Unexpected changes in 2004 likely

Moises Naim, Editor, 'Foreign Policy Magazine', Yale Center for the Study of Globalization, Washington

In 2003 all that seemed to matter was the war in Iraq and its murderous aftermath. Yet, while the world was distracted watching Iraq, elsewhere important changes were afoot. European integration had one of its worst years. The value of the U.S. dollar in relation to the Euro plummeted. Attempts to revive a global trade agreement collapsed. Russian democracy moved closer to appearance than reality. While some of these events were spurred by war in Iraq, most were manifestations of longstanding trends that came to a boil in 2003. They will also have great importance in 2004.

The political and economic fragmentation bombs that went off in Europe in 2003 will make the building of a united Europe in 2004 and beyond more difficult. Europe will face both integration and fragmentation. A draft Constitution was formally presented last July and actively debated while preparations continued for the incorporation of ten new countries to the European Union next May, bringing the group to 25 member nations. Also next May, seven former communist countries will join NATO.

Ironically, at the same time that this flurry of activity in support of economic and political integration was taking place, 2003 will also go down as possibly the worst year in terms of the common European project. Indeed, this year was the year when Europe was deeply fractured, not just over the war in Iraq but also by the failure to agree on a new constitution and Germany and France's decision to smash the stability and growth pact reached in 1997.

When faced with economic hardship earlier this year, Germany and France simply refused to abide by the pact's rules and cut their fiscal deficits or pay the huge fines designed to prevent signatories from exceeding the agreed economic targets.

To complicate things, in 2004 debates, referenda, and negotiations about the construction of a united Europe will be colored by difficult economic conditions. A strong Euro will further weaken the already economically weak Europe. Throughout the 1990s, experts predicted that the U.S. dollar would decline as a result of unsustainable trade imbalances -- it finally happened early this year. The value of the Euro relative to the U.S. dollar sharply increased. By the end of the year, it had reached the highest value in its five-year history.

Looking forward, European companies will suffer the negative effects of an expensive Euro on their ability to compete while simultaneously having to contend with Chinese and U.S. companies that are more competitive and aggressive than ever. Chinese companies pay low salaries and U.S. companies have trimmed their work force to the bone and increased worker productivity at a spectacular pace (more than 8 percent just in 2003).

Conversations about "outsourcing" and "offshoring" manufacturing operations to China or services to India are commonplace inside U.S. companies. Yet the subject cannot even be raised in most of their European competitors, as legal constraints and strong labor unions often make outsourcing operations abroad too complicated or even impossible.

Perhaps the gravest danger stemming from a strong Euro is that by hindering European exporters and making foreign-made products cheaper, the more expensive Euro will spur Europe's protectionist tendencies. This will create even more problems for a global trading system that already took a bad beating this year.

The Bush administration's reversal of the special tariffs it imposed on steel occurred only after a bitter, public dispute with the Europeans, who threatened retaliatory measures aimed at hurting states whose votes Bush most needs to win the 2004 presidential election. Although this may be seen by some as a triumph of free trade rules and a boost to the WTO, the dispute also underlined the willingness of the world's largest economy to flagrantly violate the agreements it had promoted under different domestic political circumstances.

And the disagreements were not just over steel. Bowing to demands from American business interests and with an eye to the 2004 election, Washington also began imposing restrictions on Chinese textile imports and is holding steadfast on the enormous increase in farm subsidies it adopted last year. Interestingly, the Democratic candidates for president, like Bush, are either not very supportive of free trade agreements or are openly hostile to them.

In Washington worries about raising global protectionism have become common. Recently Alan Greenspan, the head of the U.S. Federal Reserve Bank, noted that "creeping protectionism" and "the possibility of trade wars" were far more grave threats than U.S. deficits, which he felt were still manageable.

Despite these recent protectionist moves, the U.S. is still one of the most open economies in the world. Europe, Japan, and especially developing countries like India or Brazil are far more protectionist than the U.S.

This became acutely evident in the utter failure of the trade talks held in Cancun last September. The resentments and the bitter accusations flying between Europe and the U.S. and developing countries over who was responsible for the breakdown in Cancun will be felt in 2004 and beyond.

In the U.S., the electoral campaign will be in full swing, and anxiety about jobs lost to trade and offshoring of production will become common concerns for the candidates to address. In Europe, the impact of a Euro that is crippling exports will make any talk of trade concessions politically suicidal.

Further east, in 2003 Russia made no progress towards a more consolidated and functional system of checks and balances that is necessary to the health of any democracy. It moved decidedly away from it. In Russia today no TV station is independent of the government. The country's most powerful positions are held in disproportionate number by the silovicky, former members of the secret police, intelligence services, the military, and the KGB.

According to Olga Kryshtanovskaya, a respected Russian sociologist who specializes in tracking the silovicky and their careers, 25 percent of all senior officials in Moscow are now linked with Russia intelligence services. In the provinces she estimates that the number is as high as 70 percent.

But it is not just the prevalent presence of the silovicky that distorts the proper functioning of democracy in Russia. It is also the enormous influence of wealthy individuals turned politicians or government officials. Vladimir Putin's jailing of Mikhail Khordokovsky, Russia's richest man, is only one sign of the decrepit state of Russian politics.

In the recent elections for the Duma, the Russian parliament, 28 percent of all candidates from one party were millionaires. And no, it was not the party of the right -- these were all candidates of the communist party. In coming years a political party in opposition to the current government stands little chance of dislodging Putin and the silovicky from power.

Overall, 2004 perhaps promises more surprises than continuities. While the situation in Iraq will continue to attract the world's attention, other important trends may become increasingly important. The transformation of al-Qaeda from an organization to a global franchise; the economic emergence of China and the economic submergence of Latin America; the popularization of suicide as the weapon of choice for terrorists were other important trends which acquired great force this year and will shape the next. Nonetheless, the repercussions of disagreements in Europe, global economic woes, and continued political turmoil will not fade away easily.