NATO, the European Union and the United States have all welcomed a defence pact between Britain and France, but military analysts say it could hurt EU efforts to promote greater defence cooperation in the bloc.
In treaties signed on Tuesday, Britain and France — Western Europe’s biggest defence spenders — cast aside historical rivalry and agreed to set up a joint military force and share equipment and nuclear missile research centres.
NATO, the United States, and the EU’s European Defence Agency (EDA), which have argued for greater defence collaboration as a way to maintain capabilities despite the financial crisis, all welcomed the move, Reuters reports.
“Defence cooperation between NATO allies is always a good idea,” NATO spokesman James Appathurai said. “At a time when we need the most value for what we spend on defence, increased cooperation like this makes all the more sense.”
However, a former head of the EDA said that far from improving collaboration, the deal may be a blow to those wanting more defence issues handled on a pan-EU basis from Brussels.
“I think there’s a real issue as to whether this sucks the oxygen out of the air for wider EU cooperation,” said Nick Witney of the European Council on Foreign Relations think tank.
“You could have an interesting spectacle of a kind of European defence forming around an Anglo-French axis with no reference to Brussels,” he said.
France has long championed greater EU defence cooperation but Britain has been sceptical and it remains in its infancy.
British Prime Minister David Cameron stressed the agreement was not about pooling sovereignty or creating a European army.
NATO “ESSENTIAL GUARANTOR OF EUROPEAN SECURITY”
In their summit declaration Cameron and French President Nicolas Sarkozy said NATO remained “the essential guarantor of European security” and limited themselves to “encouraging” all EU members to develop their military capabilities.
Witney said the deal was awkward for Poland.
The former Warsaw Pact country, which is still nervous about its giant Russian neighbour, had been looking to push pan-EU defence during its EU presidency in the second part of next year and had been discussing the issue with France and Germany.
“There’s a big question mark now as to whether France would feel it’s willing and able to play two chess boards simultaneously — work across the channel with the Brits or try to do things under a European label in Europe,” Witney said.
“The German reaction is going to be fascinating — whether they want in, or turn up their noses and try to pretend it’s not happening,” he said.
Investors could also be underplaying the risks in Turkey and South Africa, two of 2010’s best performing emerging markets.
The lira is at its strongest in two years and Turkish shares .XU100 hit historic heights late last month.
But the European Bank for Reconstruction and Development (EBRD) has warned that Turkey’s current account deficit — some 6 percent of its output on an annualised basis — leaves it exposed to any reversal in capital flows.
Portfolio flows comprised the bulk of net capital flows into Turkey in the first half of 2010 while more stable foreign direct investment amounted to a mere 9 percent, EBRD data shows.
Turkish bonds yields are trading at historic lows after the central bank said it would hold rates steady until late 2011 in line with a dovish inflation outlook.
But the central bank has a patchy track record on inflation targets, observers say. The country also remains reliant on commodity imports and wage costs there are rising.
South Africa is also likely to struggle with inflation next year as wages rise as part of labour union settlements.
The strength of the rand currency, now trading at three-year highs to the dollar, is also hurting its manufacturing sector, making it harder for the government to wrestle down unemployment that stands stubbornly at a quarter of the labour force.
Consumer demand remains shaky and business confidence is slipping.
These stresses are barely reflected in market pricing: local shares .JTOPI are up nearly 10 percent this year.
“Flows are so strong that the market seems not to be concerned. But there are a lot of crowded positions at this stage. Investors will take any shocks badly,” said David Hauner, fixed income strategist at BA-Merrill Lynch.
In Hungary, such flows have also cushioned markets from the immediate impact of controversial policies recently announced by the government to cut the budget deficit.
Led by the centre-right Fidesz party, which swept into power this year pledging to manage the economy based on “the popular democratic will,” Hungary has spurned the International Monetary Fund (IMF) and drawn the ire of the European Commission with an unorthodox policy mix that includes the rechanneling of private pension fund assets to state coffers.
But the cost of insuring Hungarian sovereign debt against default has fallen to 285 bps from a mid-year high of 420 bps for five years while the currency has managed to rise 5 percent since July.
Local shares .BUX trade at a forward price-to-earnings ratio just above the 10-year average.
“There is sheer complacency in the markets now,” said Luis Costa, emerging markets strategist at Citi.