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    Growing pains of EU enlargement

    Welcome back. The late Polish-born pope John Paul II was fond of saying that Europe ought to breathe with two lungs, eastern and western. This compelling image has lost none of its force as the EU grapples with how to advance its long-stalled process of eastern enlargement. I’m at [email protected] Meloni, Italy’s premier, quoted John Paul’s remark during a visit at the start of this month to Moldova, where dozens of leaders from EU and non-EU countries gathered for the second summit of the European Political Community.Meloni said Italy supported the goal of EU membership for Balkan countries, Georgia, Moldova and Ukraine as part of their “reunification into the European family”.Fine words, with which all 27 EU member states agree in principle. As Emilija Tudzarovska, a lecturer at Charles University in Prague, writes for Social Europe, Russia’s attack on Ukraine last year concentrated the minds of policymakers in national capitals and at EU headquarters in Brussels.In once-sceptical western European countries, where “enlargement fatigue” has spread for a decade or more, a more common view now is that Russia’s invasion has transformed Europe’s geopolitical outlook. Long-term security and stability require a serious effort at expanding the EU’s membership.Most strikingly, French president Emmanuel Macron says that EU enlargement should proceed “the faster the better”.But the obstacles to enlargement are formidable. Some relate to the internal political, institutional and economic conditions of candidate countries, which at present fall short of the EU’s exacting standards for membership.Others concern the politically sensitive concessions and trade-offs that will be required of EU states to accommodate new members in their club. This week I’m asking what needs to be done to make enlargement a reality — and, one hopes, a success.From six to 28 — then 27Let’s start with a short look at the history of EU enlargement. To the six founding states of the 1950s (France, West Germany, Italy and the Benelux trio), the original European Economic Community added Denmark, Ireland and the UK in the 1970s, Greece, Portugal and Spain in the 1980s and Austria, Finland and Sweden in the 1990s.During this process, the EEC became the European Community and then the European Union.The biggest and most challenging enlargement took place between 2004 and 2013, when the EU brought in 13 new members. All except Cyprus and Malta came from the former communist half of Europe: Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia.Then the UK left, reducing the membership to 27 from 28 countries.Overall, enlargement looks like one of the EU’s greatest achievements. It has consolidated democracy and prosperity across a large part of the European continent, eased historical animosities among various member states and made the EU a powerful global actor in areas such as trade and business regulation.Snail’s progressNow eight more countries are official membership candidates: Albania, Bosnia and Herzegovina, Moldova, Montenegro, North Macedonia, Serbia, Turkey and Ukraine. Moreover, the EU regards Georgia and Kosovo as potential future members.However, enlargement has slowed to a crawl or worse. No country has joined since Croatia in 2013. Even those Balkan states that have begun formal entry talks are nowhere near completing all 35 “chapters” of EU law that have to be negotiated. Turkey’s candidacy is little more these days than an optical illusion.One reason for the paralysis is that some governments, especially but not only in western Europe, look at the “democratic backsliding” of Hungary and Poland, and at corruption in Bulgaria, and wonder if similar problems will disrupt the EU after another round of enlargement.These fears are rooted in the feeling that, once a country is in the EU, it is no simple task to make it fully observe the rules to which it signed up when applying for entry. As a result, the admission process was toughened in 2020 with the inclusion of new tools to reward progress or punish backsliding on issues like democracy and the rule of law.Another cause of enlargement paralysis is to be found in the territorial, ethnic and political disputes of the Balkans. Tensions between Serbia and Kosovo have once again flared up. Without a settlement of that quarrel, neither state has much prospect of joining the EU.In Kosovo’s case, the picture is complicated by the fact that five EU states — Cyprus, Greece, Romania, Slovakia and Spain — do not recognise the former Serbian province’s declaration of independence in 2008.Frictions among Muslim Bosniaks, Croats and Serbs have persisted in Bosnia and Herzegovina since the war of the 1990s and are a serious obstacle to that country’s hopes of EU entry.Finally, Bulgaria has persuaded the EU to establish certain conditions for North Macedonia’s accession that go beyond the normal admission criteria and set a bad precedent for the Balkans as a whole.Ukraine’s friends have interests of their ownIn a worrying sign for Ukraine’s EU prospects, Bulgaria, Hungary, Poland and Slovakia imposed restrictions on Ukrainian agricultural exports in April because of gluts building up on their local markets.The quarrel was smoothed over, but the lesson is there for all to see: when it comes to opening the EU door, even Ukraine’s staunchest allies will fight for their own interests.For example, Poland’s ruling Law and Justice party relies heavily on the electoral support of rural areas where competition from Ukrainian food exports is less than welcome.As for Hungary — much less of a friend to Ukraine — it is unfortunately all too imaginable that the government of Viktor Orbán would raise objections to EU entry, alleging that the ethnic Hungarian minority of Ukraine’s Transcarpathia region suffers discrimination.Claims on the EU budgetThe larger point concerning Ukraine is that, by EU standards, it is a very populous country with more than 40mn inhabitants, if you include war refugees abroad and the people of Russian-occupied regions in the south and east.Furthermore, if Ukraine joined the EU, it would account for about a fifth of all the bloc’s farmland. Even leaving aside the matter of postwar reconstruction, a cost expected to run into hundreds of billions of euros, Ukraine would be one of the least well-off member states.It would therefore have a huge claim on funds available under the EU’s Common Agricultural Policy and regional aid programmes. Together, they make up about 65 per cent of the bloc’s budget, as set out in this excellent report by the Center for Strategic and International Studies on EU enlargement.Which countries will volunteer to give up billions of euros to make room for Ukraine? At present, 18 of the EU’s existing 27 members receive more funds from Brussels than they pay in, but this could fall to four or five after Ukraine joined, according to informal EU estimates.And don’t forget that every other candidate country would also exhibit an entirely understandable thirst for EU largesse.EU treaty reform?Enlargement throws up questions beyond money. A club of 35 members would have to redesign itself, redistributing seats in the European parliament, altering voting weights in the European Council (which groups national governments) and perhaps scaling back the need for unanimity in areas such as foreign policy or taxation.No wonder some governments think the only way to make enlargement work is to rewrite the EU’s basic treaty. But that is easier said than done. From my FT days in Brussels, I have vivid (and not wholly pleasurable) memories of how difficult it was to pass treaty reform in all member states in the 2000s, the last time it was done.In any case, as Stefan Lehne pointed out in this piece for Carnegie Europe, some 13 northern, central and eastern European countries last year published a “non-paper” (a quintessentially Brussels document, implying a viewpoint worthy of serious attention, but not a formal position) that came out against “premature attempts to launch a process towards treaty change”.Keeping up enlargement momentumThere are, nevertheless, creative ways of getting enlargement on the road.In this article published by the Stockholm Centre for Eastern European Studies, Michael Emerson and Steven Blockmans explain that the EU need not delay until candidate states have met all the entry criteria. Instead, it could take a step-by-step approach, giving the benefits of membership in stages as the countries make progress.Initiatives along these lines are already taking shape. Ursula von der Leyen, the European Commission president, proposes to integrate Balkan countries, before full membership, into the EU’s digital single market in areas such as ecommerce and cyber security.This seems to me a promising approach. But I fear it will still leave many questions unanswered about how the EU can ensure that one day it breathes with two lungs.More on this topicIs the EU ready for further enlargement? — Judy Dempsey collects the views of experts for Carnegie EuropePutin has revived the EU’s dreams of enlargement — writes the FT’s foreign editor Alec Russell for the “global insight” sectionTony’s picks of the weekWestern countries are concerned that China and Russia may exploit geopolitical tensions in the Arctic to bolster their regional influence and expand their access to its natural resources, writes Richard Milne, the FT’s Nordic and Baltic correspondentPresident Recep Tayyip Erdoğan’s re-election indicates that western governments are in for a bumpy ride in relations with Turkey, according to Luigi Scazzieri of the Centre for European Reform More

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    We need new tools to predict climate risks

    Riccardo Rebonato is professor of finance at Edhec Business School and scientific director of the EDHEC-Risk Climate InstituteAs global temperatures rise, financial and policy planners badly need a way to forecast the implications. Yet the unprecedented nature of climate change means we must devise new approaches to complement the traditional statistical tools used to better tame risk.International bodies, including the Intergovernmental Panel on Climate Change (IPCC) and the Network for Greening the Financial System (NGFS), have sought to fill the gap by setting out several different climate warming scenarios. These have provided much-needed guidance to policymakers and financial planners, from investment managers to corporate executives. But they all share conceptual features that limit their usefulness.Think of the existing approach to scenario mapping as a table, which sets out five socio-economic narratives (so-called Shared Socioeconomic Pathways, or SSPs) on one side and possible warming scenarios (Representative Concentration Pathways, or RCPs) on the other.Each option — for instance “Middle of the Road”, where there is slow progress towards changes in environmental behaviour — sets out the projected impact on factors such as economic growth, population and technological development. Each narrative must be coupled with each possible end-of-century warming level.

    Riccardo Rebonato: assigning probabilities to socio-economic narratives is difficult but more beneficial

    This coupling is achieved using a model that combines economics and physics modules. The parameters are adjusted to reflect the socio-economic narrative, and the models calculate the implied “carbon tax” required to achieve the temperature target.Recent scrutiny, however, has highlighted several flaws in this approach. For each “story”, the links between the macro-financial variables are totally rigid: one assumption on economic growth results in a certain assumed level of population growth, or to a particular level of technological development, and so on. This greatly limits the possible outcomes and can engender an unwarranted sense of control. Climate black swans are shot down before they can even take flight.

    Health impact: smoke from forest fires in Canada renders New York’s air quality the worst in the world in June 2023 © Eduardo Munoz Alvarez/Getty Images

    Yet there is a deeper problem: no attempt is made to assign a probability to the various story/warming combinations. There are good reasons to remain probability-agnostic. However, a scenario without any probability attached to it is of little use. Precisely because resources are limited and the scale of a serious abatement push is little short of a war effort, financial and policy planners need an idea of which scenarios they should most worry about.Absent any guidance to the contrary, assigning equal probabilities to the narratives and the projected warmings is intuitive. But it is also unwarranted and potentially dangerous. For example, one scenario, the RCP8.5, has been criticised in science journal Nature for being virtually impossible, yet it is one of the most frequently quoted scenarios in applied work.

    Is there a way out of this impasse? Does the uncharted nature of the problem condemn us to live without probabilities? Not necessarily. Assigning probabilities to the socio-economic narratives is very difficult. But if we are interested in their climate consequences, these narratives ultimately translate into paths for economic growth, emissions and technological development.We know less about these factors than we would like. But we do have some information about economic growth; on how technological barriers limit the speed with which we can cut emissions; about the fastest rates of decarbonisation observed to date; or the link between investment in abatement technology and technological progress (what economists call “learning by doing”).From this knowledge, imperfect though it is, we can build analytical tools that both keep track of uncertainties and make good use of the information that we do have.Some exciting possibilities are being explored. Dynamic Bayesian Nets, for instance, try to add a probabilistic dimension to the SSP/RCP framework by combining our degree of ignorance with what we do know. These probabilities will never be precise, but being able to say “Scenario A is 10 times more likely than Scenario B” or “Scenario C is much less likely than all the others” would already be a very useful step in the right direction.This will make a difference. Financial planners desperately want to assess “what climate change may mean” for them. They have made extensive use of the NGFS scenarios, yet few realise that all of these scenarios are offshoots of the “Middle of the Road” (SSP2) narrative. Not surprisingly, rare events are totally missing, and there is no way to gauge their likelihood. As a result, planning is difficult and the risk of complacency is high.Equity prices barely seem to reflect either the major reallocation of investments required to seriously tackle climate change and the resulting losers and winners in different industrial sectors; or the aggregate impairment to economic output that failure to take climate action will entail.A better understanding of the likelihood of the full range of possible outcomes, and of what we should really worry about, could change this picture for the better. More

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    Sri Lanka lifts import limits on 286 items as crisis eases

    COLOMBO (Reuters) – Sri Lanka lifted import restrictions on 286 items, the Finance Ministry said on Saturday, a fresh sign the South Asian nation is starting to emerge from its worst economic crisis in decades. The island off India’s southern coast plunged into crisis last year as its foreign exchange reserves ran out. The government limited imports on more than 3,200 items, including seafood, electronics, and even musical instruments.Its fortunes have improved over the past nine months as Sri Lanka secured a $2.9 billion bailout from the International Monetary Fund (IMF), moderated its once-soaring inflation and embarked on rebuilding its foreign exchange reserves. Sri Lanka’s reserves grew 26% to a 17-month high of $3.5 billion in May, helped by stronger remittances and tourism earnings. The currency has risen about 24% this year, central bank data showed. “With the economy stabilising, import restrictions on 286 items have been lifted from Friday midnight,” the Finance Ministry said in a statement.Restrictions on 928 items will continue, including vehicle imports, which were banned in March 2020, the statement said.A wide range of items from railway carriages to radio broadcasting receivers are included in the latest list released from restrictions. Sri Lanka will also slash prices of 60 essential drugs by 16% from this week.Despite the easing of the crisis, the country still needs to complete debt talks with creditors by September, in time for its first IMF programme review, and implement key economic reforms to put its recovery on a sustainable path.The IMF expects Sri Lanka’s economy to shrink about 3% this year after a 7.8% contraction last year, but the government forecasts a return to growth next year. More

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    Swiss National Bank Chairman hints at rate rises to tackle inflation

    Jordan defended the central bank’s commitment to price stability, which he defined as inflation below 2% but in positive territory, in the article in Swiss newspaper Corriere del Ticino.”Most central banks have an inflation target of about 2%, the SNB is slightly more conservative,” Jordan said. “The 2% target is not a dogma, nor the will of a particular interest group.”Of course if inflation is higher than the target, monetary policy must be restrictive,” Jordan told the newspaper.Swiss annual inflation dipped to 2.2% in May, government data showed on Monday, but has remained above the 0-2% range targeted by the SNB since February 2022.Despite a recent easing in price rises in Switzerland, the SNB is expected by analysts and the market to raise interest rates at its meeting on June 22.Earlier this week Jordan in a separate public appearance, said he could not rule out tightening monetary policy to tackle stubborn Swiss inflation.In the newspaper interview Jordan said price stability created the best environment for economic growth, and was important for social stability and fairness.”When inflation is above 2%, people with lower incomes especially suffer,” Jordan told the newspaper. “It is therefore a matter of social justice.” More

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    Twitter to pay verified creators for ads in replies, Musk says

    “Note, the creator must be verified and only ads served to verified users count,” Musk, the billionaire who bought Twitter last October, said in a tweet. Since Tesla (NASDAQ:TSLA) CEO Musk acquired Twitter, the platform has struggled to retain advertisers, who have been wary about the placement of their ads after the company laid off thousands of employees.The move comes as Twitter’s newly named CEO, Linda Yaccarino, an advertising veteran from NBCUniversal, is about to take the helm at the social media platform.In March, Musk said that the messaging service makes about 5 or 6 cents per hour of attention from users and could raise that to 15 cents or more with advertisements that are more relevant and timely. More

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    Argentina inflation seen hitting 149% this year, up from previous poll

    For May, the analysts polled expect prices to have risen 9% in the month. Inflation in April was 8.4%, according to Argentina’s national statistics agency. Argentina’s economy, strained by a historic drought that has worsened an ongoing currency crisis, is expected to shrink 3% in 2023 from 2022, the survey found.Analysts see the weakened Argentine peso, currently officially valued at 245 pesos per dollar, ending this year at 408.68 pesos per dollar and 2024 at 917.54 pesos per dollar.Rising prices and tumbling foreign reserves pose a challenge for Argentina’s left-leaning government ahead of general elections in October. The central bank’s survey was conducted among 38 participants between May 29-31. More