-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --

Could Italy's cash-strapped Fiat, Europe's sixth auto maker, build a workable alliance with Chrysler and Opel to become be a profitable global player? Or would it be a marriage of losers, doomed to fail?

Fiat CEO Sergio Marchionne has made clear that his interest in Opel, the European arm of ailing General Motors, is more than just a well-timed tactic to get better terms in the alliance he is negotiating with troubled U.S. number three Chrysler. Chrysler faces likely bankruptcy if a deal is not clinched by April 30.

The troubleshooter who turned around the Italian group seems to want both deals. "It is quite possible for Fiat to engage in both of those transactions and to execute them properly," he said on Thursday. Marchionne sees a wave of consolidation coming in the automobile sector and is determined to gain critical mass to survive. But his strategy looks over-ambitious.

Fiat has little cash and 4.8 billion euros in debt to repay this year, so Marchionne needs deals that cost little or nothing. That means he has to target companies in a weaker position than his.

Fiat would not take on any of Chrysler's debts, and GM seems willing to give away a 51 percent stake in Opel free to anyone who will invest in it as a going concern, with the U.S. auto maker keeping a minority holding. GM needs Opel's technology to produce the smaller, greener cars which are the condition for a U.S. government lifeline.

But even if the financials were to add up, which is a big "if", the challenge for Fiat of turning such an alliance into a viable, profitable group looks daunting.

Germany's richer, fitter Daimler bought Chrysler in better times and failed to turn the Detroit dinosaur around despite sending in its best managers and engineers, which also had the effect of causing Mercedes' quality to decline at home.

Marchionne has made clear Fiat would need German state aid to restructure Opel. Since the two firms have lots of overlap in small and mid-range cars, it would have to close plants and lay off thousands of workers, with pain in both Germany and Italy. But Berlin would want guarantees on jobs and production sites in return for its aid, crimping Fiat's room to make synergies.

Making all this work is a tall order, even for a turnaround maestro like Marchionne, and could be a dangerous distraction from Fiat's own recovery, as Daimler found with Chrysler. Fiat's controlling Agnelli family, which brought him in in 2004 to rescue Fiat, should be having an anxiety attack at his strategy.

(Editing David Evans)

-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --

The foreplay to next month's G20 summit is degenerating into a buck-passing exercise rather than crafting a Grand Bargain to save the world economy and regulate capitalism.

The industrialized powers do not agree on how to arrest the steep slide in output, how to handle collapsing banks, how much market regulation is needed, how to reach a world trade deal and prevent protectionism, or how to redistribute power to emerging nations in exchange for their money.

At this rate, the April 2 London summit -- U.S. President Barack Obama's global economic debut -- is highly unlikely to restore confidence.

The United States says other countries must follow its lead and spend more on a fiscal stimulus to boost demand. It is turning a deaf ear to calls for radical financial regulation. Euro zone finance ministers, anxious to preserve the budget discipline that underpins their common currency, are refusing to pile up more debt before their current stimulus efforts have taken effect.

The EU seeks a doubling to $500 billion of the International Monetary Fund's war chest to bail out countries in trouble, including in eastern Europe, and it wants China, Saudi Arabia, Russia and others to pay most of the tab. Yet there is little sign the Europeans are willing to accept a diminution of their IMF seats and votes to make room for the emerging economies.

Washington and London are resisting pressure from France and Germany for mandatory regulation of all financial markets and institutions, including hedge funds and private equity.

STICKING POINTS

The key trade-offs required involve Germany and China pumping more public money into their economies to boost demand in return for the United States and Britain accepting global rules for regulation of all markets; and the industrialized nations agreeing to yield more power to emerging countries in the IMF, and welcome them into the Financial Stability Forum, in exchange for contributions to bolster the bail-out fund and acceptance of an ambitious world trade liberalization deal.

One of the few items on which there is at least rhetorical agreement is a crackdown on tax havens. This is politically useful to show concern for social justice (and improve revenue collection) at a time when unprecedented amounts of taxpayers' money are being poured into salvaging banks. But it is hardly the central priority in overcoming the worst financial crisis since the Great Depression.

G20 finance ministers must make substantial progress this week toward a Grand Bargain encompassing a coordinated fiscal stimulus, financial regulation, progress on trade, more money for the IMF and more say for the emerging nations.

Otherwise the London summit may go down in history as a milestone on the descent into depression.

-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --

It works more like a sprinkler than a power hose, but the European Investment Bank has a role to play in preventing a financial inferno from sweeping across central and eastern Europe.

The trouble is that politicians have overloaded the European Union's long-term lending arm with exaggerated expectations, calling on it like a fire brigade in every emergency, from saving credit-starved small firms to greening the car industry, combating the energy crisis and fighting climate change.

The need to serve many masters and focus on many priorities limits its impact, but the EIB now has more resources to back economic stimulus programs in the 27-nation bloc.

Philippe Maystadt, president of the Luxembourg-based bank, has received so many pleas for billions since the credit crisis struck that he starts by listing what the EIB cannot do.

It is not a central bank. It cannot provide liquidity. It cannot take equity stakes in banks and it cannot fund budgets. Its role is to finance investment projects that are aligned with the 27-nation EU's policy objectives.

"What we can do is provide finance as intensely and rapidly as possible for investment. That's what we're doing (and) we aim to do more, better and faster," Maystadt, a former Belgian finance minister, said in an interview.

The EIB plans to lend more than 7.5 billion euros to small and medium-size enterprises and local authorities in central and eastern Europe this year through local intermediary banks. That is three times last year's volume, and on more flexible terms.

The bank has a triple-A credit rating because it is owned and backed by the EU's solvent sovereign governments. So it borrows at cheap rates and lends the money on the same terms to clients who would otherwise have to pay far more to borrow.

Firms may now use the cash as working capital, for research and development and to buy patents and not just to buy goods.

The EIB is also working to address the special problems of eastern Europe. From Warsaw to Kiev, floating currencies have sunk against the euro, punishing hard-currency borrowers, while governments are struggling to raise funds as capital flows from parent banks in western Europe to eastern subsidiaries dwindle.

With the European Bank for Reconstruction and Development (EBRD) and the World Bank's International Finance Corporation (IFC), Maystadt is looking to support banks in eastern Europe.

"For example one could imagine combining equity stakes from the EBRD with bigger credit lines provided by the EIB, using the specific instruments of each institution in a coordinated way to increase efficiency. If the EBRD comes in to reinforce a bank's capital, it means we can lend more to that bank," he said.

EU finance ministers agreed in December to raise the EIB's capital by 67 billion euros to 232 billion euros so it can boost lending by 30 percent this year and in 2010 to help economic recovery. That is a stretch for the bank's 1,400 staff.

The extra 15 billion euros a year will be targeted at SMEs, fighting climate change and speeding disbursements for projects in the new member states in central and eastern Europe.

Under EU rules, national governments or local authorities have to finance 35 percent of EIB-backed projects. The newcomers often lack the funds, especially during the credit crunch, so the EIB is also helping fund the local share.

However, the obligation to be even-handed among EU member states makes it hard to concentrate a large amount of lending on a few priorities or countries.

"It's true we are an EU institution, so we have to work for all member states and our interventions have to be well balanced," Maystadt said.

So far, the EIB has had no trouble borrowing on capital markets, but things could get tighter and more expensive as the bank raises its extra funds just as governments are tapping the market massively to finance national recovery plans.

That raises the question of whether the EIB could borrow from the European Central Bank, which is not allowed to lend money directly to member states.

"This question hasn't yet been posed," Maystadt said. "For the moment we don't call on the ECB. It's a question that would have to be examined with the ECB. That hasn't yet been done."

Pressed to say whether the idea was topical, he laughed and fell silent.

-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --

Arms control is back and will thaw icy relations between the United States and Russia this year, but how far the new detente goes depends on the truculent mood in Moscow.

The potential exists for a grand bargain encompassing cooperation on the global financial crisis, Iran, Afghanistan, nuclear disarmament, missile defense, conventional armed forces and NATO enlargement.

But there are plenty of landmines on the road. Differences over the future of Georgia and Ukraine, two former Soviet republics on Russia's borders, are the most obvious obstacles.

After eight years of disdain for arms treaties under George W. Bush, U.S. President Barack Obama is set to propose a radical negotiated reduction in nuclear missiles and warheads.

Expect an initiative before Obama's first visit to Europe in April for a pact to replace the U.S.-Soviet Start-1 strategic arms reduction treaty, which expires at the end of this year.

Vice President Joe Biden may give a foretaste of U.S. ideas at the Munich Security Conference next weekend.

"The prospects for forward movement are reasonably good because we now have an administration in Washington which actually believes in arms control," says Strobe Talbott, president of the Brookings Institution think-tank.

Talbott, the leading U.S. government official on relations with Russia in the 1990s, expects Obama to postpone deployment of a planned missile shield in Poland and the Czech Republic, which has infuriated Russia.

But he is skeptical of a broader rapprochement because of what he calls Moscow's "sour geopolitical mood".

DISARMAMENT

Russian President Dmitry Medvedev and Prime Minister Vladimir Putin have fiercely opposed the missile shield, as well as U.S.-led efforts to bring Georgia and Ukraine into NATO. They see both moves as attempts to encircle and marginalize Russia.

Obama cannot abandon either policy without alienating key constituencies at home and in eastern Europe, but he has good grounds to put both on hold while he explores the prospects for cooperation with Moscow and for direct talks with Iran on its nuclear program.

Russia would be expected in return to allow a tightening of U.N. sanctions on Iran and to suspend deliveries of S300 air defense missiles to the Islamic Republic, which could make any U.S. or Israeli air strike more difficult.

This is important in a year when the major powers will be focused on trying to persuade Iran to halt uranium enrichment, which the West is convinced is aimed at developing a bomb.

One of Tehran's arguments is that the nuclear powers have failed to fulfill their pledge in the 1968 Non-Proliferation Treaty to work towards general nuclear disarmament.

Almost 20 years after the Cold War ended, the United States and Russia still have arsenals of more than 10,000 warheads each that are costly to maintain and make no military sense since modern wars mostly involve precision air power, highly mobile strike forces and paramilitary police.

They can afford to scrap at least 90 percent of their stockpiles while maintaining a credible nuclear deterrent.

They should seek to abolish short-range missiles which are the most destabilizing because they leave the shortest warning time and require split-second "use-them-or-lose-them" decisions by military commanders.

A bold nuclear disarmament initiative would have bipartisan support in the United States, where a quartet of elder statesmen including former Republican Secretaries of State Henry Kissinger and George Shultz has advocated such a step.

Their goal is to try to halt the spread of nuclear weapons to states such as Iran and to terrorist organizations by having major atomic powers set the example while tightening global controls on technology and fissile materials.

INSUFFICIENT?

Whether such an initiative will launch a new era of U.S.-Russian detente is uncertain.
Oksana Antonenko, senior fellow on Russia and the former Soviet countries at the International Institute for Strategic Studies, says arms control alone cannot be the engine of a better relationship because suspicion on both sides is so deep.

"It is hard to see who in the Obama team will advocate a strategic rapprochement with Russia. Russia isn't on their radar screen at all," she said.

Moscow is more concerned about stabilizing its economy and ensuring its place in the new world order arising from the financial crisis, in which the big emerging economies will have more sway at the expense of the Group of Eight including Russia.

Oil prices have fallen from $147 to $40 a barrel since last July, the Russian stock market has lost 75 percent of its value and the Kremlin faces street protests over its economic policy.

This could make Russia's leaders more inclined to seek accommodation with the West, to reassure investors including Russian businessmen, or it could prompt them to play the nationalist card.
Putin's speech in Davos raised hopes of the former but his tone and behavior at home, including plans for a big increase in military spending, point towards the latter.

Obama cannot make that choice for Russia, but he can give its leaders reasons to choose the former over the latter.

For previous columns by Paul Taylor, click here.

-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --

An American president vowing to cooperate with the rest of the world would barely be news if it did not follow eight years' of George W. Bush's tenure in the White House.

Barack Obama's inauguration address was thin on foreign policy specifics, but his pledge to work with allies and adversaries on global problems from nuclear weapons to climate change was a message many have waited impatiently to hear.

In a few phrases, Obama sought to close the chapter on the U.S.-led invasion of Iraq, the Guantanamo Bay prisoner camp and the use of torture, denial of global warming and heavy-handed attempts to promote democracy across the Middle East.

His affirmation that "we are ready to lead once more" was tempered by commitments to the rule of law, human rights, military restraint and diplomatic alliances.

In one sentence, he set himself apart from Bush's muscular unilateralism without renouncing force. "Our power alone cannot protect us, nor does it entitle us to do as we please."

Obama enunciated modest objectives for extricating the United States from the two wars he inherits from Bush -- leaving Iraq responsibly to its people, and forging a hard-earned peace in Afghanistan. No talk of victory or of "mission accomplished".

His vow to defeat terrorism was coupled with a promise to seek a new way forward with the Muslim world, where Washington's image suffered the most damage during the Bush years.

Where Bush made the "global war on terrorism" the central paradigm of his national security strategy, Obama set a broader and more inclusive agenda including areas disdained by his predecessor such as arms control and green energy.

Where Bush, right up to his final address, divided the world into good and evil, the new president offered to work with non-democracies and what used to be called "rogue states".

"To those who cling to power through corruption and deceit and the silencing of dissent, know that you are on the wrong side of history; but that we will extend a hand if you are willing to unclench your fist," he said.

Obama did not mention the flashpoints of recent weeks -- the Israeli-Palestinian conflict, Russia's use of its energy resources, or tension between India and Pakistan.

The guns fell silent in Gaza and the gas taps reopened at the Russia-Ukraine border just before he took office. No one wanted to be the first international problem for a president who warned that leaders would be judged by "what you can build, not what you destroy".

Obama omitted any mention of free trade, amid rising protectionist pressure among his own electorate heightened by the global economic crisis.

Nor did he commit the United States in his first address to a reform of global governance to give more say to emerging powers such as China, India, Brazil or South Africa.

French President Nicolas Sarkozy used the U.S. leadership vacuum during Bush's lame-duck period to press for expanding the Group of Eight industrialized powers and reforming the IMF, the World Bank and the U.N. Security Council.

Obama acknowledged that globalization and new threats such as nuclear proliferation and global warming would require "even greater cooperation and understanding between nations".

His administration will have to turn that philosophy into practical policy before the G20 summit of nations representing 90 percent of global economic output meet in London in April.

Obama faces some other tough early choices.

He must arbitrate between those who argue that resolving the Israeli-Palestinian and Israeli-Syrian conflicts holds the key to Middle East stability, and those who say conditions are not ripe for peace and he should focus on Iran's nuclear program.

He will have to choose between seeking Russia's cooperation to reduce nuclear arsenals and combat the spread of nuclear weapons and continuing Bush's divisive drive to bring former Soviet republics Georgia and Ukraine into NATO.

And he must decide whether to pursue a deal in world trade talks that could avert beggar-thy-neighbor protectionism in the economic crisis, or to assuage his voters by embracing "buy
American" measures and taking a tougher line on imports from low-cost producers such as China.

-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --

Barack Obama says he will make Afghanistan the central front in his fight against terrorism but the incoming U.S. president will have to scale back the war aims he inherits from George W. Bush and redefine success.

Bush ordered the U.S.-led invasion in 2001 to oust a Taliban government that was harboring al Qaeda militants blamed for the 9/11 attacks on New York and Washington.

His declared goals were to defeat the Taliban, create a stable democracy and promote economic development, but he turned his attention quickly to Iraq before the task was done.

Since 2005, a revived Taliban insurgency has made growing inroads against understaffed U.S., NATO and Afghan forces, while President Hamid Karzai's ineffective government has been mired in corruption and a booming illegal drugs trade.

The most Obama can hope to achieve in a mountainous country that wore down British and Soviet invaders is probably an ethnic power-sharing pact, including tribes that now help the Taliban, in hopes of keeping al Qaeda at bay once Western forces leave.

That is far from assured and would require cooperation from a weak Pakistani government transfixed by tension with India.

NATO officials see 2009 as crucial to turning the military and political tide before some allies start to withdraw in 2010.

"The basic problem in Afghanistan is not too much Taliban; it's too little good governance," NATO Secretary-General Jaap de Hoop Scheffer wrote in a Washington Post article on Sunday.

"We have paid enough, in blood and treasure, to demand that the Afghan government take more concrete and vigorous action to root out corruption and increase efficiency, even where that means difficult political choices," he said.

Yet despite disenchantment with Karzai, no alternative leader is in sight with a presidential election due in September.

PROSPECT REMOTE

Asked in a Reuters interview last July what would constitute success in Afghanistan, Obama said: "I think our goals have to be very modest but they will still be very difficult to meet. We should want a functioning Afghan government that can maintain its own security and territorial integrity.

"...Our highest priority is making sure that the Taliban and al Qaeda can't continue to use that region from which to launch attacks around the world. If we have routed them and scattered them, that would be success," he said.

Despite plans to send up to 30,000 additional U.S. troops to reinforce the 32,000 already in Afghanistan, of whom about half serve in the 50,000-strong NATO-led International Security Assistance Force, the prospect of routing the Taliban is remote.

Without extra forces, the West risks "a stalemate situation where we are not losing, but also not winning," says De Hoop Scheffer.

NATO casualties rose by 34 percent last year, fueling public and parliamentary unease in many allied nations. Long, vulnerable supply lines from Pakistan to land-locked Afghanistan are under attack.

Attacks on Afghan government property and personnel were up by 134 percent and civilian casualties by 50 percent.

The British military is gloomy about security in the southern province of Helmand, where it is in the front line.

The Taliban are gaining public support, partly due to anger over civilian casualties from NATO air strikes. Despite heavy losses, they seem to have no problem recruiting fighters.

Sensing that time is on their side, Taliban leaders see little interest in local reconciliation talks offered by Kabul.

Karzai, stung by the civilian toll and perhaps with one eye on the elections, has been increasingly outspoken in criticism of foreign troops, further undermining public support for their presence and aggravating mistrust with his Western backers.

On a visit to Berlin last July, Obama challenged NATO allies to do more, saying the United States and Germany had a stake in seeing NATO's first mission outside Europe succeed.

But European allies are unlikely to send more troops, and NATO officials expect Obama to present a shopping list of requests for police training, financial and development assistance, as well as military equipment such as helicopters, to avoid a public failure at his first alliance summit in April.

French President Nicolas Sarkozy says the key to success lies in Afghan public support and "Afghanisation" of the war. That requires accelerated training of the Afghan army and police and enrolling some tribal militias as security forces.

The European Union could do more than its present paltry 200 police trainers. But after pledging to double that number, it is having difficulty finding volunteers.

Writing in the journal Foreign Affairs, veteran Pakistani expert Ahmed Rashid and U.S. Afghan specialist Barnett Rubin said: "The goal of the next U.S. president must be to put aside the past, Washington's keenness for 'victory' as the solution to all problems, and the United States' reluctance to involve competitors, opponents or enemies in diplomacy."

They advocated a major diplomatic initiative involving India, Iran, Russia and China in a regional "contact group" to stabilize both Afghanistan and Pakistan.

General David Petraeus, who changed U.S. tactics in Iraq to roll back a Sunni insurgency, has advocated such a regional political approach in Afghanistan, and veteran troubleshooter Richard Holbrooke may lead that diplomatic drive.

But Obama has little time to find a more effective combination of military pressure and diplomatic incentives to avoid being ground down in Afghanistan.

For previous columns by Paul Taylor, click here.

-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --

The gas dispute between Russia and Ukraine that has left hundreds of thousands of Europeans shivering in the winter cold is bound to accelerate plodding European Union efforts to build a common energy policy.

The cut-off of Russian gas supplies to Europe via Ukraine highlighted how little progress the 27-nation EU has made in connecting national energy networks and diversifying supplies since the first such crisis three years ago.

"A similar situation occurred in 2006 and we Europeans now feel guilty about not having done what we said we would do," said an EU energy official, who declined to be identified because of the sensitivity of his position.

Unlike 2006, when the Europeans broadly sided with Ukraine's pro-Western, democratic government, the EU has remained strictly neutral this time in what it regards as mostly a commercial dispute over gas pricing and unpaid bills.

Both sides broke undertakings to Brussels on continuity of supply. The lack of transparency on contracts, the role of murky intermediaries and coalition feuding in Kiev all made it harder to sympathise with Ukraine this time, the EU official said.

"The Russians were having a good gas war until they overreacted by cutting supplies to the EU. As in the war with Georgia last year, they could not resist the urge to teach former Soviet republics a lesson," he said.

Russian giant Gazprom's demand for Ukraine to pay market prices is not unreasonable, but television images of Prime Minister Vladimir Putin ordering the company to turn off the taps to Europe belies talk of a purely commercial issue.

Several EU states have increased gas stocks since 2006 and avoided major disruption. But Bulgaria, the poorest EU newcomer, and western Balkans states Croatia and Bosnia were caught with no stocks at all. Supplies to 18 countries have been affected.

That prompted the EU to intervene. Czech Prime Minister Mirek Topolanek, the EU presidency holder, persuaded Moscow and Kiev to sign a deal allowing EU monitors to check the transit of gas across Ukraine to get supplies to Europe flowing again.

MUTUAL MISTRUST

Progress on integrating the European gas market by linking up national pipeline systems has been very slow, partly due to mutual mistrust among EU nations, as well as divergent business interests and political differences on relations with Moscow.

Member states still do not share information with each other about the price their energy companies pay Gazprom for gas. The executive European Commission and the EU Council secretariat have been struggling to collate such data since 2006.

"We preach transparency but we do not practice it among ourselves," the EU energy official said.
Poland has led a chorus of new members from central and eastern Europe calling for energy "solidarity" within the EU to reduce the former Soviet satellites' dependency on Moscow, which provides a quarter of the EU's gas.

But Germany, Europe's biggest gas consumer, opposes any emergency EU pooling arrangement for gas stocks, arguing that this is a commercial matter for utility companies.

Berlin is keen to manage its energy relationship with Russia without the involvement of Brussels. It resisted any EU involvement in the Ukraine dispute until the leaders of Bulgaria and Croatia appealed personally to Chancellor Angela Merkel.

EU officials say the crisis should spur European leaders at a March summit to put political momentum and public money behind plans to build cross-border energy interconnectors in Europe.

They may also agree on minimum requirements for gas storage as the EU has for national oil stocks.
And they will likely give higher priority to diversifying gas suppliers, supply routes and delivery mechanisms in particular to develop liquefied natural gas (LNG) facilities.

Among suppliers, the EU is eyeing Qatar and Nigeria for LNG as well as Algeria, Norway, Azerbaijan, Iraq and Central Asian countries for piped gas.

Russia is using the crisis to underline the cost for its NordStream and South Stream projects to carry Russian gas directly to European consumers via pipelines under the Baltic and Black seas, bypassing Ukraine, Belarus and Poland.

The dispute will also add political weight to the Nabucco project, backed by both the EU and the United States, to pipe Caspian and Middle East gas to central Europe via Turkey, but there are doubts about finding enough gas to fill the pipeline.

None of these projects offers an early solution, given the long lead times and high cost. EU officials say they are not an "either/or". There will be enough demand and enough gas to justify all three extra pipelines, they say.

In the shorter term, the capacity of existing pipelines can be expanded. But the main quick gains for European gas security would come from linking national networks into a single market and improving energy efficiency, especially in central Europe.

For previous columns by Paul Taylor, click here.

-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --

The European Union is entering a lame duck year just as new challenges are mounting from Israel's assault on Gaza, Russia's gas cut-off to Ukraine and the impending inauguration of U.S. President Barack Obama.

The EU's active crisis management in the Georgia war and the global financial meltdown last year under the energetic leadership of French President Nicolas Sarkozy was an exception, not the dawn of a new, more effective Union.

Europe now faces 12 months of stasis with two peripheral small countries - the Czech Republic and Sweden -- holding the six-month rotating presidency, EU legislation on hold because of European Parliament elections in June, and the European Commission winding down to the end of its term in November.

Domestic politics in key member states will also constrain EU initiatives. Germany, the biggest member state, has a general election in September in which the two major parties in its ungainly grand coalition will be fighting each other.

That seems to preclude agreement on bold economic stimulus measures or foreign policy risk-taking.
Europe will also be held in check for most of the year by a second Irish referendum, expected in October or November, on the EU's Lisbon treaty on institutional reform designed to give the bloc stronger leadership and a fairer decision-making system.

EU leaders will be careful not to do or say anything that could jeopardize the chances of reversing last year's "No" vote.

LACK OF LEVERAGE

The first few days of the year have highlighted the EU's divisions and lack of leverage in dealing with Israel, the Palestinians, Russia and Ukraine.

The Europeans exposed themselves to ridicule with two separate diplomatic missions touring the Middle East - an official EU delegation led by Czech Foreign Minister Karel Schwarzenberg and a French one led by Sarkozy, behaving as if he were still president of the Union.

The dual missions also reflected policy differences. While France, Britain and EU foreign policy chief Javier Solana demanded an immediate ceasefire, the Czechs and Germans blamed the Palestinian militant group Hamas squarely for the fighting and showed more sympathy towards Israel.

The EU has little leverage with either side, since the Israelis consider the United States to be the sole power broker in the region, and the Europeans will not talk officially to Hamas, which they have declared a terrorist organization.

The one card Europe can play is the possibility of deploying European monitors to help secure Gaza's southern border with Egypt and prevent arms smuggling into the Palestinian area.

The offer of an EU monitoring presence helped achieve a ceasefire between Russia and Georgia last August.

France and Turkey have offered monitors to support an Egyptian ceasefire plan put forward by President Hosni Mubarak after talks with Sarkozy.

But there are snags: Israel does not trust the Europeans to enforce an arms embargo, Egypt does not want European forces on its soil, and Hamas does not want its hands tied by Europe.

If the monitors do go in, they could end up caught in the crossfire between Palestinian militants and Israeli troops.

European forces already run that risk in southern Lebanon, where they deployed in a buffer zone in 2006 to help end a conflict between Hezbollah fighters and the Israeli border.

WRONG-FOOTED

The EU has also been wrong-footed by Russia's gas cut-off to Ukraine, which has now led to severe reductions in gas supplies to EU member states in central and southeastern Europe.

The European Commission and the Czech presidency have so far scrupulously avoided taking sides in what they describe as a commercial dispute.

But Czech Prime Minister Mirek Topolanek said if supplies to Europe were not restored by Thursday, the talks should be escalated to the top political level and the EU would intervene.

While many European governments, especially in former communist central Europe, suspect Moscow is playing with the gas taps to intimidate Ukraine's pro-western government and send a message to other European countries dependent on Russian supplies, the EU has no common position.

The German election is a factor here too. Foreign Minister Frank-Walter Steinmeier, the Social Democratic candidate for chancellor, is widely seen as sympathetic to Russia, while Christian Democratic Chancellor Angela Merkel is more critical.

The same paralyzing factors may make it difficult for the EU to respond to challenges it is likely to receive from Obama.

Germany seems set to resist joining any massive fiscal stimulus of the kind the U.S. president-elect is planning.

Germany, Italy and Austria, with strong commercial interests in Iran, are unlikely to accept much tougher sanctions against Tehran's nuclear program, especially without U.N. approval.
Berlin has also made clear it will not send more troops to Afghanistan or commit its forces to frontline combat missions.

The one issue on which a lame-duck Europe will be an eager partner for Obama is in fighting climate change. But EU hopes that the new U.S. leader may join an international agreement on curbing greenhouse gas emissions in Copenhagen at the end of this year may be over-optimistic.

For previous columns by Paul Taylor, click here.

-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --

He wasn't present and he isn't even in office yet, but Barack Obama was the elephant in the room at last week's European Union summit on economic recovery and climate change.

The 27 EU leaders knew they needed strong agreements to reduce greenhouse gas emissions and give their recession-hit economies a big fiscal stimulus to make themselves credible partners for the U.S. president-elect.

Europe's green deal had to be bigger, bolder and more ambitious to avoid being dwarfed when Obama announces his own clean energy program at his inauguration next month.

After the EU agreed on rules to cut carbon dioxide emissions by 20 percent by 2020, draw 20 percent of its energy from renewable sources and reduce energy consumption by 20 percent, European Commission President Jose Manuel Barroso adapted Obama's campaign slogan to drive home the point.

"Our message to our global partners is 'yes, you can'," he declared. "Yes, you can do what we are doing ... especially to our American partners."

"We are asking him (Obama) to join Europe and with us lead the world."

French President Nicolas Sarkozy, climaxing an energetic six-month presidency of the EU, proclaimed: "No other continent in the world is setting itself such binding limits as the measures we have just adopted."

Behind their hubris lay worries that the charismatic new U.S. president could grab the mantle of green leadership from Europe, even though the goals he has outlined so far are more modest -- to stabilize U.S. carbon emissions by 2020.

"The risk is that the Europeans could be upstaged by Obama acting more radically than Europe," says Antonio Missiroli of the European Policy Center think-tank.

There is also the perennial fear that Europe may not figure very high on the new American leader's radar screen, and that he may care more about relations with Asia's emerging economic powerhouses than with the slow but steady EU.

"For Obama's agenda, Euorpe is neither very relevant nor an obstruction. It doesn't tip the balance," Missiroli said.

Sarkozy warned more reluctant EU leaders that Europe would make itself look ridiculous if it abandoned its green ambitions just when the United States had finally elected a president who made climate change his priority.

Brussels officials are talking enthusiastically of linking the European emissions trading scheme with a future U.S. system to lay the foundation for a global carbon market.

They may be in for a cold shower, given likely resistance in the U.S. Congress to any binding cuts in carbon emissions.

Indeed, EU and U.S. officials are pessimistic about the chances of an international agreement in December 2009 at United Nations talks on a climate pact to replace the Kyoto Protocol, which Washington never ratified.

Some European leaders argued that the EU had to take the lead precisely because of the problems Obama will face at home.

"An EU agreement will support President Obama, who will have great difficulty getting an agreement on a system of emissions trading," German Chancellor Angela Merkel told fellow leaders behind closed doors, according to an official record.

On the economy too, Barroso argued that Europe and the United States should coordinate their recovery programs.

Yet the main European powers remain divided on the correct response to the recession, despite agreeing on paper on a European Commission programme calling for a stimulus of about 1.5 percentage points of Gross Domestic Product.

Obama has indicated he is considering a far bigger fiscal jolt to the economy, given the scale of the U.S. recession.

Germany's finance minister has branded Britain's sweeping cut in sales tax "crass Keynesianism". All other EU countries rejected any across-the-board cut in Value Added Tax.

France has focused its recovery measures on public infrastructure investment, plus a short-term cash incentive to trade in old cars for new ones.

Merkel has resisted pressure from Berlin's EU partners to do more to stimulate Europe's biggest economy, but she now faces domestic calls too for tax cuts and spending on public works.

On both climate change and the economy, Europe hopes to find a more cooperative partner in Obama, but perhaps with a degree of self-delusion about his interest in European solutions.

For previous columns by Paul Taylor, please click here.

-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --

European Union leaders this week face a crucial credibility test of their ambition to lead the world in fighting climate change, just as President-elect Barack Obama is making it a top priority for the United States.

Will the EU give real teeth to its pledge to cut greenhouse gas emissions by at least 20 percent by 2020, draw 20 percent of their energy from renewable sources and cut energy consumption by 20 percent over the same period, or will it fall short?

The omens for the Dec. 11-12 summit are not too encouraging.

Europe's climate goals were agreed in March 2007 in sunnier economic days. The financial crisis and looming recession have fueled pressure from heavy industry and some governments to go easy on implementation measures.

The EU will almost certainly reach a deal by the early hours of Saturday, which French President Nicolas Sarkozy will no doubt declare a triumph for his presidency of the bloc.

Yet the draft legislation has already been watered down to assuage industrial lobbies led by Germany, and more concessions will have to be made to placate coal-dependent Poland.

European Commission President Jose Manuel Barroso says he is confident the essentials of the EU executive's proposal to turn Europe's climate objectives into reality will remain intact.

But green campaigners say the result will be a toothless package that falls far short of the EU's leadership boast.

"The glass is three-quarters empty. The emperor is standing there with no clothes," says Stephan Singer, head of the European Climate Change and Energy Unit at pressure group WWF.

FEAR OF COSTS

He and other environmentalists argue that the EU should be aiming to cut emissions by 30 percent in the light of impending "regime change" in the White House, Australia's ratification of the Kyoto Protocol on climate change, and sigs of progress by China, India, Brazil, Indonesia and the Philippines.

Singer says the 27-nation EU will probably achieve its so-called 20-20-20 objectives, since European emissions are already almost 9 percent down on the 1990 starting point, leaving just 11 percent to cut in the next decade.

Moreover, EU states can make half those reductions far from home through a Clean Development Mechanism, which gives them carbon credits for funding emissions cuts in developing nations.

The emerging EU deal may not be tough enough to galvanize other nations into an agreement at U.N. climate negotiations in Copenhagen in December 2009 to save the planet from potentially catastrophic ecological consequences of global warming.

Fear of high initial costs for business and consumers has made many European governments wary of unilateral EU action, despite warnings from economists such as Britain's Sir Nicholas Stern that the price of inaction will eventually be far higher.

Auto manufacturers have been given an additional three years till 2015 to meet a binding limit on carbon emissions from cars, and fines for non-compliance have been tapered in a way that may encourage some producers to overstep the mark.

INDUSTRIAL LOBBYING

The main climbdowns have been on the European Emissions Trading Scheme (ETS), which caps overall output of carbon dioxide, the main greenhouse gas, and makes companies buy and sell permits to emit CO2 according to their needs.

The Commission proposed requiring industry to buy all or most ETS allowances at auction from 2013. Power companies would have to buy 100 percent of their permits from the outset.

However, energy-intensive sectors such as steel, glass, chemicals, aluminum, ceramics and cement, which threatened to relocate outside Europe if forced to pay for pollution permits, will now be granted free allowances -- at least initially -- unless there is an international agreement.

The criteria proposed by the French presidency to determine which industries are exposed to international competition and are hence deemed unable to pass on auctioning costs to customers seem particularly generous to business.

This is a victory for German Chancellor Angela Merkel, whose green credentials have been tarnished by industrial lobbying since she presided over the 20-20-20 accord last year.

Merkel is determined not to jeopardize jobs in Germany, Europe's biggest industrial economy, in an election year.

Exempting many companies from having to buy permits will reduce the incentive to use energy efficiently and shrink the proceeds from auctioning earmarked to fund clean energy projects in poorer EU states and developing countries.

Even electricity generators may now get some free carbon allowances in countries that are highly dependent on coal.

This is a sop to Poland and other central European states that are heavily reliant on coal and do not want to become more dependent on Russia by switching to less polluting gas.

PARTNER FOR OBAMA

A summit deal may hinge on Germany and Britain agreeing to earmark more EU money for next-generation clean coal power stations, cross-border electricity grid interconnectors and perhaps new nuclear plants for Poland and its Baltic neighbors.

On the plus side, European countries have made significant progress on legislation to promote renewable energy sources such as wind, wave, tidal and solar power.

And they are well set to reap big energy efficiency gains through better building design, insulation, lighting, heating and cooling.

So the EU's green credibility may just about survive the inevitable compromises and delays necessary to get a deal at the Brussels summit, although environmental campaigners are bound to denounce a sell-out.

"In the end, we will achieve 80 to 90 percent of our objectives and the critics will scream about the other 10 or 20 percent," sighed an EU official involved in the climate drive.

"But Obama will look at what Europe is doing and see he has a partner in the fight against climate change."