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Wednesday, April 28, 2010

Climate Change: EU and Proposed U.S. Approaches to Carbon Leakage and WTO Implications

Larry Parker
Specialist in Energy and Environmental Policy

Jeanne J. Grimmett
Legislative Attorney

The United States has proposed, and the European Union (EU) developed, policies to mitigate the potential economic and environmental (i.e., "carbon leakage") impacts of carbon policies on energy- or greenhouse gas-intensive, trade-exposed industries. While studies have found little effect of carbon policies on EU competitiveness in the present, the EU decision to move toward auctioning of allowances in the future has spurred development of criteria to extend potential availability of free allowances to exposed industries to 2020. In a December 2009 decision, the European Commission (EC) listed 164 industrial sectors and subsectors deemed exposed sectors under appropriate European Parliament and Council directives. 

H.R. 2454, which passed the House on June 26, 2009, includes two strategies to address these concerns: (1) free allocation of allowances (similar to that of the EU), and (2) an international reserve allowance (IRA) scheme. Studies have suggested that a free allowance scheme appears effective in mitigating the trade-related impact of the carbon program on energy-intensive, trade exposed industries. However, production cost for those industries (along with other industries) could increase because of the potential pass-through of compliance-related costs by upstream producers of various inputs into their manufacturing processes. Whether these costs would become significant would depend on the ability of upstream suppliers to pass on the costs, and the ability of the downstream industries to respond by increasing the efficiency of their operations or by substituting other, less-costly inputs into their processes. There are questions about whether the allowances provided by H.R. 2454's allocation scheme are sufficient. If the Environmental Protection Agency's estimates are correct, the allocation would appear sufficient. If industry estimates are correct, or if individual showings of eligibility prove significant, the pool of allowances provided by the bill would appear inadequate under the assumptions used here. Also, the data and administrative resources necessary to implement the program would be substantial. 

Although H.R. 2454 as passed would require EPA to establish an IRA program consistent with U.S. international agreements, questions may be raised as to whether proposed Part IV and its application would fully comply with U.S. international trade obligations. The distribution of free allowances may constitute actionable subsidies for purposes of the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures by possibly qualifying as "foregone revenue" when auctioning of allowances would also be permitted. In addition, the requirement that importers purchase IRAs to accompany particular imports might be found to constitute a prohibited import surcharge or, if the product may not otherwise enter the United States, a prohibited quantitative restriction under the General Agreement on Tariffs and Trade (GATT) 1994. While the IRA program might be provisionally justified under GATT general exceptions for health protection or resource conservation, the GATT also requires that it not be applied "in a manner that would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade." Whether an IRA program can be applied consistently with these requirements may depend on the type of program that may be crafted by EPA under the proposed legislation—that is, on the elements that would be required under the bill and the administrative possibilities inherent in its discretionary authorities. Absent an international consensus on the types of trade-related measures that may be applied as part of a domestic climate change regime, adversely affected countries may seek to challenge these measures under WTO dispute settlement provisions. Since neither the distribution of emission allowances nor border restrictions imposed as part of a domestic greenhouse gas-reduction program have yet come before WTO dispute settlement panels, WTO obligations and exceptions remain untested in this complex regulatory environment.


Date of Report: April 12, 2010
Number of Pages: 71
Order Number: R40914
Price: $29.95

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Friday, April 23, 2010

Bosnia: Current Issues and U.S. Policy

Steven Woehrel
Specialist in European Affairs

In recent years, many analysts have expressed concern that the international community's efforts since 1995 to stabilize Bosnia are beginning to come apart. They noted that the downward trend has been especially evident since 2006, with the election of leaders with starkly divergent goals. Milorad Dodik, Prime Minister of the Republika Srpska (RS), one of the two semi-autonomous "entities" within Bosnia, has obstructed efforts to make Bosnia's central government more effective and has at times asserted the RS's right to secede from Bosnia. Efforts to reform Bosnia's constitution have made little progress. 

There has been a debate about the future role of the international community in Bosnia. The Office of the High Representative (OHR), chosen by leading countries and international institutions, oversees implementation of the Dayton Peace Accords, which ended the 1992-1995 war in Bosnia. An EU peacekeeping force, called EUFOR, is charged with keeping the peace in Bosnia and overseeing the Bosnian armed forces. The international community has vowed to close OHR after Bosnia meets a series of reform objectives, ending direct international oversight. After OHR's closure, international support for Bosnian reforms would be limited to aid and advice from the United States, European Union, NATO, and other institutions, with the prospect of eventual NATO and EU membership. An EU Special Representative (EUSR) would remain in Bosnia, although the post would likely have a smaller staff than OHR. In addition, it would likely be limited to an advisory and reporting role, lacking OHR's powers to veto legislation and remove local officials. 

There has been pressure within the EU to scale back EUFOR, which has a current strength of about 2,000 troops. Citing the improved security situation in Bosnia, France and other EU countries have called for EUFOR to be sharply reduced in size and limited to an advisory function. However, in January 2010, the EU did not agree on a reduction, perhaps out of concern about the lack of progress on reforms in Bosnia. 

Some observers are concerned that the combination of increasing internal tension within Bosnia and a declining international role could seriously set back over a decade of peace in Bosnia, perhaps leading to violence and the destabilization of the region as a whole. They call for greater international engagement in Bosnia, including an increase in EUFOR's capabilities and strong powers for the EUSR, if OHR leaves. The United States has strongly supported Bosnia's integration into Euro-Atlantic institutions. However, the U.S. role in the country has declined in recent years as the EU role has increased. 
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Date of Report: April 12, 2010
Number of Pages: 17
Order Number: R40479
Price: $29.95

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Kosovo: Current Issues and U.S. Policy

Steven Woehrel
Specialist in European Affairs


On February 17, 2008, Kosovo declared its independence from Serbia. On February 18, the United States recognized Kosovo as an independent state. Of the 27 EU countries, 22 have recognized Kosovo, including key countries such as France, Germany, Britain, and Italy. Serbia and Russia have heatedly objected to the recognition of Kosovo's independence. Independent Kosovo faces many challenges, including its relations with Serbia and Serbs in Kosovo, as well as weak institutions, an underdeveloped economy, and the impact of the global financial crisis. 

Vice President Joseph Biden visited Kosovo on May 21, 2009, after stops in Bosnia and Serbia the previous two days. He received a hero's welcome in Kosovo, where he declared that the "success of an independent Kosovo" is a U.S. "priority."



Date of Report: April 12, 2010
Number of Pages: 13
Order Number: RS21721
Price: $29.95

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Tuesday, April 20, 2010

Belarus: Background and U.S. Policy Concerns

Steven Woehrel
Specialist in European Affairs

Belarusian President Aleksandr Lukashenko snuffed out Belarus's modest progress toward democracy and a free market economy in the early 1990s and created an authoritarian, Soviet style regime. In 2008, Belarus released political prisoners and made very modest improvements in its human rights policies, in a successful effort to secure the suspension of some U.S. and EU sanctions against Belarus. The international financial crisis has forced Belarus to seek international help, including loans from Russia and the International Monetary Fund. 

Belarus has close historical and cultural ties to Russia. Efforts to establish a political and economic "union" between the two countries have had substantial public support in Belarus. Nevertheless, the pace of integration between Belarus and Russia has been fitful. Current Russian policy toward Belarus appears to be focused on gaining control of Belarus's economic assets while reducing the costs of subsidizing the Belarusian economy. 

For many years, the United States pursued a policy of "selective engagement," which limited ties to the regime while providing modest support to pro-democracy organizations in Belarus. The United States and the European Union also imposed sanctions on Belarusian leaders. In March 2008, Belarus withdrew its ambassador from Washington and forced the United States to recall its ambassador from Minsk, in response to what Belarus perceived as a tightening of U.S. sanctions. 

In 2008, the United States and European Union changed tactics in their policy toward to Belarus. They moved to suspend some sanctions against the regime in exchange for very modest improvements on human rights issues. In October 2008, the EU suspended a travel ban on Lukashenko and other Belarusian leaders, and has extended the suspension several times since then. The United States has relaxed sanctions against several subsidiaries of the state-owned oil and petrochemicals firm Belneftekhim. Analysts have attributed the policy shift, in which the EU has played the leading role, to a variety of factors, including concerns about Russia's increasing assertiveness in its relations with neighboring countries, especially after Russia's military assault on Georgia in August 2008. In May 2009, Belarus was permitted to join the EU's Eastern Partnership program, which could provide Belarus with EU aid and other forms of cooperation. This EU opening toward Belarus has continued despite the fact that Belarus has failed to make progress on human rights issues and has even regressed in some areas. 

Congress has responded to the situation in Belarus with legislation. The Belarus Democracy Act (P.L. 108-347) authorized aid for pro-democracy forces in Belarus and funding for increased U.S.-sponsored broadcasting to Belarus. The bill supported sanctions on Belarus and top leaders of the Lukashenko regime until Belarus met specific democratic and human rights criteria. The bill also required the President to report to Congress on the sale by Belarus of weapons or weapons-related assistance to regimes supporting terrorism, and on the personal wealth of Lukashenko and other senior Belarusian leaders. The 109th Congress passed several resolutions criticizing human rights abuses and calling on Belarus to hold free and fair elections. In January 2007, President Bush signed the Belarus Democracy Reauthorization Act (P.L. 109-480), which reauthorized and updated the provisions of the original Belarus Democracy Act.


Date of Report: April 15, 2010
Number of Pages: 15
Order Number: RL32534
Price: $29.95

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Saturday, April 17, 2010

European Union Enlargement: A Status Report on Turkey’s Accession Negotiations

Vincent Morelli
Section Research Manager

October 2009 marked the fourth anniversary of the European Union's decision to proceed with formal negotiations with Turkey toward full membership in the Union and launched the annual period when all three European Union institutions, the Council, Commission, and Parliament, were required to assess the progress Turkey had made or failed to accomplish in the accession process and to issue recommendations on whether and how the process should continue. 

Many "Turkey-skeptics" saw the end of 2009 as a deadline for Turkish action that would have marked a critical juncture for the future of Europe's relationship with Turkey. At issue was not only the positive progress Turkey had achieved in meeting the requirements of the EU's acquis communautaire but whether a specific lack of progress by Turkey would force EU member states into a difficult debate pitting loyalty to another member state, being shunned by a candidate for Union membership, versus Europe's long-term strategic interests in Turkey. The principal issues regarding Turkey's accession center around what the EU believes has been too slow of a pace for certain critical reforms within Turkey; a perceived ambivalence toward the EU by the current Turkish leadership; Turkey's failure to live up to its agreement to extend the benefits of its customs union with the EU to Cyprus, including the continued reluctance by Turkey to open its sea and air ports to Cypriot shipping and commerce until a political settlement has been achieved on Cyprus; and a continued skepticism on the part of many Europeans about whether Turkey should be embraced as a member of the European family. Further complicating the attitude toward Turkey was the lack of a settlement of the political stalemate on Cyprus and the ongoing debate within parts of Europe over the implications of the growing Muslim population in Europe and the impact Turkey's admission into the Union would have on Europe's future. Thus, the talk once again was of a potential "train wreck," the suspension of negotiations, revised talk of a different relationship with Turkey, and renewed expressions of doubt over whether Turkey should ever be admitted into the Union. 

On October 15, the European Commission issued its fourth formal report on Turkey's accession progress followed by the EU Council, which issued its conclusions on Turkey's progress on December 8. Both 2009 reports, like their previous reports, were marked by a mixed assessment of Turkey's accomplishments thus far in working through the various chapters of the accession process that have been opened. The reports noted some progress in judicial reform and relations with the Kurds and Armenia, but little progress in other areas such as media freedoms. Contrary to some views within Europe, neither the Commission nor the Council viewed their 2009 reports as any more significant or important than previous annual reports. 

In February 2010, the EU Parliament completed its review of Turkey's progress and adopted a resolution regarding the Union's enlargement strategy. The Parliament's assessment, although similar to that of the Commission and Council, did include rather tough language in its accompanying resolution. 

During this period, unification talks continued between Greek and Turkish Cypriots, but an overall settlement remained elusive. Short of such a settlement, Turkey was unwilling to open its ports to Cyprus. Although the debate in all three institutions was animated in part, the Union clearly decided to defer any difficult decisions regarding Turkey's accession negotiations to a later time. 
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Date of Report: April 5 2010
Number of Pages: 17
Order Number: RS22517
Price: $29.95

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Sunday, April 11, 2010

Greece’s Debt Crisis: Overview, Policy Responses, and Implications

Rebecca M. Nelson, Coordinator
Analyst in International Trade and Finance

Paul Belkin
Analyst in European Affairs

Derek E. Mix
Analyst in European Affairs


Over the past decade, Greece borrowed heavily in international capital markets to fund government budget and current account deficits. The reliance on financing from international capital markets left Greece highly vulnerable to shifts in investor confidence. Investors became jittery in October 2009, when the newly-elected Greek government revised the estimate of the government budget deficit for 2009 from 6.7% of GDP to 12.7% of GDP. There are now questions about whether Greece will be able to repay its maturing debt obligations and interest payments, totaling €54 billion ($73 billion), in 2010. This report analyses the Greek financial situation and identifies its implications for the United States. 

The debt crisis has both domestic and international causes. Domestically, analysts point to high government spending, weak revenue collection, and structural rigidities in Greece's economy. Internationally, observers argue that Greece's access to capital at low interest rates after adopting the euro and weak enforcement of European Union (EU) rules concerning debt ceilings facilitated Greece's ability to accumulate high levels of external debt. 

During the crisis, the Greek government has sold bonds on international capital markets in order to raise needed funds, although investors have demanded high interest rates to compensate for the perceived risk of these investments. Greece's government has also unveiled, amidst domestic protests, austerity measures aimed at reducing the government deficit below 3% of GDP by 2012. At the end of March 2010, the Eurozone member states, led by Germany and France, announced after much debate that they would provide financial support to Greece if necessary and if accompanied by financial support from the International Monetary Fund (IMF). A common method for addressing budget and current account deficits, currency devaluation, is not possible for Greece as long as it uses the euro as its national currency. If the austerity measures and/or financial assistance from outside parties prove insufficient, Greece could be forced to default on its debt. 

Greece's crisis has numerous broader implications. There is concern that Greece's crisis could spillover to other European countries with difficult economic situations, including Portugal, Ireland, Italy, and Spain. Additionally, Greece's crisis has raised questions about possible problems with the Eurozone, which has a unified monetary policy and diverse fiscal policies. It has also come to light that complex financial instruments may have played a role in helping Greece accumulate and conceal its debt. This has played into current debates about financial regulatory reform in the United States and the EU. 

Greece's crisis could have at least five implications for the United States. First, falling investor confidence in the Eurozone could further weaken the euro, which would likely widen the U.S. trade deficit. Second, financial instability in the EU could impact the U.S. economy given the strong trade and investment ties between the United States and the EU. Third, $14.1 billion of Greece's debt is held by U.S. creditors, and a Greek default would likely have ramifications for these creditors. Fourth, some point to similarities between the financial situation in Greece and the United States, implying that Greece's current crisis foreshadows what the United States could face in the future. Others argue that the analogy is weak, because the United States, unlike Greece, has a floating exchange rate and the dollar is a reserve currency. Fifth, the debate about imbalances within the Eurozone is similar to the debates about U.S.-China imbalances, and reiterates how, in a globalized economy, the economic policies of one country impact other countries' economies.



Date of Report: April 7, 2010
Number of Pages: 18
Order Number: R41167
Price: $29.95

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Thursday, April 8, 2010

Cyprus: Reunification Proving Elusive

Vincent Morelli
Section Research Manager

Attempts to resolve the Cyprus problem and reunify the island have undergone various levels of negotiation for almost 40 years. Prospects for a settlement that would end the political division of Cyprus appear to have reached a stalemate and may now enter a period of retrenchment possibly dominated by harder-line views by both sides and more difficult negotiations. 

Despite a positive and concerted effort over the past 18 months and through 60 meetings between Cypriot President Dimitris Christofias, a Greek Cypriot, and Turkish Cypriot leader Mehmet Ali Talat to reach some type of acceptable solution, time and politics appear to be no longer on either's side. On April 18, 2010, Turkish Cypriot leader Talat faces reelection as "president" of northern Cyprus; by all accounts by observers of the Cyprus issue, he could have a difficult time winning. Polls taken in late March show Talat at least 15 percentage points behind his rival. His likely successor, Dervis Eroglu of the National Unity Party (UBP), while insisting that negotiations would continue, appears to have taken a harder-line posture toward a negotiated settlement, and there are even some in his party who are advocating a permanently divided island and international recognition for the Turkish Republic of Northern Cyprus (TRNC). 

For his part, Republic of Cyprus President Christofias has recently experienced his own internal political difficulties as one of his governing coalition partners, the Socialist Party (EDEK), quit the governing coalition on February 9, 2010, reportedly over disagreements with the President's negotiating strategy. Almost immediately following the EDEK decision, hard-liners in the other coalition partner, the Democratic Party (DIKO), forced a vote of the party's central committee on whether to abandon the coalition as well. DIKO hard-liners had also criticized Christofias for what they considered to be too many concessions to the Turkish Cypriot side. In the end, DIKO voted to remain in the coalition, but the outcome of both votes seemed to indicate that Christofias was no longer guaranteed support for whatever negotiated solution he could have achieved in the near term. 

Despite these political setbacks, and although both sides appeared to remain far apart on the most critical issues for any settlement, both Christofias and Talat pledged to continue the negotiations right through the end of March. With the last formal negotiating session on March 30, Talat left the negotiations in order to step up his political campaign in a final attempt to win reelection. Some observers were hoping that at the last negotiating session a joint statement would have been issued by both sides outlining the extent to which progress has been achieved on the major issues under consideration. And, while both sides did issue a statement at the conclusion of the session, it did not contain any details or outline of the "important progress" both sides continue to refer to. 

The United States has long maintained a position of strong support for a negotiated settlement. This has been reaffirmed by the Obama Administration. Many Members of Congress have continued to maintain their interest in Cyprus during the 111th Congress, partly due to keen constituent concern. Hearings could be anticipated on the future of the negotiations in the aftermath of the April elections in northern Cyprus. This report will be updated as developments warrant.


Date of Report: April 1, 2010
Number of Pages: 15
Order Number: R41136
Price: $29.95

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