THE ARAB WORLD
How the EU is mishandling its No 1 energy source
Autumn 2009
The Gulf, not Russia, is set to remain Europe’s largest energy supplier for decades to come, yet the EU has no political profile there and very tetchy trade relations. Richard Youngs warns that European governments seem bent on making a serious strategic error there
Call it the Arabian Gulf, the Persian Gulf or just the Gulf, but under any of these labels it is the ‘forgotten friend’ of European foreign policy. It’s an area of EU policymaking that attracts little attention or critical scrutiny, and because Brussels’ relations with the Gulf Cooperation Council (GCC) have been on auto-pilot and thus bereft of headline-grabbing rifts, they have seldom been infused with much urgency.
It is a serious oversight. There are a number of issues that render the Arabian Peninsula of increasing importance. The Gulf is becoming a pivotal player in a lengthening list of emerging challenges. These include efforts to stabilise international finance; the impending energy supply crunch; the need to target sources of Islamic radicalism; regional Middle East diplomacy and the need to positively marshal multipolarity. In this light, it is strange that the EU has devoted so much institutional energy to the Mediterranean and so little to the Gulf.
At the beginning of this year, the GCC states walked out of free trade talks with the European Union. The proximate reason was their objection to the EU’s human rights clause and its insistence on retaining the ability to impose export duties. More fundamentally, the impasse reflected waning European influence in a vitally important region. Efforts are afoot to resuscitate the talks. But even if this happens it has been a sobering episode that should prompt a broader European re-think.
At London’s G20 summit, Saudi Arabia’s King Abdullah was placed symbolically in the front row for the leaders’ official photograph. In the vortex of the financial crisis, the Gulf has emerged as a weighty player. The GDP of GCC countries has tripled over the last five years, and revenues from the oil bonanza have been invested more wisely than in the 1970s. In search of liquidity, European leaders have rushed to the Gulf and are courting the petro-monarchies.
But they have been unwilling to offer much in return. Europe’s reaction to SWF investment was panicky and inchoate and a code of conduct drawn up by the European Commission has been largely ignored. This proposed a greater openness in the EU to SWFs providing that the managements of these funds observed minimum levels of transparency. In practice, some member states have restricted SWFs’ access, while others have encouraged them. Gulf SWFs accounted for a third of the emergency financing made available by European governments at last autumn’s deepest point in the banking crisis, but overall Europe has sent confused messages. And just as Europeans had come round to recognising how much they needed the Gulf’s funds, the region’s SWFs were already shrinking their operations in EU countries and turning to other markets.
The main trade dossiers of the FTA talks have been closed. But the GCC views remains that the EU is a stingy negotiator on commerce. One of the longstanding problem areas has been the move by Gulf oil producers to extend downstream into petrochemicals. The Association of Petroleum Producers in Europe has been a powerful lobby group against deeper trade liberalisation, and EU petrochemical imports from the GCC are a third lower now than they were in the 1980s. European governments continue to be seen as obstacles to the kind of far-reaching reform to international institutions that Saudi Arabia, in particular, seeks.
The EU nevertheless has some legitimate complaints. The GCC lacks internal coherence, so decisions there can depend heavily on the changeable dispositions of one or two senior political figures. The EU has justifiably pushed Gulf states into reducing differential pricing of gas exports, lifting barriers to European companies in the services sector and opening up government procurement.
But in these 18-year trade negotiations, the EU has been the less pliable partner, even though it has the greater room for generosity. The EU runs a large trade surplus with the GCC and notwithstanding shifts in international bargaining power, the GCC is still commercially much more dependent on the EU than vice versa. With open trade, the EU would have the potential to export thousands of products and services to the Gulf. The Gulf’s trade capacity outside the hydrocarbons sectors remains negligible. Meanwhile, the EU has also refused to reciprocate the GCC’s liberalisation of visa requirements.
The Brussels Commission has done its best to cajole the EU’s most protectionist member states. But this is a classic case of EU immobilism. The trade mandate is now nearly two decade old, yet a sense of resignation prevails that nothing can be done to free it from its shackles.
These economic travails are important not only in their own right, but also in weakening the foundations for political partnership. The Gulf position is clear: A balanced FTA is the pre-requisite to cooperation on other, more strategic questions. And yet a number of EU countries still insist that political and economic issues must be kept separate.
It is instructive to contrast the low profile of EU relations in the Gulf with the fanfare that surrounded last year’s launch of the Union for the Mediterranean. For all the political trumpetings, it is an initiative that so far amounts to little more than a few important but unexciting technical projects on maritime transport and such like. The EU’s Strategic Partnership with the broader Middle East – supposedly the main vehicle for revitalising Europe’s political presence in the Gulf – has meanwhile been left to rot.
The level of European commitment to the Gulf is still shockingly low. The Commission has only one delegation to the GCC, a small mission that was opened in Riyadh in 2004. Europe’s dithering is now opening the door to other countries; the EU has been increasingly displaced, as Gulf states have signed a raft of free trade accords with Asian states.
The impasse extends to the crucially important energy sphere. For all Europe’s foreign policy focus on Russia, the Gulf remains its most important energy supplier. And its reliance on the Gulf will grow over the next two decades, even if investment in renewable energy rises significantly. Yet no systematic energy dialogue has been established between the EU and the GCC. The latter has rebuffed the kind of formal energy cooperation that the EU has offered elsewhere. In terms of energy contracts, the EU is also being elbowed aside by Asia.
European governments generally retain an overly benign view on the region’s politics. Gulf regimes are autocratic, but perceived to be stable. They are still judged to be holding at bay political forces that would be far less friendly towards the West.
Gulf regimes have, though, implemented some political reforms. In February of this year, King Abdullah demoted two powerful conservative religious figures and named Saudi Arabia’s first ever woman minister. Less conservative religious groupings have been incorporated into the kingdom’s Ulema council. In April, the Saudi National Organisation for Human Rights was able to publish a highly critical report of rights abuses. In overall terms, Saudi Arabia’s incipient middle class has become more independent of the state.
But despite some modest reforms, under the surface politics and society are brittle. Protests grow against the lack of transparency in the use of oil revenues. The demand for reform is clearly unsatisfied, so the chances of future turbulence look high. Saudi Arabia’s population is expected to double by 2025, and already 30% of its young people between 16 and 25 are unemployed. With oil prices now below the level required for GCC budgets to break even, political dissatisfaction is set to deepen.
The EU has gained little grip on such challenges. It retains a highly status-quo orientation in its diplomacy. Military cooperation with the Gulf’s repressive regimes is greater than ever, and the practice of linking arms sales to defence agreements has intensified. The Gulf is among the regions where European support for political reform is least visible, and the EU does not enjoy the leverage provided elsewhere by aid flows. Those ‘reform’ projects that get its backing are in practice increasingly about the EU’s own fears of ‘radicalisation’. But de-radicalisation initiatives now underway in the Gulf are not about reform as they are predicated much more on efforts to stem the momentum of change. Europeans risk conflating the reform and counter-terrorist agendas to unhelpful effect.
The European Union must demonstrate a new flexibility in commercial talks that is commensurate with the Gulf’s strategic importance. The solution to the current impasse is not to drop the human rights clause, even if several member states have advocated such a move. This would establish an injudicious precedent, and would not anyway resolve the real sources of tension. Diplomats recognise that the GCC’s decision to suspend talks cannot be separated from the way in which the financial crisis has altered the balance of power. At root, the current impasse is about a more assertive Gulf wanting better terms in its relations with Europe.
The EU insists that the GCC should act as a single actor. Brussels argues that there is no scope for progressing bilaterally on trade issues, as most Gulf countries want. And yet in the security field European governments clearly favour bilateralism and indeed compete fiercely against each other for arms contracts. The EU should consider greater flexibility, and should also combine bilateral relations with regionalism in the way that its own European Neighbourhood Policy does.
The bottom line is that the EU must cease to treat the Gulf as a secondary strand in its overarching strategy for North Africa and the Middle East. The goal should be to develop a single initiative in the Middle East as splitting up North Africa and the Middle East for the EU’s bureaucratic convenience belies the region’s political logic. The stubborn resistance by many European governments taking such a step is becoming an increasingly costly mistake.