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The Turkish question splits EU foreign policy; tests ease stress over banks

EU gets tough on Iran, but is split over Kosovo. Cameron riles French and Germans over Turkey's EU membership bid. Iceland prepares to join the club. Bank tests leave analysts stressed while markets chill. Europe heads to beach as immigrants push up the population.

Top News: It's been a mixed month for the EU's ambitions to develop a united foreign policy. On the one hand, the bloc's 27 nations agreed on what they said were Europe's toughest ever sanctions on Iran in response to the Islamic Republic's refusal to bring its nuclear program into line with international demands; on the other, an international court's ruling on Kosovo's independence underscored divisions among the EU members over the status of the Balkan territory. 

EU nations gave Iceland the green light to start fast track membership talks, but comments by Britain's new prime minister showed that the union is deeply divided over whetherto allow Turkey to enter the club.

Exasperated by the failure of years of on-off talks with Iran, EU foreign ministers overcame differences over how to respond to Tehran's nuclear program by agreeing a package of measures targeting the Iranian economy that go well beyond recent U.N. sanctions. The EU banned European companies from investing in Iran's oil and gas industries and imposed new restrictions on financial transactions. It also prohibited EU companies from providing insurance coverage to Iranian shipping or other entities. 

Previous efforts to secure tough EU sanctions have run up against divisions among European nations with strong economic interests in Iran or concerns that a hard line could be counterproductive by provoking Tehran into calling off talks or speeding up its uranium enrichment program. July's show of unity is an indication of the deep concern in European capitals. 

Ahead of the European decision, Iran offered to resume talks in September. However, given Tehran's track record of prevarication, the EU ministers went ahead with sanctions. Predictably Tehran downplayed the impact of the EU moves and said it would press ahead with plans to supply fuel to its nuclear reactor. Interestingly, however, the Iranian authorities did not immediately withdraw the offer of talks.

The EU's unity over Iran was not matched by its response to a ruling by the International Court of Justice backing Kosovo's independence from Serbia. Most EU nations joined the United States in recognizing Kosovo as a sovereign nation after its unilateral declaration of independence in February 2008, but five have refused to do so, either through solidarity with Serbia or concern that separatists in their own regions could follow the Kosovars' example. 

The EU responded to the ICJ ruling by calling on the Serbs and Kosovars to overcome their differences, so both find a path to eventual EU membership, but while Germany and others backing Kosovo's independence welcomed the court's decision, Spain said it would not drop opposition to the territory's split from Serbia.

Serious foreign policy differences were also underscored during a visit to Turkey by British Prime Minister David Cameron who assured his hosts of British support for Ankara's faltering drive for EU membership and blasted EU partners France, Germany and Austria for their feet dragging.

The EU agreed back in the 1990s that Turkey could become a member some day in the future, but since then negotiations have been stalled by disputes over Cyprus and positions have hardened in several EU members where there is widespread concern over the impact such a large, poor, Muslim state from the borders of Iran, Iraq and Syria could have on the economic, immigration and foreign policies of the EU. Many in Britain share those concerns, but those who would prefer to see the EU as a loosely linked trading bloc see Turkey as a potential counterbalance to perceived Franco-German efforts to develop the union into a political superstate.

Small, Nordic and (until the financial crisis) rich, Iceland presents no such problems and EU nations agreed to open membership talks that optimists hope could be wrapped up in the next couple of years. There are three main obstacles — demands from Britain and the Netherlands that investors be compensated for losses from Iceland's banking collapse, fishing rights for European fleets in Iceland's cod-rich waters and the traditional wariness of the northern nation's citizens.

Money:The main financial news this month was Europe's decision to follow the United States in running stress tests on the continent's leading banks to judge how they would resist a new recession and an increase in bad debt. The idea is to ensure the financial institutions have enough capital to face further, hypothetical shocks, restore investor confidence and resume their role of financing a nascent economic European recovery.

The results published on July 23 were generally positive. Out of 91 banks tested only seven — mostly smaller Spanish savings banks — fell short of the criteria. The conclusion was that a mere euro 3.5 billion was needed to beef up those weakest links and hey presto! Europe's banking system is healthy again. 

Not unexpectedly analysts were scathing, dismissing the tests as a cynical public relations exercise by the EU to show that things are much better than they really are. However, markets generally responded well taking the view that even if the tests may not have been very tough, the vast amount of information which the banks were obliged to divulge about the state of their finances was enough for investors to believe that the situation was not as bad as feared. 

Europe's financial policy makers headed to the beaches for their summer break feeling slightly less stressed but aware that they will return in September to face tough decisions about reform of the financial sector.

Elsewhere: For many Europeans August means just one thing: vacation. With four weeks paid vacation the norm in many European nations, millions head south to the beaches of the Mediterranean in an annual exodus that often leaves Americans green with envy. Not only that, but Europeans retire earlier, enjoy generous maternity (or paternity) breaks and work for shorter hours when they are on the job. Are the Europeans lazy or Americans crazy to work so much? - one wag once asked.

In these days of crisis and high unemployment, Europeans are being forced to examine whether they can maintain their supposedly laid-back lifestyle. Retirement ages are creeping up and benefits being cut back by governments desperate to rein in budget deficits.

Despite that there are plenty of people trying to get a slice of the European way of life. New data released in July showed that the EU's population has risen to top 500 million for the first time — with the increase coming mostly from immigration rather than rising European birthrates.