– 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.

— Diana Furchtgott-Roth,former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The opinions expressed are her own. —

Leaders of the Group of 20 countries meeting in Washington on Nov. 15 are hoping that America’s role in the global financial crisis will shame President George W. Bush, or maybe President-elect Barack Obama, into supporting greater international financial regulation, diminishing America’s role in international financial institutions.

But America is unlikely to give up control over its financial sector, certainly not under Bush, and probably not even under the internationally-popular Obama.

International leaders demand a replay of the 1944 wartime conference at Bretton Woods, New Hampshire, at which delegates from 44 nations created the World Bank and the International Monetary Fund. The World Bank made loans to war-torn countries and now lends to developing countries. The IMF supervised fixed exchange rates centered on the U.S. dollar and gold, a regime abandoned in the 1970s, and made rescue loans to troubled economies, a role that continues.

When European Union leaders met in Brussels on Nov. 7 to prepare for the financial summit, they proposed a course that might be as far-reaching as Bretton Woods.

An EU statement, sweeping but vague, proposed that financial institutions of “systemic importance” be made subject “to rules or at least to oversight wherever they operate” and that “no market segment, no territory, and no financial institution should escape.” That proposition is a dangerously empty vessel into which all manner of regulatory mischief could be poured.

Such international regulation would be unprecedented.

British Prime Minister Gordon Brown and French President Nicholas Sarkozy, now the EU president, want the IMF to enforce the new regime, building up an institution traditionally headed by a European. Standards would be promulgated and enforced by the IMF, similar to the way that the European Commission enforces rules among EU member states.

Their goal is to offer principles for a new international financial system that would be translated into workday regulations for all manner of financial institutions, even ratings agencies. Ambitiously, the Europeans want another summit in 100 days to consider draft regulations.

But it’s unlikely that Congress or any American president, Bush or Obama, would sign on.

Whatever the wisdom of more far-reaching international financial regulations, many Americans don’t want binding rules administered by a bureaucracy unaccountable to the public. They prefer to do the job themselves. They want sovereignty over their own affairs, and are suspicious of international organizations.

Americans’ distrust of international regulation stems from international organizations that are perceived to be anti-American. For example, the United Nations Oil for Food program, intended to allow food to reach hungry Iraqis, wound up profiting Saddam Hussein’s family and political supporters, leaving southern Shiites to starve.

Congress gains power by regulating the financial sector because companies donate campaign funds to members. The securities and investment industry, which stands to lose the most from international regulation, is particularly generous.

The Center for Responsive Politics reports that securities and investment houses donated over $1 million to Senator Chris Dodd, now Senate Banking Committee chairman, and over $540,000 to Alabama Republican Richard Shelby, then-chairman of the Senate Banking Committee, in 2004, the year they last ran for reelection.

Obama received $13 million from the industry for his presidential campaign, and Senator John McCain $8 million.

The fundamental question is whether more international financial regulation can resolve the current crisis and prevent another one– without hindering innovation. Since risk-taking is the engine of economic innovation, we don’t want to stifle it by regulation and all financial innovations will carry some new risks.

The huge crowds that cheered Obama in Europe last summer will not persuade him to cede control over his country’s financial system to the IMF. The most that the G20 can hope for under the new president is that Congress adopts its new principles and America regulates itself.

Diana Furchtgott-Roth can be reached at dfr@hudson.org.

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