The Washington Diplomat / April 2009
By Larry Luxner
In 2003, when he was still British ambassador to the European Union, Sir Nigel Sheinwald supervised a marathon session of hush-hush meetings with Libyan officials in London that ultimately led to a stunning announcement: In exchange for world acceptance and an end to sanctions, Gen. Muammar Gaddafi would agree to give up Libya's weapons of mass destruction and renounce terrorism forever.
Three years later, as Tony Blair's foreign policy advisor, Sheinwald secretly met Syrian President Bashar al-Assad in Damascus, and in 2007 sparred by phone with top Iranian security official Ali Larijani in a nerve-jangling but eventually successful bid to win the release of 15 British sailors being held captive by Iran.
Impressive achievements, yes but when it comes to intractable challenges, Libya's Gaddafi, Syria's Assad and Iran's Mahmoud Ahmadinejad pale next to the current global financial catastrophe.
Sheinwald, whose policy experience ranges from Moscow to Tokyo to Zimbabwe, now finds himself at the center of complex efforts by Prime Minister Gordon Brown to coordinate, along with the United States, Europe's response to the world's worst economic crisis since the Great Depression.
"This is a major, global set of problems, and we need a global solution," he said as both countries prepared for the Group of 20 summit in London on April 2.
Sheinwald, Great Britain's ambassador to the United States since October 2007, sat down with The Washington Diplomat last month for an exclusive interview that focused on the enormous economic difficulties confronting both countries. The 45-minute encounter took place at Sheinwald's residence exactly two days after Brown's visit to the Oval Office, in what marked President Barack Obama's first meeting with a European leader since his inauguration.
"My absolute priority since arriving in Washington has been building relationships with the people who are ultimately now in the Obama administration. I made clear that this had to take precedence over our day-to-day work on trade and foreign policy," the ambassador said. "We had to be ready on Day One to start working with the new administration and I think we've managed to do that."
At the leaders' press conference, Obama's cool nod to the "special partnership" that exists between the two longtime allies a departure from the historic "special relationship" raised more than a few eyebrows in London, as did the U.S. president's decision to return a Winston Churchill bust that stood in the Oval Office back to the British Embassy.
Some say the snub reflects Brown's waning influence back home, where the high public approval he enjoyed for his initial handling of the economic crisis has since been eroded in the wake of ever-gloomier news. But Sheinwald dismisses the partnership-relationship fuss as just a matter of semantics.
"Frankly I don't understand the difference between partnership and relationship," he told The Diplomat. "I think the accent in that should go on the word 'special.' No one believes our relationship with the United States is based just on history or culture or sentiment. It's got to be renewed by each new generation of leaders, and the emphasis will change according to international circumstances."
Sheinwald, 55 and the father of three sons, said that at the moment the economy is the most pressing issue the trans-Atlantic community faces as it converges in London for the G-20 gathering, where he said that without a doubt his major agenda for the summit is the one Brown sketched out during his Washington visit.
"First of all, we need to make sure the stimulus efforts which individual governments have been taking - both fiscal and monetary - complement each other, and are mutually reinforcing, in order to get the maximum dividend in terms of jobs and economic recovery," Sheinwald explained.
"Secondly, there's the world financial system. We're all suffering from the same problem: We're all frozen up, and credit's not moving. Nationally, we're working to deal with this issue of damaged assets, but there's a wider systemic issue of cleaning up our banking system."
And with Britain heavily reliant on its financial sector, holding about $4.4 trillion in foreign debt (staggering for a country with a $2.1 trillion economy), the clean-up couldn't come any faster as the government takes drastic steps to keep three of the country's largest banks afloat.
Since February 2008, Northern Rock PLC has been completely nationalized, while Lloyds Banking Group PLC agreed in March to extend the government's state in the bank to up to 75 percent in exchange for state guarantees covering $367 billion in risky assets. The government's stake in Royal Bank of Scotland (RBS), meanwhile, could jump to 95 percent from its current 70 percent as part of a similar rescue attempt involving $462 billion in so-called "toxic" assets.
"Even though it's a very significant stake, we're not taking over RBS," Sheinwald insisted. "We want it to be run on a private basis. The only real requirement is that those banks start lending again. That's why the government has stepped in."
Like the United States, Great Britain faces the possibility of major bank failures as credit dries up and unemployment rises. In mid-March, the number of people without jobs in the United Kingdom surpassed 2 million for the first time since the Labour government came to power in 1997. The official jobless rate is now 6.5 percent, and it's rising faster than at any time since records began in 1971.
In fact, a recent post on Foreign Policy.com suggested Britain might be the next European economy to collapse after Iceland. "The financial crisis has gotten so severe in Britain that it has earned London a new nickname in the international media: Reykjavik-on-Thames," FP's David Kenner wrote. "The question in Britain is no longer when the economy will enter a recession, but when it will enter a depression, with many bracing for a slump that could rival the 1930s in severity."
Things don't look good for the rest of Europe, either. A new European Union policy paper approved by EU finance ministers last month warned that "the outlook for 2010 is highly uncertain. Financial markets remain volatile and credit channels are not yet functioning properly, while unemployment rates are expected to rise sharply in most member states in 2009 and 2010."
Bank failures are imminent in once-prosperous countries such as Austria, Estonia, Latvia, Iceland, Italy and Sweden and Sheinwald seems determined not to let the contagion spread to British shores.
"We will not allow our banks to fail," he declared. "The fact is that in situations like this, governments have to step in as the last point of defense," he said. "We've done this reluctantly, because we know we want this to be a short-term measure. We don't want our banks to be controlled by government in the long run."
In addition to boosting its stake in major banks in exchange for massive bailouts, the British government has a few other weapons though not many in its arsenal for unfreezing credit and boosting consumer demand.
The day of our interview, March 5, the Bank of England slashed interest rates yet again, to 0.5 percent. "We've reduced interest rates to near zero over the past year or so," Sheinwald said. "That degree of monetary and fiscal stimulus needs to be done around the world. All these national measures will be appreciably more effective if they are coordinated."
But countries within Europe and even within Eastern Europe disagree sharply on what must be done. Faced with their own recessions, many Western European countries especially fiscally disciplined Germany, Europe's largest economy are reluctant to bail out their Eastern neighbors after they overdosed on credit and consumption binges. Yet at the same time, if one Eastern European nation collapses, the domino effect falls directly on Western countries, which hold much of the East's debt.
The rift has strained relations within the 27-member EU to the breaking point and could become the biggest test the bloc faces. German Chancellor Angela Merkel recently rejected an appeal by Hungary for a $240 billion bailout of hard-hit Eastern and Central European countries, many of which want to speed up adoption of the euro and are looking to their wealthier EU counterparts for help.
EU leaders have said that instead they would roughly double a $34 billion crisis fund specifically for ailing Eastern European nations, but the larger aid effort is likely to be funneled through the International Monetary Fund. As of press time, EU leaders meeting in Brussels were set to vote on a plan that would double the resources available to the IMF for helping countries hardest hit by the recession. The draft, which would boost the IMF's capital to $500 billion, makes no official reference to the size of the possible EU contribution, though EU officials said the bloc would kick in up to $100 billion.
In a nod to China's growing clout, the draft also called for IMF reform so that "it reflects more adequately relative economic weights in the world economy."
"Emerging markets and the poorest countries are very vulnerable at the moment to all the shocks we've faced," Sheinwald pointed out. "It's not just monetary policy or interest rates. You've got to work on the fiscal side as well, through the IMF and the World Bank, to help us through this. There are a whole series of levers you need to be pulling."
Yet not everyone agrees on exactly which levers to pull. Ahead of the G-20 summit, a trans-Atlantic split has emerged on how to best address the economic crisis, with the United States, and to some extent Britain, favoring public spending to stimulate the economy, while EU countries such as Germany and France advocate tighter regulation in favor of massive public spending that drives up debt and inflation.
"We have to have a way out of the crisis, and a way out of debts," said European Commission President Jose Manuel Barroso, warning that public spending must have clear limits. "Because we cannot put, of course, in the future generations the cost of the current crisis."
Despite U.S. pressure to increase stimulus spending, EU officials also say they want to wait and see if the roughly $250 billion stimulus package they've been implementing is working (varying estimates put the money-pumping measures at about 3.3 percent of the combined EU gross domestic product). In the meantime, Merkel and others stress that regulation of major cross-border financial institutions is key to avoiding a repeat of past market excesses. "The problem is not about spending more money, but putting in place a system of regulation so that the economic and financial catastrophe that the world is seeing does not reproduce itself," Merkel said recently at a joint press conference in Berlin with French President Nicolas Sarkozy.
Among other goals, the European leaders suggested "colleges of supervisors" assigned to scrutinize all international financial institutions "regardless of the country of domicile" before the end of this year. But it remains to be seen what concrete actions the G-20 summit will produce on that front, especially given U.S. wariness of handing over power to international bureaucrats.
Sheinwald whose country's wealthy London financiers went roughshod on risky investments says that some type of oversight and reform is inevitable. "We're not saying there needs to be a single regulator governing all the world's banks, but there must be much better coordination among regulatory authorities in Europe and around the world. All financial institutions which involve risk should be regulated," he said.
"In the area of financial regulation, things are done at the European level. But in other areas, for example tax policies, you'll find that individual governments have much greater latitude under the EU rules and you have to respect that," Sheinwald added. "Of course it looks complicated from the outside, but it reflects the reality that there's no such thing as a United States of Europe. Nevertheless, there is a great desire to coordinate as much as possible."
Still, he admits that the crisis is the first of its kind in a globalized world, and will take time to fully understand. "Governments are having to handle a completely unprecedented situation," he said. "We are trying to finesse this and make it better week by week. And that's the way it's going to be for awhile."
The ambassador, declaring that both the United States and Britain "must resist protectionism," also called for the enactment of a monitoring system to discourage unfair trade practices.
"We must keep our markets and our investments in each other's economies open," he insisted. "We cannot return to protectionist policies. That's a very big theme for my government. We've got to keep trade flowing and not allow ourselves to return to the old-fashioned ideas of nationalist markets."
Yet at least 17 of the 20 countries that vowed at a November summit to avoid protectionist steps that could sharply damage global trade are themselves guilty of enacting such measures - including raising tariffs, taxing imports and boosting subsidies - according to a World Bank report issued March 17.
"Leaders must not heed the siren-song of protectionist fixes, whether for trade, stimulus packages or bailouts," warned the bank's president, Robert B. Zoellick. "Economic isolationism can lead to a negative spiral of events such as those we saw in the 1930s, which made a bad situation much, much worse."
According to the World Bank report, national bailouts and subsidies proposed worldwide for the auto industry now total $48 billion, with such aid coming from governments including the United States, France, Great Britain, China, Argentina, Brazil and Canada.
Asked directly if Washington's continued bailouts of General Motors, Ford and Chrysler constitute a thinly veiled form of U.S. protectionism, Sheinwald skillfully sidestepped the question.
"In principle, I'm sure it can be done in ways which reduce the distortion of competition," he replied, referring to the Obama administration's continuing rescue of Detroit's Big Three. "We'd certainly hope that as your plans develop, you'll have an eye on international markets and the principles of competition. It's a sensitive area. The concerns we've heard reflect people's anxieties about their jobs and their futures."
But the ambassador warned that such pressure could ultimately destroy future prosperity. He added that governments around the world should focus on the advantages of globalization "rather than pretending globalization hasn't happened and working against it."
Domestically, another source of angst is the plummeting pound. At press time, Britain's pound was worth only $1.39 compared to more than $2 not even two years ago. That has some Britons grumbling that maybe it's time to abandoned their cherished currency for the relative safety of the euro.
This was one subject Sheinwald didn't care to discuss much.
"We try as much as possible not to comment on exchange rates. That's one of our rules in life as diplomats," he said. "But we'll look at the situation. If the government believes there's a clear case for us joining [the euro zone], then we'll draw that conclusion, but that hasn't been the case until now."
Another thorny problem is that of tax havens. A handful of jurisdictions around the world, including a few under the British crown (Jersey, Isle of Man and the Channel Islands), have come under international pressure to reduce banking secrecy. The issue is expected to come up at the G-20 summit because it's one that leaders could "put on a show of collective action with the announcement of a crackdown," according to one European source quoted by Reuters.
Assets of between $1.7 trillion and $11 trillion are believed to be stashed away in such offshore banking centers. In mid-March, Switzerland, Andorra, Liechtenstein and Monaco all pledged to meet demands to bring their banking laws in line with international standards, before such changes are imposed on them.
"We're going to want this to be one of the strands in the outcome of the London meeting. We've actually worked as a government over the past decade to try to reduce the problems from non-cooperative jurisdictions," said Sheinwald. "We believe we have borne down on these jurisdictions, and some problems do remain. From personal experience, having been our ambassador to the EU, we fought for greater transparency in places like Luxembourg and Switzerland, and we'll continue to do that."
On the bright side, the ambassador says, both Europeans and Americans are talking about "greening" the recovery and making sure it is sustainable. "We're looking to create a genuinely new low-carbon economy for the future, and this is an opportunity to do that."
When Sheinwald isn't dealing with the world economic meltdown, as British envoy to the United States he's got plenty of other international crises to juggle ranging from Afghanistan to Zimbabwe.
At the moment, Great Britain has more than 8,000 troops in Afghanistan, by far the second largest contingent after the United States. This makes the issue a high priority back home, and many critics including some former top British officials say U.K. policy in Afghanistan just isn't working.
Kim Howells, the former Foreign Office minister with responsibility for Afghanistan, recently accused the country of being corrupt "from top to bottom" and said the international community was wrong for treating Afghan President Hamid Karzai with kid gloves.
"There are few signs that the chaotic hegemony of warlords, gangsters, presidential placemen, incompetent and under-resourced provincial governors and self-serving government ministers has been challenged in any effective way by President Karzai," blasted Howells, who was in charge of the Afghanistan brief for more than three years until he stepped down last October.
He told the Guardian newspaper that British public support for the war in Afghanistan was fragile. "We will be asked why the lives of our service personnel should be risked why we are fighting to preserve what looks remarkably like a regime that is being undermined by corrupt cliques that have access to the highest levels," he argued.
Sheinwald conceded that British policy in Afghanistan is running into obstacles, but he pointed to a "resilience" in public opinion despite the 143 British servicemen and women killed since the start of operations in 2001 and tried to put a positive emphasis on the greater gains made since the ouster of the Taliban.
"We've all got to remember that there have been real advances in Afghanistan in the past six or seven years. So many people have returned, and the role of women in Afghanistan has been transformed. All those things are genuine changes for the better in the lives of ordinary people, which we ought to be pleased about," the ambassador told The Diplomat.
"But in the past couple of years, we've stalled. We don't believe we will be defeated, but we clearly worry that we're not getting closer to success. That's because while we've had a great deal of success confronting the Taliban on the battlefield, we've found it difficult to maintain our position on the ground and deal with the Taliban's cowardly attacks," he said.
Echoing that sentiment, British Foreign Secretary David Miliband recently admitted that the Taliban has created "a strategic stalemate in parts of the country through their use of improvised explosive devices."
Sheinwald said Her Majesty's government welcomes the Obama administration's new approach to the region, and that "we very much agree with the idea that you've got to look at Afghanistan and Pakistan together, because unless you do, you won't succeed in either place." To that end, the government recently appointed a tough-talking diplomat, Sir Sherard Cowper-Coles, to serve as special representative to Afghanistan and Pakistan, working closely with U.S. envoy Richard Holbrooke.
But like an increasing number of officials, including Cowper-Coles, Sheinwald suggested that both Washington and London need to be more realistic about what can actually be achieved in the war-torn country. "We don't need Jeffersonian democracy in Afghanistan to achieve our security gains but we do need to make sure that the military increase is accompanied by an increase in international efforts in the political and economic arenas."
To that end, Sheinwald accused "some of our European partners" he diplomatically declined to say which of not pulling their weight when it comes to the "international sharing" of responsibilities in Afghanistan.
"NATO's reputation is on the line here," he said quite bluntly ahead of the security bloc's 60th anniversary summit, which takes place right after the G-20. "Those countries which are not able to put combat forces in Afghanistan shouldn't feel that they can't do something else, like counternarcotics, police training or helping economically. There are a huge number of ways in which European governments can contribute," Sheinwald said. "They're not off the hook."
Another perennial hotspot is the Middle East. The British have been disengaging from Iraq with military operations in Basra set to cease May 31 though clearly not disengaging from the region's problems. In early March, Great Britain quietly decided to open low-level contacts with the political wing of Hezbollah, which the State Department considers a terrorist group. Foreign Secretary Miliband said the move was made to stress the urgency of disbanding militias and curbing Iran's influence within the Lebanese fundamentalist movement.
But ultimately progress in the region, according to Sheinwald, depends to a large extent on the Israeli-Palestinian front and finding a two-state solution to the conflict, which he says needs to be recognized as a foreign policy priority.
"We can't have a solution to the Middle East problem with a Gaza-last policy. We have to find a way through this. The U.K., like other European countries, tends to look at the Middle East as a transcendent issue. We don't think we'll be able to solve the region's other problems or put pressure on Iran until there's forward movement on this issue."
Given the enormity of crises Sheinwald has on his plate right now, it was amazing he found time to meet with The Diplomat at all. On top of the daily diplomatic rigors, from hosting a steady stream of British ministers and delegations to making nice with the new American administration, he's made it a point to stay active in the community.
Though not one to revel in the public limelight, the ambassador, along with his wife Julia, an internationally recognized pediatrician, have sponsored a variety of local events from the CARE humanitarian group's annual celebration, to knighting Sens. Edward Kennedy and John Warner. (It's also rumored that Washington has Sir and Lady Sheinwald to thank for bringing Dame Helen Mirren to D.C. stages this fall in the Shakespeare Theatre production of "Phθdre," a cultural coup for the city.)
But the ambassador whose postings have included Japan, Zimbabwe and the Soviet Union when it was still the Soviet Union seems accustomed to juggling multiple tasks under demanding circumstances with a characteristically cool, not necessarily stiff, British upper lip. And even though he admits the job has more than its share of headaches, it's all just part of the job for this seasoned envoy.
"I've been a diplomat for nearly 33 years now, and like everyone else who's been through this," he says, "I think the biggest headache is the multiplicity of problems we're dealing with - and the fact there's no place to hide."