Alexey Gromyko: The euro-zone will survive unscathed

Interview with deputy Director of the RAS Institute of Europe, Head of the Centre for British Studies, RIAC member Alexey Gromyko.

- Mr. Gromyko, today there are many speculations in mass media about the Greek crisis and the danger of its spillover to Spain, Italy and a number of other countries. How will the economic crisis affect the EU – Russia relations, or, alternatively, what new opportunities for our relations will it create?

Interview with deputy Director of the RAS Institute of Europe, Head of the Centre for British Studies, RIAC member Alexey Gromyko

- Mr. Gromyko, today there are many speculations in mass media about the Greek crisis and the danger of its spillover to Spain, Italy and a number of other countries. How will the economic crisis affect the EU – Russia relations, or, alternatively, what new opportunities for our relations will it create?

- Indeed, the Greek problem has long ago gone beyond the national borders – economic crisis has exposed the weaknesses of the European integration in general. Many failed to take the situation in Greece seriously: the share of Athens in the EU’s GDP is 2-2.5% and even hypothetical withdrawal of Greece from the Euro-zone wouldn’t have led to catastrophic consequences. But, provided one regarded the crisis as a link in the chain of developments, the scale of the problem would be much bigger than it might seem at first sight.

Besides, before the problems of the so-called sovereign debt finally emerged in Greece they had been brewing for two years, and Greece as we well know isn’t the first country to ask for a bailout from different financial structures both the existing ones and specially created in the EU with this particular purpose. Financial aid was provided to Ireland and Portugal as well as to other EU member states, such as Hungary and Latvia. Now financial crisis is spreading to the larger states of the European Union which can not in any way be regarded as insignificant for the fundamental principles of the EU workings. I mean, above all, Spain and Italy. Recently we have been talking especially much about Spain, mainly, because there is such a magic figure as 7%.

When sovereign bonds with ten - not three or five - year maturity exceed 10% it means that the country actually loses the ability to finance them. Spain, for example, is now teetering on the brink of 7% interest rate. It either exceeds this level or finds some solutions to decrease it to 6%. But the problem is there and, therefore, the main item on the EU summit’s agenda was the bailout of Madrid. As we all know money was provided, however these are only tactical temporary measures but not strategic solution of the EU problems for five - ten- fifteen- or even twenty-year term perspective.

Economic crisis might push different affected countries and organizations to self-isolation and, in terms of economy, to the erection of protectionist barriers, which has been the case lately. The EU on the whole has become more protectionist than it was before 2008.

That said, crisis can also have an adverse effect: the parties can embark on the path of joint problem solution and, as far as I’m concerned, such an approach allowed Russia and the EU to a great extent draw nearer their positions on a number of issues if not in practice but in a dialogue at least. It is not only the crisis proper but the very logic of the EU-Russia relations development that contributed a lot to this rapprochement. This summer upon the resolution of the Supreme Court of the Russian Federation Russia will obviously become a full-fledged WTO member. It is the main pre-condition of concluding a new framework treaty between Russia and the EU that should replace the expired in 2007 and annually extended agreement on partnership and cooperation.

The problems of the European Union and the Euro-zone are close to Russia not only because the EU, as it is stipulated by all possible documents, is its strategic partner but also due to the fact that the share of the euro in currency reserves of Russia’s Central Bank is practically equal to the share of the US dollar amounting to 42-43% and therefore Russia is keenly interested in stability of the euro. The dollar is not as reliable as it used to be and although it remains the only world reserve, or exchange, currency and despite the problems with the euro neither the Central Bank of Russia nor the Central Banks of other countries feel like staking their financial stability on the dollar.

From this perspective expressed both by Mr. Medvedev and Mr. Putin Russia is interested in the EU resolving its problems and starting to grow again. It will undoubtedly have a positive effect on Russian economy: we have to bear in mind that the European Union is Russia’s major importer and exporter. Besides, the EU is number one in terms of both portfolio and foreign direct investments in Russian economy if we sum up the investments of all the EU member states. Therefore, from the pragmatic standpoint, there is no doubt that Russia is interested in stabilization of the situation in the European Union. Moreover, Russia has already provided direct financial aid to Cyprus.

Apart from that Moscow has allotted a considerable sum to help the EU. Russia and China have taken steps to support the EU by providing funds through the International Monetary Fund. And if we take tourism, for example, it becomes obvious that Russian tourists have recently contributed a lot into the budgets of Greece, Spain, Italy and a number of other European states. And this is another factor of our mutual interest.

- You’ve mentioned the countries which in an attempt to escape from the crisis try to hide in an ivory tower, or are at least tempted to do it. The first country that comes to mind is, of course Great Britain. You are known as a big expert on the U.K. This country has long been notorious for a great number of eurosceptics and its special attitude to the European integration and special position in key EU institutions and regimes. Is now Great Britain isolating itself with the number of eurosceptics growing or, vice versa, it is using the crisis as an opportunity to increase its weight in the EU?

- Great Britain today is actually one of the most eurosceptical countries in the European Union. That said, the issue of withdrawal from the EU is currently irrelevant albeit rather significant part of the U.K.’s population especially the Conservative party and the United Kingdom Independence party (which is small but already pretty influential) electorate if the referendum was held now would vote for the withdrawal of Great Britain from the EU.

This is, however, pure populism for Great Britain has been the EU member since 1973. In the 1960-s it did it’s utmost to be included into the European Economic Community but its membership was twice vetoed by De Gaulle. In 1973 after the third attempt Great Britain became the EU member and since then it has played there a very important role as one of the top three largest and most influential both politically and economically countries of the EU.

It is absolutely clear that the European Union is inalienable from Great Britain as well as Great Britain owes its position in the world to its membership in the EU. The thing is that in 1973 the weight of the U.K. in the world started to decrease therefore all the countries applying for the EU membership did it, among other things, to boost their influence due to the resources and the whole set of instruments provided to them as the EU members.

That said, with the enlargement the EU internal structures have grown socially and economically disproportional. The mega enlargement of 2004 allowed in the EU ten countries at one go; since then two more states, Romania and Bulgaria, have become EU members, in 2013 Croatia will join the European Union and in the course of the near decade such countries as Montenegro, Iceland, Macedonia and, potentially, Serbia, Bosnia and Herzegovina, Albania will also become the EU members.

Apart from the advantages of the last twenty years of enlargement there have also been disadvantages: from the administrative perspective the organization has grown into a bulky and unmanageable one and taking into account that the majority of decisions are to be taken by consensus it becomes apparent that with years the problems have only exacerbated.

Over the last two decades more and more competences and decisions have been allowed to be taken by QMV, in other words, there have been left fewer and fewer legislation spheres where member-states can exercise their right of veto. This is the way the EU is trying to deal with its administrative problems.

However, it should be born in mind that the Europe of seven members in 1957 or fifteen in 1995 is different from the Europe with 27 or even more member-states and gradually, although this process started back in the 80-s, the EU has embarked on the path of the so-called multi-speed Europe development also known as the Europe of changing geometry. The European Union has started to be divided into different sub-groups – the core and the periphery, with the latter including not only the countries belonging to the same geographical territory of Europe but also the original EU members such as Italy, for example.

Great Britain is one of a few countries belonging to the EU core but, simultaneously, starting from 1973 it has been a eurosceptic country, a state that has always staked on the EU enlargement rather than on the deepening of the European integration. And it’s not accidental that Great Britain is an ardent proponent of Turkey’s admission to the European Union, with France and Germany being against it not only because Turkey is mostly a non-European country with the other mentality but mainly because the EU won’t withstand the membership of such a big state.

It will take another two decades for the EU to coordinate the workings of its internal mechanisms with the existing members. Britain, besides, is against federalization processes in the European Union and making it into even more centralized structure in the future. Even the most zealous federalists in the EU don’t have it in mind to turn the European Union into a kind of a super-state, something like the United States of Europe. But there exists such a term as the Federation of Nation States that brings about some controversy. That said, the European Union is a unique regional structure. Indeed, as nowhere else in the world it has implemented the combination of both the cooperation between the states and at supra-national level.

Britain is the country that carries on promoting the idea quantitative rather than qualitative EU enlargement. Great Britain wouldn’t object to regaining a number of competences which it once delegated to the EU supra-national structures.

David Cameron, the head of the ruling coalition in Great Britain consisting of Conservatives and Liberal Democrats, has already said that the issues of reviewing or amending the basic EU treaties will be considered only at a national referendum, not in the House of Commons. We know well that any referendum of the kind today would lead to a negative result. It means, actually, that a priori London has embarked on the path of altering the EU fundamental legal arrangement.

It also means that other countries will be urged to take measures – necessary for the EU to cope with current problems - that go beyond the existing legal system. It will inevitably lead to the entrenchment of the multi-speed Europe principle and the division of Europe into the so-called core and peripheries depending on the issue put on the agenda. For example, the Schengen zone and the Euro-zone are the examples of a two-speed or a multi-speed Europe. Of course, these processes will be continued.

Over the coming twenty years there will be much talk about how to find the golden middle between the processes of deepening and development of flexibility in the European Union. This balance should be found as soon as possible.

I believe that the Euro-zone will remain unscathed in the coming decade, with Greece most likely retaining its membership for at least two reasons. Firstly, there hasn’t been developed the mechanism of withdrawal yet and, secondly, when such a mechanism is developed the consequences for both Greece and the European Union will be much more damaging than the bailout. Judging by the outcome of the two Greek elections it becomes evident that the country tries to avoid front collision with the EU. The left-wing forces that could come to power in Greece on June, 17 lost the elections and as a result the coalition consisting of those parties which advocate the necessity of compliance with the agreements achieved between Greece, the European Union, IMF and ECB was formed. However, the problem is that some provisions of these agreements can be reviewed to extend the period of some painful for Greece reforms.

- Well, and in conclusion some words about Russian-British relations. What aspects of bilateral relations are, from your perspective, most promising in a few coming years?

- These are the same directions that have been successfully developing lately: economy, culture, investments and tourism. Political relations are in stagnation. Of course, a huge step forward was made with the visit of David Cameron to Moscow last September. Basically, unofficially the return visit of the Russian President to Great Britain is on the agenda, and if it takes place, a big if, it will be not earlier than next year.

But even during the period of a deep decline in political contacts between our countries in 2008-2009 the economic relations continued to actively develop. Great Britain is in top three most active foreign states on the Russian oil-and-gas and investment markets. And now when Russia is recovering from the economic crisis the statistics of 2010 and 2011 is much better in comparison with 2008 and 2009.

As far as I know, we haven’t reached the pre-crisis level of 2008 yet, but we are very close to it and this mutual interest for mercantile, in good sense, reasons will keep momentum as the main driver of bilateral relations. Let alone the fact that over the last years the LSE has become the main channel of access for Russian business to the world market of borrowed funds, and all the largest Russian IPOs were launched at London Stock Exchange.

Besides, British business has recently been lobbying the political leadership of the country to normalize relations with Russia, and as a result the agreement on such a controversial for Great Britain project as the Northern Stream has been reached. London reserved a certain volume of gas supply in the first gas line. Obviously, Britain, with becoming more and more dependent on foreign gas and oil supplies and depletion of reserves in the North Sea, will inevitably have to pay more attention to the opportunities offered by Russia in order to satisfy the internal demand for hydrocarbons.

It must be said that it is Great Britain that has many champions of the idea widely criticized in this country to turn Moscow into a regional financial centre. In Great Britain the London City strongly supported this idea. There has been set up a task force in Russia and the London City with a view to promoting this plan. Russian specialists explore best practices of the City while London experts come to Russia and make their contribution to the development of the Russian project.

Joint Russian-British inter-governmental commission on trade and investments works on a regular basis. It holds its meeting annually therefore at the top political level our relations, although stagnating, are in a pretty good shape. It’s clear that politics can not but influence the state and the climate of bilateral relations but it will be right to say that in the near two or three years we will be able to completely normalize our political relations. It doesn’t mean, however, that all the problems or even part of the challenges being currently the stumbling blocks in our relations will be overcome.

There are many stumbling blocks, kind of the Kuril Islands, in the relations between Russia and the U.K., and, obviously, one of them is the problem of extradition to Russia and from Russia. And the second is the issue of the so-called political refugees. In this regard, Britain is undoubtedly the country where those Russians who are in opposition to our country, to Russian authorities and political regime will continue to feel at home. But this is also the case with Russia’s relations with Japan, let alone very complicated relations between, say, Russia and Poland.

The existence of some problems should not impede overall interaction. Russia and Great Britain are interested not only in bilateral cooperation but they also seek interaction in multilateral international formats, and in this regard, as responsible members of the international community they, no doubt, should demonstrate maturity and political wisdom and not contingent the execution of their international commitments upon the problems in bilateral relations.

Therefore, to a certain extent I’m showing restrained or modest optimism and do believe that in two- or three years time our countries will be getting not only economically, socially and culturally but also politically more and more interdependent, and it will be a steady upward trend.

There is a kind of a time bomb in our relations: it is the so-called Magnitsky list. But, from my perspective, the rather pragmatic stance taken by the Foreign Office is unlikely to change. For it was the Foreign Office that during the hearings in the House of Commons opposed the turning of the calls of a number of British MPs for punishing Russia and “tightening the screws” into practical measures.

Well, and besides, much depends upon an array of external factors, above all the outcome of the U.S. Presidential elections, because Russian-British relations can be viewed at least partly as the function of U.S-Russia relations. Clearly, that, if after the December elections the relations between Moscow and Washington are developing well, than the aggravation in relations between Moscow and London is unlikely to happen. So, let’s live and see, but in general my forecast is more positive than negative.

- Mr. Alexey Gromyko, thank you very much.

The interviewers were RIAC Program Director Ivan Timofeev and PR-manager Olga Amelina.