of countries united by ideas about how the world should be run. In the 1990s it seemed prophetic to talk of the ‘end of history’. Francis Fukuyama’s famous thesis was not that power struggles or even wars would end (in fact, he thought they would continue), but that the great ideological battles of the 20th century would end with “the universalisation of western liberal-democracy”. However, although the differences between major powers are less stark today than during the Cold War, the big story in international relations seems to be history’s dramatic return.

By 2020 we will most likely not see a new world order, but at least four. Already the contours of a new ideological map are emerging that splits the world across two axes. One is domestic: between democracy and autocracy. The other is about philosophies of global order: between those who want to see the world governed by law and international institutions and those who want to see it governed by power. These divisions could give rise to a quadripolar world.

To Europe’s west, the most powerful bloc will continue to be the American World, underpinned by the dollar, popular culture, and the prevalence of the Washington consensus. The goal of US foreign policy is to build a ‘balance of power that favours democracy’. Instead of seeing international institutions as the ultimate foundation of a liberal order, US foreign policy will increasingly seek to maintain US primacy, and the power of key democratic allies such as Japan and India in East Asia.

To Europe’s East, Russia and China. Although they will continue to be suspicious of each other, they are united by their autocratic systems of government, and they will increasingly use international law and institutions to protect the sovereignty of states from western interference. Together, China and Russia could turn the Shanghai Co-operation Organisation into an anti-NATO of countries that are repressive. They will also use their seats in multilateral institutions such as the United Nations to contain the United States.

To Europe’s south will be a stateless world of faith – defined neither by democracy nor the rule of law. While some countries in the Middle East – Lebanon, Palestine, and Turkey – may develop a new strain of ‘Muslim Democracy’, many won’t manage to change their politics quickly enough to keep up with social demands.

And that leaves the fourth zone. An expanded EU will share a belief in democracy with the Americans – but be alienated from them because of its belief in multilateralism and international law. Around its core, the ‘Eurosphere’ will include another 70 countries that are deeply dependent on the Eurosphere for trade, aid, investment. These will gradually be drawn into the European way of doing things, through the European neighbourhood policy that links market access to compliance with European standards on human rights, the rule of law, migration and proliferation.

Not all countries will fit neatly into one sphere or another. This will lead to a global battle to co-opt ‘swing countries’ in South-East Asia, Central Asia, the Caucasus and the Middle East. The biggest swing-state will be India.

The shift from a unipolar to a multipolar world could be almost as significant for global politics as the end of the Cold War. Like the events of 1989, it will force European strategists to change their mental maps of the world, and develop relations with countries that were outside the EU’s sphere of influence.

So what should European leaders do?
Their most urgent challenge should be to prove my predictions wrong. By pursuing a ‘disaggregation strategy’ of engaging the relevant forces in each of the other blocs, they could prevent the ‘quadripolar world’ from coming into being. For example, there are strong forces in favour of the international rule of law and international co-operation at a federal and state level in the United States, that the EU could engage with on climate change and international trade. Russia and China have major differences on energy and proliferation that could be exploited, in order to prevent these great powers from becoming a cohesive force. And in the Middle East, the EU should do all it can to play off the differences between Iran and Syria, and Hamas and Hizbollah, through policies of conditional engagement. The alternative to breaking down these emerging blocs could be a permanent sense of frustration, and a gradual shrinking of European influence in the world.

Mark Leonard was director of foreign policy at the Centre for European Reform until November 2006. In early 2007 he will set up and direct a new pan-European initiative of the Soros foundations network, to promote the EU as a model for an open society.

Climate change:
Western business can help China and India
by Katinka Barysch


We Europeans are proud pioneers in combating climate change. But what we do at home is almost irrelevant unless we persuade and help China and India to limit emissions.

European countries are doing more than most to reduce emissions at home, according to report presented to the UN’s climate change conference in Nairobi this week: 15 of the world’s ‘greenest’ countries are in Europe. And the EU wants to go further. The European Commission has just published a plan to extend the EU’s pioneering emissions rights trading (ETS) scheme to cover more sectors and pollutants.

European climate policies matter – as examples for the rest of the world and as a testing ground for new technologies and policies. But to stop global warming we need a global approach.

In the US – the single biggest source of greenhouse gas emissions – the consensus is slowly shifting in favour of tougher policies. While the Bush administration has ruled out ratifying the Kyoto Protocol, a large number of State governments have adopted emission reduction targets or joined regional ‘cap and trade’ schemes.

Whether the US supports a post-Kyoto regime will critically depend on whether China and India come on board. China is already the second biggest emitter of greenhouse gases, mainly because it relies on coal – the dirtiest of fuels – for two-thirds of its power generation. Coal in China is cheap and plentiful. The country still has reserves to last it about 200 years, and the price of producing energy with coal is a fraction of any alternatives. India is a similar story: it relies on coal for more than half of its energy needs and is the fourth biggest source of CO2 emissions in the world. The International Energy Agency assumes that 70 per cent of additional coal demand until 2030 will come from India and China.

The Kyoto protocol almost pales into insignificance in comparison. In 2004, the Christian Science Monitor reported that China was on course to build 562 additional coal-fired power plants by 2012, more than half of the world’s total. Together with planned new plants in India (213) and the US (70 or so), these will emit 2.7 billion additional tons of carbon dioxide. Compare that with the (maximum) 480 million tons that Kyoto countries have promised to cut from their CO2 emissions by 2012.

Coal is not the only problem. China is already the second biggest oil consumer in the world, after the US. It used up 5.5 million barrels of oil a day in 2005, and India an additional 2 million. Both countries’ needs will continue to grow fast as people get wealthier and more mobile. More than three million new passenger cars were registered in China last year. But still only 11 out of 1,000 people have their own vehicle. In a developed country like the UK, more than half of all people have a car.

Improving the EU’s ETS is important. But our priority must be to persuade and help China and India to limit greenhouse gas emissions.

The Chinese and Indian authorities say they take climate change seriously. But they insist that economic growth has priority and only rich countries can afford to combat climate change. China and India account for only 10 per cent of the fossil fuel CO2 accumulated in 1850-2004. The EU, the US and Russia together account for 70 per cent. Getting Beijing and Delhi to sign up to a tough post-Kyoto regime will be as difficult as it will be essential. In the meantime, are there other things we in Europe can do?

At a workshop on India, China and climate change – which the CER ran together with the German-British Forum on November 14th – we explored how the private sector could help China and India to become greener.

The transfer of Western technology is helping to make these countries more energy efficient. But change is slow: 15 years ago, Chinese power plants typically operated at a level of efficiency that was 35-50 per cent of that of German plants. Since then that share has crept up to 50-60 per cent. A step change is needed.

Many people put their hopes into clean coal technologies. These capture the CO2 produced by coal burning and bury it under ground. So far there are only a few pilot plants in places such as Norway and the UK. But even if the West managed to make the technology commercially viable, it would remain too expensive for China to roll it out on a grand scale.

Western governments and the EU give China some money to encourage the adoption of clean technologies. But it is not enough to make a difference. Perhaps market mechanisms are more promising. Business is certainly interested. There are now 80 environmental companies listed in London’s AIM (alternative investment market) alone. Mainstream companies from Goldman Sachs to Virgin have earmarked billions of dollars for green investment schemes. There are now more than 100 funds that solely invest in clean energy and other environmental technologies.

Under Kyoto’s ‘clean development mechanism’, rich-world polluters can keep within their target by investing in environmental projects in those developing countries that have no targets themselves. In theory, therefore, Western businesses have an incentive to invest in energy savings technologies, clean coal plants and renewables in China. In practice, however, the clean development mechanism is clunky and complicated. Its effectiveness also suffers from Kyoto’s limited lifespan. Most green investments, such as new power station or windfarms, have long lifespans. So investors have to make an assumption about long-term trends in carbon prices. At the moment, they don’t even know whether there will be a carbon market after Kyoto runs out in 2012.

China itself is not exactly making it easy for Western companies. Widespread disregard for intellectual property rights makes investors reluctant to transfer the cutting edge technologies that are often needed in environmental projects. Moreover, regulatory frameworks are uncertain or badly enforced. Take renewables as an example. Both India and China have ambitious targets but since burning coal is cheaper than building dams or erecting wind turbines, regulation is needed to encourage investment. In 2004, the Chinese authorities announced that 30 Giga-watts should come from wind power by 2020 (a modest target: experts assume that China’s potential for wind-powered energy is at least ten times that). However, when the government finally released the relevant regulation in 2006, potential investors withdrew in frustration: local content requirements of 70 per cent and an overly competitive market framework would make it almost impossible for western companies to turn a profit. The big winners would be incumbent Chinese energy giants.

Western investment can help China and India to limit their greenhouse gas emissions. But these countries also need to help themselves by building an attractive regulatory and business environment for green investments.