The 'feel-good' factor

There is little doubt that the direction and rate of economic growth is largely dependent on the policy environment and the stock of natural, physical and human resources of a country. However, the pace of growth is also critically influenced by national perceptions. These sentiments are, in turn, driven by the "feel-good" factor.

A lack of it would reflect negatively on national morale, but more importantly, on investor sentiment. Even when a country is experiencing greater prosperity, as reflected in key economic indicators, investors may still be pessimistic about the future. While the causes may seem inexplicable, they may be deep-rooted.

Over the last two years, Pakistan appears to have moved on to a higher growth path, with foreign exchange reserves touching $12.6 billion, the GDP growth rate close to six per cent, inflation and interest rates at their lowest in recent memory, the surge in the stock market to unprecedented levels and manufacturing industry exhibiting an impressive turnaround.

Even though most of the industrial progress has been in sub-sectors in which Pakistan does not have comparative advantage (for instance automobiles, electronics, sugar, etc.), development in these sectors is pushing up the demand for goods and services, fuelling the overall growth.

However, despite the improvement in economic indicators, and to some extent, in investor sentiment (reflected in the growing investment-to-GDP ratio), an element of uneasiness and uncertainty still prevails. The question is why, despite better indicators and a higher economic growth, is there still general disquiet amongst the investors.

An attempt is made here to explain this phenomenon by examining different aspects of the feel-good factor. The point is that even when a country is progressing economically, overall success will depend upon the strength of the feel-good factor that gets translated into a general sense of optimism about the future.

The purpose also is to discuss how the costs of doing business are raised as a result of policies formulated and put in practice by the government, and how this leads to the erosion of the feel-good sentiment.

The feel-good factor should not be merely based on abstract numbers but also have flesh and bone that go beyond the successes of a few corporate entities for Pakistan to translate recent successes to sustainable higher growth rates.

Take India, for instance, where the feel-good factor is aptly brought out in investor surveys. Potential foreign investors are not only taking India more seriously but have also become very positive on the outlook for that country.

A recent report prepared by Goldman Sachs argues that over the next 50 years, India is likely to be amongst the top three economies of the world with the potential to grow the fastest.

Another report termed India as the best investment destination in Asia from short-term as well as long-term perspectives - hence, the high investor confidence. All this stems from the pride that ordinary Indians are now displaying on learning of their new role on the international stage.

The concept of nationhood has come to mean a lot more. More and more people are adapting to the demands of a competitive environment, developing a taste for change and willing to become entrepreneurs, to move to different jobs, activities and locations.

The importance of the feel-good factor in generating investment is also illustrated by the case of Dubai. It is the feel-good factor that largely explains why barren soil is commanding prices prevailing in more developed markets.

The feel-good factor in Dubai has touched enviable levels, as a result of which investor confidence is high, attracting multinationals to shift their regional offices from centres like Singapore and transforming Dubai into a new business hub connecting east and west. Even a short visit to the city generates the feeling that almost anything is doable.

In Pakistan, some of the factors that have hindered the development of the feel-good sentiment include issues of law and order, political instability (particularly the structural tension between the elected institutions and the military), the slow assimilation of the philosophy of a competitive economy based on merit rather than patronage, the weak implementation of announced policies and the unpleasant experiences of investors with frequent changes in government policy.

The examples of the latter include the nationalization in the 1970s, the freezing of foreign currency accounts, withdrawal of incentives, taxes and other concessions without adequate notice (such as the income and sales tax exemptions and electricity tariff concessions given in the latter half of the 1980s to industries located in the Gadoon Amazai Industrial Estate, and sales tax concessions given to manufacturing enterprises located in the NWFP, etc).

Perceptions take time to change since opinions and views shaped over a long period have a deep impact, especially if the scale of the shock and the losses incurred are large.

Since the feel-good factor is critical in shaping sentiment, nasty experiences of the past reduce the time horizon of investment payback and lower the threshold of losses that investors are willing to bear in Pakistan, compared with the limit that they would place in the case of another country similarly placed economically but with a more credible history.

Casual surveys of potential investors suggest that the factors contributing to the weak sentiment in Pakistan include the high costs of doing business, resulting from the nature and degree of corruption (which has, however, reduced appreciably at the highest levels in the last three to four years), the high price and low quality of infrastructure (roads, communication, energy and fuel), the inhospitable regulatory environment, the lack of transparency in government procedures and decision-making, all of which serve as disincentives to invest, hindering the prosperity and growth of the private sector.

The unfamiliarity of the majority of enterprises with regulatory systems, mechanisms and procedures encourages the misuse of discretionary powers in an environment where opportunities and institutional arrangements for grievance redressal are limited.

Since incentives for strict and fair implementation are weak, an official can (without any fear of being held accountable by the system/superiors for his highhanded behaviour) openly violate internally issued interpretations of laws and rules, or simply refuse to accept rulings of superior courts on the subject.

Moreover, the power of veto is so liberally distributed in the system that subordinate staff can scuttle the process at any stage with senior officials almost helpless in being able to check, let alone reverse, the attempt to put a spanner in the works, especially now for fear of the wrath of NAB. These problems are exacerbated by widespread interference, both political and bureaucratic.

Enterprises that are able to function in such an environment are generally those that have managed to reach some kind of an understanding with the relevant government departments on how these laws are to be implemented. This arrangement, in many cases bilateral in nature, can be disrupted with the change of a government or key personnel of the department.

Since legal and judicial systems in Pakistan have not been successful in enforcing contracts, they have failed to resolve disputes in an efficient and timely manner. The high cost of contract repudiation increases costs for investors in two ways.

First, it increases the risk of larger scale investments. Secondly, it forces firms to diversify their manufacturing operations into activities in which they do not have a comparative advantage, thereby lowering the efficiency of investment. Since it takes years to get disputes resolved through courts, contract violators have much to gain by getting a case stuck in the court queue.

Weak enforcement of property rights and contracts add to the atmosphere of low trust that prevails in the economy. As a result, business transactions tend to be restricted among parties that have developed a degree of trust in each other's business ethics.

Development of trust requires long-term stable interactions that begin with restrained contracting. If trust cannot be established, contracting remains restrained, the cost of conducting transactions high, thus discouraging business development and growth.

A perennial issue that has been the bane of our society concerns those who have gained unfairly from political patronage and connections - who, despite being guilty of misdemeanour, corruption and abuse of position and public office, continue to thrive because of lack of proper accountability mechanisms. Unfortunately, this gets translated into general resentment against even those who have prospered through just and fair means.

Such outcomes act as deterrents to investment, especially of foreign origin, since ethical honesty is critical for reinforcing the feel-good factor. However, now that the public sector is slowly beginning to adopt a more transparent and merit-based system of recruitment, merit will begin to be perceived as the key factor underlying the prosperity of people, thereby, hopefully, changing perceptions gradually.

In addition, there is this general mindset of the bureaucracy that private entrepreneurs make money simply by exploiting others. This stems partly from the value system and social ethos of bureaucrats that leads them to distrust market forces.

They believe that the private sector should only be permitted to make what are perceived as "reasonable profits" (whatever the term means) and that the only institution that can check "excessive profiteering" and exploitation of defenceless consumers by the private sector is the government - a belief that gets ingrained into general public opinion.

These factors are instrumental in the creation of a low-trust culture and in providing a regulatory role for the government even in areas where it is not required, thereby constraining the development of a robust, dynamic and efficient private sector.

To conclude, although the "feel-good" factor is critical in improving the investment climate required for facilitating growth and creating additional employment opportunities, the principal lesson learned from the election results in India is that whereas growth may be a necessary condition for poverty reduction, it is certainly not a sufficient one.

To help the poor move out of poverty (with a third of the population living below the poverty line) by equipping them to compete effectively for economic opportunities with the relatively better off segments of society requires their basic needs to be addressed, in which the role of the government in financing or delivering basic social services (education, primary healthcare and provision of pure drinking water) is critical.

The writer is a former finance minister of Punjab.

Revolt of the underclass - II Lessons from Indian polls

In the event Chandra Babu Naidu suffered a crushing defeat at the hands of the Congress. His defeat is attributable largely to the digital divide he helped create in his state, where the majority of the population, consisting of small farmers, suffered from neglect and the incidence of suicides among farmers reached scandalous proportions.

In many states, including Karnataka, Kerala, Tamil Nadu and Punjab, the farmers had been hard hit by the entry of global agro-businesses, as well as by the rise in prices of fertilizer, water and power. The BJP's obsession with the IT revolution led it to neglect the increasing disparities in Indian society.

These disparities included not only regional and rural-urban inequalities, but also disparities between the incomes of those working in the new economy or IT sectors and the rest of the economy. Those employed in these strident sectors enjoy a sheltered and pampered existence.

They are isolated from the outside world and earn close to foreign salaries. Half the family in this group lives and works abroad and there is always a steady stream of emigrants.

The social activities of the elite also take place away from the larger India, as they live in cordoned off communities and colonies in truly enclave-fashion. While this is not a new phenomenon in Pakistan, it is a rather new and shocking development in Nehruvian India. As a result, the disgust and the revolt of the underclass exhibited in the polls are not so surprising.

A major surprise in the 2004 elections is the impressive rise in the electoral strength of Left parties, including the communists, which have gained half as many seats in the Lok Sabha as the two major parties, the Congress and the BJP.

The rise in the Left vote can be seen as a vote against both the anti-secular policies of the BJP and the pro-Washington consensus policies initiated by the Congress in 1991and indiscriminately implemented and strengthened by the BJP in the last six years.

The Left parties played a major role in the BJP defeat through their mass struggles across the country on a number of issues. In both Andhra Pradesh and Tamil Nadu, the Left led massive and militant struggles against the pro-rich policies of state governments, and were able to forge tactical alliances with the Congress and other centrist parties against the BJP and its allies.

In Andhra Pradesh, the communist parties have been campaigning over the rise in electricity rates and the starvation of farmers since 2000. In late August 2000, the parties organized a massive demonstration against the Naidu government, focused on the issues of inequity and faced a barrage of bullets from the police in which activists were killed.

While the BJP was busy distributing saris and causing stampedes to bribe its voters, the communists set up gruel centres in drought-affected areas, politicizing large rural masses. This helped turn the electoral tide against the urban- and middle-class based, anti-secular BJP.

The most sinister part of the BJP's Hindutva agenda was its attempt to subvert the educational system through rewriting textbooks and packing academic bodies with its ideologues whose aim was to glorify the ancient Hindu civilization and culture at the expense of other religious communities in India.

Yet on issues of more basic education, the BJP had little to show and social sectors did not receive the attention that they deserved. The education of the children of India's elite, who go to schools which demand huge donations is increasingly taking place abroad at all levels of education.

The Indian education system, which had remained rather equitable compared to Pakistan's until lately, has also become a victim of commercialization and is becoming increasingly dualistic and fragmented.

Extreme social and economic disparities continue to persist and have become further aggravated in the 1990s both in India and Pakistan. Both countries have well and truly two separate societies living side by side. The elite, especially the beneficiaries of globalization, are doing very well for themselves - perhaps more so in India than in Pakistan.

While poverty may not be increasing in India, empirical evidence in Pakistan suggests that poverty has been on the increase in the last decade and there do not seem to be many pointers towards an improvement in the situation. Perhaps, a lesson that Pakistani elites and economic managers can learn from the BJP's electoral defeat is from the sorry fate of its "India Shining" campaign.

The BJP got carried away by the eight per cent plus growth last year, when all impartial analysts had pointed out that what was on display was only a recovery and not a trend.

It was bowled over by all the international attention on its bullish stock market, its burgeoning foreign reserves, the BPO upsurge and rapid GDP growth. It started believing "India is on the verge of explosive growth" and that economic growth would benefit all geographic regions and all classes.

The Pakistani economic managers, with much less favourable cards in their hands, are in danger of committing the same, if a more disastrous, mistake. By constantly harping on the exaggerated performance of the economy and by dismissing the evidence on increasing poverty through dubious means, they are fooling no one but themselves and are courting disaster for themselves as well as for the economy.

It is true that Pakistani elites face no imminent threats to their lifestyles from any elections, whose outcome in any case is scripted in advance by those in power. The day of reckoning must, however, eventually come. Hopefully, through ballots rather than bullets.

Concluded.

Mideast: the reckless duo

It is no secret that Israel's prime minister, Ariel Sharon, is dead against the establishment of an independent state of Palestine. Israel's frequent incursions into Palestinian-controlled areas and its disproportionate use of force in these areas, in the name of self-defence, are actually designed to sabotage the peace process in the Middle East, particularly the Quartet-sponsored roadmap which had kindled a ray of hope for Palestinian statehood.

It is, however, intriguing that the recent escalation in violence against the Palestinians has taken place immediately after Sharon's return from Washington, which leads one to believe that the Bush administration's weight is behind Israel's abhorrent acts against the Palestinians.

The US abstention from voting during the UN Security Council's May 19 resolution, expressing grave concern about the humanitarian situation of the Palestinians, also lends credence to this assertion.

Regrettably, the Bush administration also paid no heed to UN Secretary-General Kofi Annan's repeated requests to US Secretary of State Colin Powell and National Security Adviser Condoleeza Rice to ask Israel to end its repression in the occupied Palestinian territories, and to put a halt to the brutal killings of Palestinian civilians, including women and children. These atrocities, as well as the destruction of Arab property, continue unabated.

A few statements issued by US officials relating to the deteriorating situation in occupied Palestinian land were unfortunately tinged with disapproval of Palestinian actions, which, according to these statements, provoked Israel's military retaliations in self-defence.

It is amazing that the US administration invoked the logic of "self-defence" to justify the targeted assassinations and extra-judicial killings of innocent people and of the extensive destruction of their property as an instrument of state policy.

The US abatement of Israel's acts of terrorism against the civilians was particularly shocking as it ran counter to President Bush's much-trumpeted war on terrorism. The responsibility to advance the peace process rests on the members of the Quartet, particularly on the United States who initiated it.

However, it seems that regardless of the statements issued by US officials from time to time, reaffirming Washington's commitment to the two-state solution to resolve the Palestinian-Israeli conflict, President Bush, under the influence of the Jewish lobby which wields enormous influence on US policymakers and media and plays a decisive role in determining the outcome of presidential elections in the country, has had second thoughts about the creation of an independent and viable Palestinian state.

It is also important to bear in mind that the Middle East has enormous strategic and economic importance for the US and under the changed scenario in the Middle East, particularly in the wake of the US-led invasion of Iraq which alienated Muslim countries in the region, its dependence on Israel has increased to protect its geo-political and economic interests in the region. Sharon, in exchange for the same, has apparently struck a bargain with Bush.

While addressing the journalists at the World Economic Forum in Jordan, on May 16, the Assistant Secretary of State, William Burns, spoke of "a deep sense of frustration and uncertainty throughout the Middle East region right now".

He also conceded that this frustration is directed against American policy. He also admitted that he had no illusions of bringing the Palestinians and Israelis back into discussions regarding the Quartet's peace plans.

The UN Security Council (UNSC) resolutions as well as the Quartet's roadmap recognized the inadmissibility of the acquisition of territory by force and stipulated an end to the occupation of the West Bank and Gaza Strip which Israel had occupied during the 1967 Arab-Israel war.

Similarly, all the United Nations resolutions, particularly 194, recognized the right of the Palestinian refugees, who were uprooted and displaced in 1948, to return to their original homeland which has now become Israel. The Quartet's roadmap, however, envisaged the refugee issue to be resolved through negotiations.

Israeli Prime Minister Ariel Sharon has, however, decided to adopt a new approach to the Palestinian-Israeli conflict. His plan envisages retention by Israel of six major settlement blocs in the West Bank and withdrawal from the Gaza Strip, allowing Israel to maintain direct and full control over all its exit points - airport, port as well as the land crossings to and from Gaza.

In addition, Israel will also have the right to intervene militarily inside Gaza whenever it feels the need to do so. Thus, for all intents and purposes, the Sharon plan seeks to maintain the status quo which would be tantamount to perpetual defiance of the UNSC's resolutions and virtually signal the end of the Quartet's roadmap.

In a letter addressed to Ariel Sharon, Bush has conferred legitimacy on the Israeli prime minister's illegal settlement policy by stating that "as part of a final peace settlement Israel must have secure and recognized borders" and that "in the light of new realities on the ground, including already existing major Israeli population centres, it is unrealistic to expect that the outcome of final status negotiations will be a full and complete return to the armistice line of 1949, and all previous efforts to negotiate a two-state solution have reached the same conclusion."

Regrettably, Bush has thus given Sharon a green signal to retain Israel's settlements in the West Bank and Gaza, completely disregarding international law, the UNSC resolutions and the Fourth Geneva Convention, which prohibit the occupying power from making demographic changes in the territory occupied by force.

Astonishingly, Bush, in his letter to Sharon, has referred to the 1949 armistice line, which has, serious political ramifications, whereas the Quartet's roadmap recognized the 1967 borders.

It is, however, heartening to note that the UN General Assembly in its resolution, adopted on May 6, has expressed its determination to contribute to a comprehensive negotiated settlement in the Middle East, resulting "in two viable sovereign and independent states, Israel and Palestine, based on the pre-1967 border and living side by side in peace and security".

On the question of refugees, to be solved through negotiations, Bush's endorsement of Sharon's proposal that Palestinian refugees seeking to return should be settled in the projected Palestinian state and not in Israel has not only preempted a negotiated settlement in this regard between the concerned parties but has also showed his ignorance of the fact that the right of refugees to return to their original homeland is embedded in international law and cannot be taken away by anyone. Sharon's suggestion that the Palestinian refugees return to the projected Palestinian state, which has not even been created, to say the least, was the iniquity of racial prejudice.

President Bush's endorsement of Sharon's unilateral plan signals a major shift in Washington's policy in the Middle East and has swept aside its decades old diplomatic efforts to work out a reasonable solution to the simmering and intractable Palestine problem. It has also hurt US credibility across the world as an honest and impartial peace broker.

Bush's own image has also been tarnished for abandoning his long-held stand on Palestine to obtain the support of the strong American Jewish community and of the 30 to 40 million fundamentalist Christians in the country who also support a strong Israel, as part of their theological belief.

In blatant violation of the UNSC resolutions, Israel continues to remain in illegal occupation of the Palestinian territory and is creating hurdles in establishing an independent and sovereign Palestinian state, as decided by the UNSC and also envisioned by the Quartet.

Therefore, instead of blindly supporting Sharon, at great moral cost, Bush should rise to the occasion and, shunning his personal interest, strongly support Palestinian rights.

The Palestinians remain deprived of their inalienable right to self-determination, as expressed in terms of an independent and sovereign state on their own land, owing to Israel's reneging on implementing its part of agreements, on one excuse or another.

More often than not, they have also suffered due to misguided US policy. President Bush ought to know that the Palestinians are human beings and that humanity is not limited to the borders of the United States.

The writer is a former ambassador.

Making and breaking of the King's party

Pakistan has an unstable party system in which most political parties are divided into factions. Because political parties are the ultimate barometer of stability in a democracy, internal rifts in these organizations have largely contributed to political instability in the country.

Perhaps, on this count the merger of various factions of the Pakistan Muslim League (PML) is a good omen for national politics. However, if the past is a guide, a unified Muslim League may not have a long life.

Of all political parties in Pakistan, the Muslim League has been the most susceptible to fragmentation. It is also a party whose fate has been controlled by the establishment rather than the party leadership or by the people.

In fact, breaking and uniting the League has often been a main component of the establishment's power strategy. On its part, the party has always been a willing tool in the hands of the establishment and remained the easiest choice whenever the latter has looked for a King's party. A brief look at the League's history will bear this out.

The 1946 elections held on the basis of separate electorates were a watershed in the history of the Muslim League (then called the All India Muslim League). The party won all the Muslim seats and accounted for more than three-fourths of the total Muslim vote.

The victory of the League, however, owed more to the charismatic leadership of M.A. Jinnah and the increasing demand for a separate homeland for the Muslims, which the party advocated, than to a vibrant party organization.

After the creation of Pakistan, the League failed to maintain its popularity. For a multiethnic state like Pakistan there was the need for a strong and stable political party with an across-the-nation base capable of holding all ethnic groups together.

In India, the Congress did that. However, in Pakistan the League failed to do so. The absence of a strong organization and a credible leadership after Jinnah weakened the party. Apprehensive of defeat, the party leadership shied away from seeking a popular mandate. The result was that by and by the party lost its popularity and strength, which, if it was to hold on to power, rendered it completely at the mercy of the establishment.

When the governor-general dismissed the central League government in 1953, the party bowed to the decision by accepting Muhammad Ali Bogra as the new prime minister. When the governor-general dismissed the Constituent Assembly in 1954, the party again meekly surrendered.

The League's failure to take a firm stand against the dismissals created the perception that it was an anti-people, pro-establishment party. Hence, in the 1954 provincial elections in East Pakistan, the party was routed by the United Front, comprising mostly League dissidents.

The League won only nine - 10 when an independent threw his weight behind the party - out of 309 seats. In the western wing as well, the party cut a sorry figure. A process of disintegration in the party set in from which it never fully recovered. The disintegration led to the birth of the Republican Party, fathered by none else other than the president of the republic.

During the Ayub era, when the need for a political party to support the regime was felt, the obvious choice was the League, which was revived by the name of the Convention Muslim League.

However, notwithstanding full official backing, the party failed to regain its popularity. The 1970 elections were contested by at least three Leagues with an utterly dismal performance turned in by each one.

Throughout the Bhutto period (1971-1977) the League remained a virtual non-entity. The party was resurrected after the 1985 elections held by the Zia regime to create a semblance of democracy.

Though the elections were held on a non-party basis, it was soon felt that a representative set-up could not work without political parties. But which party should represent the regime? Once again the Muslim League was chosen. Senators, MNAs, MPAs and the heads of local body institutions were enticed into joining the born-again League.

The regime projected the League as a party stronger and more popular than the main opposition force, the Pakistan People's Party (PPP). However, the League's strength and unity were built on sand. The party remained united only as long as it remained in the saddle.

After Prime Minister Junejo was sacked by the president in 1988, dissension broke out in the party. The League, however, was cobbled together by the establishment to face the PPP in the national elections. Despite the administration's backing, the party was unable to form a government at the centre.

However, courtesy horse-trading, a PML government was installed in the Punjab, which adopted a confrontational posture towards the central government at the behest of the powers that be.

With the support of the caretakers, the party won the 1990 elections and remained in power until its government was ousted by the president. Then history repeated itself.

No sooner was the party government dismissed, than the PML leadership fell apart and two main factions emerged: the one led by the ousted prime minister Nawaz Sharif called PML-N and the other by Hamid Nasir Chattha called PML-J. Of course there were other factions like the PML Qasim and the PML Functional each claiming to be the real League.

After prime minister Nawaz Sharif was ousted in 1999 by General Pervez Musharraf, many of his erstwhile party colleagues ditched him and formed another League faction named the PML-Q. When the establishment looked for a king's party, the PML-Q was the most convenient choice.

The faction ever since has served as the political mouthpiece of the establishment. There was little surprise when after the 2002 general elections, the PML-Q emerged as the single largest party and formed the government.

With the exception of the PML-N, all League factions stand united. There is little doubt that the main force behind the League's unification is once again the establishment.

Hence, not surprisingly, after the unification, the chief of the unified League, Chaudhry Shujjat Hussain, declared support for the policies of President Musharraf. But how long will a united League last? The answer is simple: as long as it remains in power.

The story of the Muslim League is a sad commentary on our politics. When there are political leaders willing to dance to the tune of the powers that be, even if it means rocking the very boat they are in, democracy can hardly flourish.

It is not that divisions in their ranks necessarily sink parties. In India, for instance, the Congress has split up on more than one occasion. At any rate, a political party must be capable of managing the rise of factions in its ranks, just as the Congress has done.

However, to cope with such problems a party must have its roots among the masses. Such parties do not need the help of the state machinery to survive and thrive, and they ride to power by popular mandate.

On the contrary, political parties which do not have a base among the masses can only derive sustenance from the state machinery. For such parties, the only way to enter into the corridors of power is to seek the backing and blessings of the forces calling the shots.

The EU presidency race

EU leaders have three weeks to fill the Union's most important political job but much manoeuvring lies ahead before they agree on the right candidate. No one yet knows for certain who will replace Romano Prodi as the next president of the European commission. Cards are being held unusually close to chests, with leaks and briefings fuelling speculation from Portugal to Latvia.

Guy Verhofstadt, the Belgian prime minister, has emerged as the man most likely at this stage to take over the EU's supranational executive. The puff of white smoke is expected at the Brussels summit on June 17. Mr Verhofstadt once dubbed Baby Thatcher because of his hard-line economic policies, speaks French, English, Italian and German as well as his native Dutch.

Mr Verhofstadt's communications skills alone would make him a vast improvement on the, gaffe-prone Mr Prodi, a former Italian prime minister who has been bullied and sidelined by the big member states.

The Flemish Liberal is expected to be backed both by the French president, Jacques Chirac, and the German chancellor, Gerhard Schroder. Mr Schroder raised Mr Verhofstadt's candidacy when he met Mr Blair in London recently as he lobbied for a "super-commissioner" to coordinate EU economic policies. If successful, the Belgian prime minister would have to move less than a mile across central Brussels to the commission's headquarters.

Another Franco-German favourite, the veteran prime minister of Luxembourg, Jean-Claude Juncker, has also insisted that he does not want the commission and prefers to stay in national politics. But he has not been ruled out.

Diplomats estimate that Mr Verhofstadt now has the support of about half the EU's 25 member states, though there is less enthusiasm from some of the eastern newcomers. "If it is not Verhofstadt or Juncker," a commission official said, "then anyone is possible." - Dawn/The Guardian News Service