EUROPEAN BUSINESS REVIEW (EBR), 02/2014

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EUROPE NEEDS CHANGE

IS RECOVERY STRENGHTENING?

MYTHS & LESSONS FROM ARGENTINE

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Issue Contributors Joseph T. Salerno, Antonis Zairis, J.D. Bindenagel, Olivier Blanchard, Valbona Zeneli, Antonia Dimou, Konstantinos Frouzis, Oliver Bräuner, Juan Carlos Martinez Oliva, Eva Kjer Hansen, Horacio Falcâo, David Dubois, Michael Peshkam, Deryl Sturdevant, Alessandro Niccolo Tirapani

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04 EDITORIAL

Merkel and her EPP give Cameron hope on EU reform

06 OPINION

6

Myths and Lessons of the Argentine “Currency Crisis” The dynamics of convergence and the exit from crisis Europe 1914: Lessons for China and Japan in 2014

14 ECONOMIC OUTLOOK

Is the world recovery really strengthening?

16 THE WORLD

First official talks of Taiwan and China since 1949!

TTIP’s Effects on the Global Economy

14

20 ENERGY SECURITY

Powering the Future: The European Union and the East Mediterranean Energy Discoveries

22 TRENDS

IronFX Global new paradigm approach takes over the online trading industry That’s how change can be achieved

27 SPECIAL REPORT

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EU needs CHANGE! Europe tries to reverse drift towards de-industrialisation Think small: How to improve ChinaEU security cooperation Why a variable banking union is Europe’s best bet Why the EU must boost the powers of national MPs

38 LIFESTYLE

Hotel Grande Bretagne, A Luxury Collection Hotel

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40 MANAGEMENT

The Seven Myths of Win-Win Negotiations

42 SOCIAL BUSINESS

The Decision-Making Edge of Social Business

44 LEADERSHIP (Still) learning from Toyota 48 EVENTS

44

“Athens Declaration” of Committee of the Regions on EU’s growth strategy: Too little progress change now or fail again

48 LAST PAGE

Fail2Succeed Campaign

For previous editions archive and up-to-date information on major topics and events you may visit our website http://www.europeanbusinessreview.eu

A BRUSSELS VIEW

Merkel and her EPP give Cameron hope on EU reform

by N. Peter Kramer, Editor-in-Chief

In her speech to both Houses of the UK Parliament, the end of February, German Chancellor Angela Merkel left the door open to “limited, targeted and swift” EU treaty changes. Following her meeting with David Cameron she said, “I firmly believe that what we are discussing today is doable,” adding “Where there’s a will there’s a way”, but that the negotiations would “not be a piece of cake”. Appealing for a “strong UK with a strong voice inside the EU”, Merkel said Britain was “an important ally” for making the EU more open to the world, more competitive, with less intrusive EU bureaucracy. She said she shared Mr Cameron’s concerns about so-called “benefit tourism” by migrant workers and talked about the need to protect the rights of non-eurozone countries in the single market.

Some comments in leading German dailies on Merkel’s UK visit: Handelsblatt pointed out that Germany and the UK share a “staggering amount of common ground” and “the list of common interest has now even been extended by a very important point: both Germany and the UK want to readjust the institutional structure of the EU”. Die Welt wrote “Cameron will get his treaty changes sooner or later. In return, he should learn to walk the European walk and talk the talk – as Merkel does, while pushing a German agenda.”

Indeed, Merkel didn’t set out a specific and detailed offer to Britain; there is still all to play for but the onus is now on David Cameron to articulate a clear plan of action to take to the EU negotiating table. Cameron can’t rely on Germany alone. He needs to build up a network of alliances involving as many European capitals as possible. That would make it easier for Merkel to offer her political support. But the British Prime Minister didn’t have much success during his recent meeting with the French President. Although it looked on the pic-

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tures the two of them had a good time together in a traditional English pub, the socialist Francois Hollande staid neutral on the subject of returning powers to the EU capitals. An ally of Cameron is the Dutch government. Foreign minister Frans Timmermans repeated recently the slogan: European if necessary, national if possible! But a weak spot is the Prime Minister of the Netherlands, Mark Rutte, who backed the Dutch critical approach of ‘Brussels’, on the other hand he is a strong supporter of his liberal friend the Belgian Guy Verhofstadt: the most Eurofederalist of all Eurofederalists.

Interesting is that in the beginning of March Merkel’s party, the European People’s Party, obviously shared her views. The EPP adopted an election manifesto speaking against a ‘centralised Europe that deals with every detail of people’s lives’. The EPP calls also for more ‘prudent’ EU enlargement policy and says EU citizens should only have social benefits if they worked in the country they live in.

There is hope for Cameron!

OPINION

Myths and F Lessons of the Argentine “Currency Crisis”

by Joseph T. Salerno*

The crash of the Argentine peso last month brings to a close yet another foredoomed experiment in South American left-wing populism.

The precipitous “devaluation” of the peso by 15 percent against the U.S. dollar in January represents its steepest decline since the devaluation of 2001 when Argentina defaulted on its foreign debt.

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rom January 21 to the close of trading on January 23 the peso dropped from 6.88 per dollar to 8.00 on the official market. On the black market the peso fell by 6 percent on January 23 to 13 to the dollar. Over the past year the peso has declined by 35 percent.

In a foolish and futile attempt to maintain its overvalued pegged exchange rate, the Argentine central bank has sold off dollar reserves at the rate of $1.1 billion per month over the past year in buying up the excess pesos sloshing around on foreign exchange markets. Overall, dollar reserves have plunged from a record high of $52.6 billion in 2011to a seven-year low of $29.3 billion. Also since 2011, the Fernαndez de Kirchner government has implemented highly restrictive exchange controls including delays in approving repatriation of the dividends of foreign firms as well restrictions on purchases by tourists, taxes on credit card purchases, and, recently, limits on online spending that have made it nearly impossible for ordinary Argentine citizens to obtain dollars to hoard or invest abroad. Of course, these draconian measures have failed to stanch the outflow of dollars in the face of the salutary operation of the black market in which dollars were freely available at the equilibrium price of 13 pesos per dollar. The government finally threw in the towel on January 22 and 23 by refusing to intervene in foreign exchange markets to prop up the peso, which declined by 10 percent on January 23 alone. On January 24, the government went further and announced a loosening of exchange controls. Now Argentines will be permitted to buy pesos in proportion to their income while the redeemable tax on peso purchases has been reduced from 35 percent to 20 percent.

Now these are the facts as they have been reported but many commentators have erred in their interpretations of the situation.

First, the sharp decline in the value of the peso does not represent the onset of a so-called “currency crisis” but rather the very means of resolving a crisis already long underway. For the “devaluation” of the peso by the Argentine monetary authorities refers to nothing more than the removal of price controls that have maintained the price of the U.S. dol-

OPINION

lar in terms of the peso below the market equilibrium price and thereby generated a permanent excess demand for dollars in Argentina. In other words, the devaluation is simply the admission that the peso had already been robbed of a significant part of its value by inflation. This had been concealed by the fact that at the controlled price of dollars, prices of foreign imports were artificially low in terms of pesos while Argentine exports were rendered more expensive and less competitive in foreign markets. The Argentine government tried to suppress the resulting trade deficit and shortage of dollars by exchange controls, that is, by measures designed to ration out the available dollars to its cronies. In addition, people increased their demand for dollars to hoard or invest abroad because they anticipated the inevitable “devaluation” of the peso and consequent loss of purchasing power in terms of goods. By permitting the exchange rate to increase from the controlled price of 6.88 to the market price of 8.00 pesos per dollar, foreign products will become more expensive to Argentines and domestic products become less expensive to foreigners (because more pesos can be purchased with a given amount of dollars).

If the government stays the course on its policy change, the result is that the quantity of imports will decrease and that of exports will increase until they approach equality. Thus the trade deficit will disappear or becomes small enough that it can be financed by the inflow of foreign private-sector investment. Actually, since Argentina still needs to begin to settle about $6.5 billion of overdue debt with creditor nations, it is more likely that it will have a trade surplus, with the excess exports generating the dollars necessary to service these debts. To repeat, this is not the beginning of a crisis, but the resolution of an existing crisis caused by garden-variety price controls.

Second, many media commentators and even economists insist that the devaluation does indeed precipitate a domestic crisis because it generates a broad rise in peso prices of both imported goods and exportable domestic products, which are now sold abroad in greater quantities, reducing the supplies available for domestic buyers. This general increase in prices therefore injures Argentine consumers, they claim. But this response leaves out the unseen and beneficent consequences of the removal of any price control. It is obviously true that, for example, the abolition of rent controls reduces the welfare of existing renters who

must pony up higher rents and benefits apartment owners. But it is also true that there are many others who benefit, including all those renters who were shut out of the market because of the apartment shortage even though they were willing to pay higher rents or who succeeded in leasing apartments for much higher black-market rents. Likewise the abolition of a price control that overvalues the peso benefits Argentine export firms and their workers and suppliers as well as those consumers who were precluded from importing goods or making foreign investments that they desired or who were only able to do so by paying a much higher price for dollars on the black market.

Thus the adjustment of Argentine prices in accord with the true market value of the peso does not make the entire nation poorer. It simply redistributes real income from those who were benefiting from the distortion of the price system by rate pegging and exchange controls, namely, government employees, favored firms, and organized labor, to those without political connections who were victimized by the intervention.

In addition, in the case of both rent controls and the pegging of the exchange rate, the abolition of controls results in greater efficiency in resource allocation and the maximizing of the volume of mutually beneficial exchanges at the equilibrium price.

Along these lines, it is surprising and not a little amusing to witness Nobel Prize-winning economist Joseph Stiglitz, a staunch Keynesian, wagging his finger and sternly warning of the obvious: Reality will clearly force some changes: you have to live within your means, if your currency is going down, it means you’re going to be paying more for your imports. They will have to change their policies and the question is when and how.

Where Stiglitz gets it wrong is in his implication that everyone in Argentina will be worse off because they are “going to be paying more for [their] imports.” As the preceding analysis demonstrates, however, the government and its cronies and favored constituencies may be worse off, but those previously without access to dollars except through black markets will be better off with the “devalued” peso.

Third, the media focus on the hemorrhaging of foreign reserves by the Argentine central bank as a main factor precipitating the crisis is ridiculous. For it is not the loss of reserves but the very fact that the central bank needs to hold dollar reserves at all that is a sign of crisis. The only reason that the central bank needs re-

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OPINION

serves is to prop up the overvalued peso by selling dollars in short supply and buying up the inevitable excess of pesos. If the dollar-peso exchange rate were left free to be determined solely by market forces the Argentine monetary authorities would not find it necessary to hold even a single dollar, precisely because the supply and demand for each currency in terms of the other would balance at every moment without surplus or shortage. If the Argentine government needed to make purchases abroad or to make payments on its foreign debts it could easily acquire the dollars to do so by purchasing them from commercial banks or other private institutions on the foreign exchange market. It would pay for whatever dollars it required with pesos that it received in tax revenues or borrowed from the public or ordered printed up by the central bank. In the disorderly world of national fiat currencies, a nation avoids additional chaos and crises by permitting the market to determine the value of its currency in terms of other fiat currencies with differing rates of inflation.

This brings me to my fourth point. Many politicians and other observers on the right in Argentina and elsewhere attribute the crisis to the profligate spending programs of the leftist FernÎąndez de Kirchner government. They argue that the social subsidies, nationalization of foreign-owned firms, expansion of the regulatory state, etc., have driven the government budget into deficit. But government budget deficits are not the cause of the overvaluation of a currency and the shortage of foreign exchange any more than they are the cause of inflation. Thus, if the additional spending had been financed by raising taxes or borrowing from the public, Argentine prices would not have risen. However, the Argentine government decided to finance these deficits by rapidly expanding the

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money supply, at an average rate of 30 percent per annum over the last four years. This resulted in a rapid inflation of Argentine prices that unofficially reached 28 percent last year, more than twice the 11 percent reported by the Argentine government. Inflation and its anticipation stimulates imports and the flight of capital abroad and suppresses exports. Money creation, in conjunction with a pegged exchange rate, is therefore the one and only cause of a so-called “currency crisis.�

The ideal global monetary system is one with a uniform market-supplied money such as existed under the classical gold standard of the 19th century. Under this system, disequilibria in the balance of payments were quickly adjusted because any change in the supply of gold tended to be spread evenly over all participants in the system and this ensured a roughly uniform rate of inflation among all countries.

This is similar to the situation today among the various states within the United States, all of which are on the U.S. dollar standard. Thus imbalances in the balance of payments between say, New Jersey and the rest of the U.S., are only temporary and are swiftly adjusted. The lesson to be learned from the myths analyzed above is that any attempt to replicate the operation of a single world currency by government price-fixing schemes involving national fiat currencies is doomed to failure and will only exacerbate the monetary disorder that has buffeted the world economy since the destruction of the international gold standard in 1914. *J oseph Salerno is academic vice president of the Mises Institute, professor of economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.

OPINION

The dynamics of convergence and the exit from crisis

by Dr. Antonis Zairis*

The political dynamics of mandatory convergences, e.g. living with and managing the memoranda, as well as the complex nature of the country’s economic and structural problems, bear the necessity for a public dialogue on the creation of new political currents reproduced in society on the basis of a nevertheless political rationalism and new realism which, on the other hand, guarantee unprecedented deep political breaks and social reforms.

H

owever, since on the one hand we have seen this before and on the other we avidly talk about it for the past 30 years, one thing is certain: wealth redistribution in society presupposes the creation and accumulation of wealth – even Bernstein has said this many years ago to Marx in person – and this can be achieved only as a result of fortified and free entrepreneurship, high competitiveness and profitability of businesses in the context of a healthy and free market.

This is what the political leadership of this country should aim to in order to create preconditions for recovery through the use of resources and domestic investments in fixed capital. In case foreign investments arrive, we will welcome them, however they do not seem close!!!

It is worth noting that according to the Hellenic Statistical Authority (ELSTAT) the Gross Fixed Capital Formation (GFCF) amounted to 20 billion Euros for 2013 with a forecast of 21 billion for 2014, while before the world financial crisis in 2008 it amounted to 56 billion.

On the other hand, the infamous Greek social state that carelessly provided benefits at some point burnt off. The Greek Governments tried to seek for solutions to decrease excessive public spending and entrusted a weakened and last hope to new political practices and extensions, supported by private initiative and the honesty of Greek businessmen. However, this attempt was not successful either… given that private initiative is weighed down, razed and leeched by taxation.

However, the dynamics of these new potential political currents politically blend liberal transformation,

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which promotes a free and open market, respect of individual rights and encouragement of private initiative, as well as socialist reformism which aspires to equal distribution of goods, social cohesion, solidarity and well-being, and at the same time draw upon the best things these two views have to offer.

Between us, we are all liberals when we aspire to drastic interventions in a state apparatus that does not produce, but on the contrary lives off of the Greek taxpayers’ direct and indirect taxation and also when we react against state intervention in the Economy and align with creative and intelligent ideas that can be applied in the globalized free market.

Moreover, we are all socialists when we seek for protection and care for the financially week social classes, when we are against all sorts of social exclusions and discriminations, in state with a demarcated framework of principles and institutions that protect the citizen in an civilized open society which tolerates diversity.

Nowadays, the world deals with a multileveled and multidimensional crisis – institutional, social, economic, political, and religious. Who would disagree to a more representational, productive and essentially participative Democracy that would render a role for the citizen? An inclusive and qualitative Democracy that does not end up in the concentration of power to the few, in the hands of various elites who use it in order to serve their own interests and goals.

In this tragic and hideous reality, the political spectacle thrives on TV frames which reproduce an overgrown academism and a roaming rigid politi-

OPINION

cal discourse that debates and suggests in an abstract rather than a practical manner.

Every year, on the other hand, until recently, everyone had witnessed the revealing data of the annual Budget of the Government by observing that 70-80% of the estimated income would serve the public debt, which meant that salaries, pensions and benefits were directly dependent on loans. Today we are covering Public Administration expenses and there is a primary surplus after interest which however has derived in a way that absorbs resources and liquidity from real economy.

However, there are two (2) serious questions. Since primary surpluses have not derived from restructuring the economy’s production model or competitiveness and productivity but from razing salaries and pensions and unfair taxation: a) can they be viable and b) is the geometrically increasing public debt manageable?

Nonetheless, international experience provides us with the examples of many countries of which primary surpluses coexist with chronic recession.

Who can then preconceive a happy future for our country, a country with a reduced economic level by 30% with low productivity, decreased development rates, increasing youth unemployment and constantly declining incomes?

However, all citizens and leaders of this country, we must deeply understand that in today’s environment of globalization and the EMU, the course, the pace of our country for economic, political or social reforms is now evaluated according to the community’s or international criteria and not through national or regional comparisons. It is this last point that we must seriously consider.

*D r Antonis Zairis holds a PhD degree in Economic Sociology and has held the position of Director General at the Ministry of Foreign Affairs, during the period 2012-2013. Today he is Vice President of the Hellenic Retail Business Association. He is also an alternate member of the West Group in the Intergovernmental Committee of Experts regarding the Sustainable Development Financing Strategy in the UN framework. Furthermore, he teaches at the Democritus University of Thrace and at the University of New York in Tirana. He is author of 15 books specialized in Management, Marketing and Sales.

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OPINION

Europe 1914: Lessons for China and Japan in 2014

by J.D. Bindenagel*

Japan’s Prime Minister Shinzo Abe recently likened the tensions between Japan and China to the relationship between Germany as a rising power challenging the United Kingdom 100 years ago. He certainly had a point when he noted that trading relations and investments had not stopped the brewing conflict in Europe a century ago from engulfing the world in war.

It

is ominous that China and Japan are currently so keen on butting heads.

After all, this is 2014. People throughout Asia must nervously reflect on the hard lessons the Europeans learned.

Europeans are revisiting the Great War on the 100th anniversary of its outbreak in August 1914 after Gavrilo Princip, a local terrorist in Serbia, not one of the major belligerent countries, assassinated the Archduke Franz Ferdinand of Austria and launched a global war. The failure of European leadership a century ago brought calamity to Europe.

Domino-style, that war brought on a veritable tumbling of major empires, beginning with that led by the Russian Tsar, the Austro-Hungarians and the Ottomans. It also destroyed the foundations of the global economy and European gov-

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ernance. Fascism and dictatorship followed in the 1930s that led to the Second World War and the Cold War. In East Asia leaders can consider these lessons, remember that economic relations offer no guarantee that rising powers will rise peacefully and prevent the world from sleepwalking into war.

The real challenge, whether then in Europe or now in Asia, is how to turn enmity into amity.

Then as now, the best way to proceed is to begin with small steps in the resolution of many disputes. And this is where Japan’s Prime Minister must do much more than (implicitly) point the finger at China.

There is no denying that China suffered humiliation from the Japanese Imperial Army invasion in the Sino-Japanese Wars. Little wonder, given the absence of an apology from

Japan, that the Second World War continues to feed Chinese anger.

This is part of the sentiments that are surfacing in the competing claims for the Senkaku/ Diaoyu Islands in the East China Sea. The lack of recognition of the wartime conquest of Nanjing and Prime Minister Abe’s visit to the controversial Yasukuni shrine remain significant symbols of lack of justice for China.

Unlike the cultural context of Europe that respects apologies that accept responsibility for suffering brought on by the National Socialist regime in the Germany of World War II, Japan and China seem caught in a cultural context where shame is associated with apology.

German President Johannes Rau apologized to the victims of Nazi Germany in 1999, which was respected by the millions

OPINION

Japan’s Prime Minister, Shinzo Abe

of living victims who suffered in the name of the German people. Unfortunately, reconciliation from the bitter events of the Second World War would be ideal, but resolution of all these issues is not likely.

There are several steps that can be taken to successfully manage these tensions: 1. Chinese, Japanese and regional leaders should set aside the use of force to resolve the tension. A code of conduct in the South China Sea is necessary to manage maritime operations.

2. The parties should engage with each other in clarifying narrative to promote mutual understanding and prevent angry populisms and xenophobic na-

tionalism that can rebound to destroy leaders and countries.

3. Japan, China, Vietnam should set aside the unresolved issues and turn to joint management of national interests in fishing, energy and resource development. The Gulf of Tonkin-Hainan agreement between China and Vietnam is one example.

4. The United States should provide needed leadership among parties to create and share historical narratives that can lead to better understanding, maritime policing, adherence to the Law of the Sea and maintenance of the freedom of the seas for shipping, while helping to avoid political miscalculation and military confrontation.

* J.D. Bindenagel is a retired U.S. career diplomat and expert on Germany.

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ECONOMIC OUTLOOK

Is the world recovery really strengthening?

by Olivier Blanchard*

The global economy seems to be on the mend. The key points are that the recovery is happening as expected, but it remains fragile and uneven across major economies.

Normalising monetary policy poses risks for vulnerable emerging markets and deflation is a real concern for the Eurozone.

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The IMF’s January 2014 World Economic Outlook Update offers three main messages: • First, the recovery is strengthening.

We forecast world growth to increase from 3% in 2013 to 3.7% in 2014.

We forecast growth in advanced economies to increase from 1.3% in 2013 to 2.2% in 2014. And we forecast growth in emerging market and developing economies to increase from 4.7% in 2013 to 5.1% in 2014.

• Second, this recovery was largely anticipated.

We have revised our forecast for world growth in 2014 by just 0.1% relative to our October forecast. The basic reason behind the stronger recovery is that the brakes to the recovery are progressively being loosened. The drag from fiscal consolidation is diminishing. The financial system is slowly healing. Uncertainty is decreasing.

• Third, it is still a weak and uneven recovery.

Among advanced economies, it is stronger in the US than in Europe, stronger in the euro core than in Southern Europe. In most advanced economies, unemployment remains much too high. And downside risks remain.

ECONOMIC OUTLOOK

Tour d’horizon The recovery is far from even.

Risks to outlook We see two main risks to the outlook.

US growth appears increasingly solid. Private demand is strong. As a result of the December budget agreement, fiscal consolidation, which weighted on growth in 2013, will be more limited in 2014.

These factors lead us to forecast 2.8% growth for 2014, compared to 1.9% in 2013. While monetary policy remains very accommodative, the focus is increasingly turning to monetary policy exit, and we expect the policy rate to rise in 2015.

Japan grew at 1.7% in 2013, and we forecast the same growth rate for 2014. This is good news. But this growth has come largely from fiscal stimulus and from exports. For growth to be sustained, consumption and investment have to take the relay.

And the Japanese government will continue to face the challenge of achieving enough fiscal consolidation to reassure debt holders while not slowing down the recovery – a difficult challenge.

Conditions are increasingly favourable in the UK and the Eurozone core nations. Public debts are on sustainable paths, and fiscal consolidation is, rightly, slowing down. Credit conditions are favourable. This leads us to predict growth of 2.4% for the UK, 1.6% for Germany, although only 0.9% for France, where confidence is still low.

Southern Europe continues to be the more worrisome part of the world economy. We forecast positive growth for 2014, but this growth is fragile.

On the one hand, exports are strong. On the other hand, internal demand is weak, suffering from the loops between weak activity, weak banks, weak firms, and the need for fiscal consolidation. Sustained growth will require cutting those loops, and relying both on external and internal demand.

•F irst, as the recovery takes hold in advanced economies, a main challenge will be to normalise monetary policy.

While some of this expected normalisation has already been priced in both long rates and exchange rates, we can expect complex and sometimes disruptive capital movements across countries for some time to come. In that environment, the evidence from last year is that emerging market economies with weak macro frameworks may be most affected. What we need to decrease this risk is both clear communication by advanced economies’ central banks, and stronger domestic policies in those emerging market economies under stress.

• Second, while our baseline forecasts are for low but positive inflation in the Eurozone, the risk is that inflation turns into deflation.

There is nothing magical about the number zero – when inflation turns to deflation. But the lower the inflation rate, and a fortiori the larger the deflation rate, the more dangerous it is for the Eurozone recovery.

Deflation means higher real interest rates, higher public and private debt burdens, lower demand, lower growth, and further deflation pressure. To avoid that risk, accommodative monetary policy by the ECB remains of the essence. And so is the strengthening of banks’ balance sheets. In this respect, carrying out the balance sheet assessment and stress test process now under way may be the most important short-term task facing the euro area today. In short, recovery is indeed strengthening. But much work remains to be done.

Emerging market and developing economies We forecast that growth in emerging market and developing economies, while lower than in the past, will remain high. On the one hand, these countries will benefit from higher advanced growth in advanced economies. On the other, as US monetary policy normalises, they will face tighter financial conditions. We believe that, for most countries, the first effect will dominate the second. On the internal front, perhaps the main challenge is faced by China, which needs to contain the building of risks in the financial sector without excessively slowing growth, a delicate balancing act.

* Olivier Blanchard is Chief Economist of the IMF

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15

THE WORLD

First official talks of Taiwan and China since 1949!

by N. Peter Kramer

Mainland China (‘Peoples Republic of China’) and Taiwan (‘Republic of China’) have held their highest-level and official talks since the end of the Chinese civil war in 1949.

In 1949 the government of the Republic of China fled to the island Taiwan after losing the war to Mao Zedong’s communists. The milestone meeting comes four month after Xi Jinping, the Chinese President, said that neither side could continue ‘political disagreements forever’. According to Xinhua, the official Chinese news agency, Mr Xi said: ‘The two sides must reach a final solution step by step; these issues cannot be passed on from generation to generation’, Previous cross-strait talks have been carried out through representatives of quasi-official organisations of both sides to avoid direct government contact. On Februari 11 Wang Yu-chi, Taiwan’s Mainland Affairs Council Minister, and his Chinese counterpart, Zhang Zhijun, head of Taiwan Affairs Office Minister, met each other in the Chinese city of Nanjing. A symbolic place, Nanjing was the capital of the Republic of China when the nationalist Kuomintang of Chiang Kai-shek was in power.

He and his government fled from there to Taiwan 65 years ago.

Since then China has threatened to use force against Taiwan, which it regards as a renegade province. In 1995 and 1996 it fired missiles in the

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direction of Taiwan ahead of the first democratic presidential election on the island. Following the 2008 election of President Ma Ying-jeou, who favours closer ties with the mainland, Beijing has chosen for a more conciliatory approach. The two sides signed a landmark trade agreement the Economic Cooperation Framework Agreement that paved the way for stronger economic ties that have boosted trade and tourism. Last year cross-strait trade has doubled reaching an amount of US$197 billion and nearly 3 million Chinese traveled to Taiwan, following easing of restrictions on both sides.

Mr Zhang said at the end of the four days meeting in Nanjing ‘we should treasure this progress and work together to maintain and develop this positive momentum’. His ROC colleague Wang stressed that ‘before today’s meeting it was hard to imagine that cross-strait relations could get to this point’. Mr. Wang invited his Chinese counterpart to come to Taiwan. President Ma considered the meeting in Nanjing of historic significance; conducted under the principles of parity and dignity, the talks have great importance for the institutionalisation of interactions between two sides, he added.

THE WORLD

TTIP’s Effects on the Global Economy The proposed deal to reach an agreement - by the end of 2014 - on a transatlantic trade and investment partnership (TTIP), serving the world’s first and second biggest markets – the European Union and United States is intended to deepen transatlantic relationship, assert global trade policy leadership and advance a rulesbased system for the global governance.

by Valbona Zeneli*

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THE WORLD

In

practical terms the deal is expected to boost combined GDP by almost 1% in the short term, add 2 million extra jobs and offer more choices and lower prices for consumers.

In spite of the advantages it should bring, the proposed Transatlantic Trade and Investment Pact (TTIP) has already met with opposition from global stakeholders, who point to several obstacles to the success of the agreement.

Effects on other trade deals?

One of the main points of criticism is that such a trade deal would put third countries - such as Canada, Mexico and Turkey, that already have bilateral agreement either with the U.S. or EU - at a disadvantage. Will it diminish the value of their agreements?

Another criticism is that the eventual deal would jeopardize the functioning of the WTO. Could it hinder successful conclusion of a multilateral agreement (i.e. the completion of the Doha Round)?

Many others cite the contentious history of the EU-U.S. over trade policies governing global agriculture, intellectual property and information technology.

Statistically speaking, modern empirical research suggests that the conclusion of important bilateral agreements actually increases the incentives of third parties to achieve further liberalization steps at a multilateral level.

This is also good for the rest of the world, given the integrated supply chains in today’s global market. Everyone can benefit from the agreement.

The need for integration Policymakers have drawn lessons from the most recent economic downturn. These lessons reflect a new development paradigm and reveal that international economic cooperation and integration have become imperative for addressing the nature of new global challenges.

This shift towards broader agreements responds better to today’s economic realities, in which international trade and investment are increasingly interconnected. The main objective is the consolidation and harmonization of investment rules worldwide, creating a level playing field for competition.

Other agreements currently being negotiated are the Trans-Pacific Partnership Agreement (TPP) – linking North and South America with the dynamic markets across the Asia-Pacific region – as well as the EU-Japan and EU-

Canada agreements, which are moving quickly toward finalization. Does a regional agreement like the one between the U.S. and EU reduce the likelihood of successful reforms of the multilateral trade regime under WTO?

Building block or obstacle?

It has been demonstrated that regional integration efforts are neither a building block nor a stumbling block to the progress of multilateral liberalization. On the one hand, they reduce incentives for participating countries to make concessions at the multilateral level.

On the other hand, they increase the benefits from successful multilateral negotiations for initially uninvolved countries. In particular, emerging economies could be persuaded to make concessions.

Regarding the objection that the TTIP agreement would diminish the value of bilateral agreements with third countries, scholars suggest for countries already linked by agreement to either the EU or the U.S. have great incentives to form a deeper partnership with the other partner with whom they do not yet have an agreement.

This would allow a U.S.-EU trade deal to eventually serve as a platform for the inclusion of other regions with which both parties have negotiations or agreements.

This is the heart of the “building-block” argument.

A deeper bilateral agreement between the U.S. and the EU poses no existential threat to the multilateral trading system. Instead, it helps this system to develop further in a more structured form.

A historic step in the making The transatlantic economic order, in the rules-based system, is unique. In the last decades, it has boosted global economic growth for a variety of stakeholders, including China. This order has the potential to integrate the rising powers into this system, but strengthening the latter remains a prerequisite.

The TTIP is a timely political, economic and cultural partnership that – if negotiated well – should boost world economic development, strengthen the natural partnership of the West and create an international level playing field for fair competition.

It may also strengthen the bonds within European Union countries. It is a historic step in the making, which could tremendously benefit both sides of the Atlantic. * Valbona Zeneli is a professor of national security studies at the George C. Marshall European Center for Security Studies.

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ENERGY SECURITY

Powering the Future: The European Union and the East Mediterranean Energy Discoveries

by Antonia Dimou*

The energy discoveries of the East Mediterranean could ensure Europe’s energy security in terms of alternative supply sources and delivery routes, and reduce its energy dependence on Russia. Of particular importance in the European security context is that a sizeable proportion of the discoveries are situated in the Exclusive Economic Zone (EEZ) of Cyprus, an EU member state, and Israel, an EU associated state. It is estimated that the EU’s natural gas needs for the next 50 years can be met by the gas reserves of the East Mediterranean.

According to a 2010 US geological survey, the Levantine basin could hold as much as 120 trillion cubic feet, thus securing supply of energy not only for the countries of the region and Europe but also for the Asian market.

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T

herefore, the basic pillars of a comprehensive EU energy policy as envisaged by the European Commission’s “Energy Roadmap 2050” of December 2011 should move an additional step and encourage the development of a “South East Energy Mediterranean Corridor” for the transportation of liquefied natural gas (LNG) to Europe, and with possible connections to Asia through the Suez Canal; ensure that the littoral states in the region respect current bilateral and international agreements on delineation of EEZs, territorial waters, continental shelf, in accordance with the UNCLOS Convention, to which all Member States, and the EU as such, are signatories; politically encourage all states in the region to give priority to commercial considerations that will allow the international energy corporations to develop the regional energy potential free of unnecessary government intervention and regulation; and, last but not least, support pipeline projects that link offshore natural gas reserves of Israel with Jordan and Egypt, all EU associated states.

Realistically, the East Mediterranean is a complicated piece of real estate characterized by political and financial instability and open maritime disputes, thus a medley of export options are still under exploration. A proposed option is the construction of LNG facilities in Vasilikos located in Cyprus, serving the division of Israel’s exports between Cyprus, Jordan and Egypt, offering Tel Aviv all the benefits of a flexible LNG policy centered on EU soil that would allow it to ex-

port to the more lucrative Asian and European markets, while spreading the risk of pipeline exports between several market destinations at minimal cost.

However, the results of the confirmation drillings in Aphrodite Cyprus field showed clearly that the resources were not sufficient to justify the development of the Vasilikos LNG facility. For such a facility to proceed, it has to procure the minimum of 7 bcm per year from Leviathan or from other resources. That said the prospects for the LNG facility to be developed are still valid in the context of a MOU signed between Cyprus and Total, provided that the latter makes the necessary discoveries in the Cyprus EEZ. Another export option is the construction of a pipeline to Turkey which faces several political and technical complications especially since the ultimate intention to export Israeli gas to Europe will face the saturation of existing Turkish grid capacity. Not less importantly, the decades-old Cyprus problem surfaces the dispute between Turkey and Cyprus over the island’s sovereignty, thus prohibiting the pipeline option that would carry Israeli gas to Turkey.

Other marketing possibilities include the sale of gas to Jordan through pipelines to respective destinations. In particular, Noble Energy, a heavy foreign investor in Israel’s and Cyprus fields, signed a contact worth $500 million to supply 66 billion cubic feet of gas from Israel’s Tamar field to Arab Potash and Jordan Bromine. In the same spirit, Noble and shareholders in Levia-

than, signed a $1.2 billion sales agreement with the Palestinian Power Generation Company, which plans to build a gas-fired power plant in the northern West Bank city of Jenin.

An additional option for the monetization of East Mediterranean gas reserves is provided

by Egypt. Egypt’s needs as an energy consumer have left two major LNG facilities in Daniette and IDKU virtually idle. Pipelines from such reserves to Egypt for liquefaction and re-export become a real option, given that the distance between the Egyptian coast and the Israeli as well the Cyprus reserves is approximately 250 km.

Undoubtedly, export options to be selected to feed gas-hungry markets have to be commercially viable under long-term supply contracts.

It becomes more than evident that the energy discoveries affect the traditional roles, relationships and balances between Israel, Turkey, Jordan, Egypt, Cyprus, and Greece. But above all, East Mediterranean discoveries provide a chance for the European Union to support a regional agenda that ensures its vital energy interests. A positive outcome for the region however, will depend on the willingness of each national stakeholder and each energy investor to take a fresh look at how it defines its interests. The time is now near at hand…

*S enior Advisor, research institute for European and American Studies, Greece and Center for Strategic Studies University of Jordan

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IronFX Global new paradigm approach takes over the online trading industry

by EBR

IronFX Global, led by founder and CEO Markos A. Kashiouris, in little more than three years has taken the FX industry by storm. From modest beginnings, the firm now has a dominating presence in the FX industry and globally, boasting more than 50 offices in 6 continents, and a multilingual staff-base of over 1100 employees, communicating with clients in over 45 different languages.

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Notwithstanding the global economic crisis which set the gloomy backdrop to the IronFX launch in 2010, Kashiouris and the IronFX management team identified an opportunity to make solid investments in the foreign exchange market. “The superior liquidity, the transparency of the market, the 24 hour dealing, the fact that forex is too big a market to manipulate”, he says “all that will make forex an increasingly popular asset class.” IronFX uses a distinctive client-oriented approach to gain advantage over its competitors. Client care is the blueprint for the IronFX strategy, executed by a brigade of locally-based IronFX account managers who safeguard the interests of each individual client. The company has pioneered a maverick shift of attention from traditional online marketing crusades to focus on client care and personalised service. “To put it simply” Kashiouris states, “we have a unique and proven business model that allows us to keep gaining market share at phenomenal rates”.

Specialising in forex, CFDs on US and UK stocks, commodities and metals, the mission of IronFX is to deliver exceptional service experience to all clients, both retail and institutional, via its One Account, Fifteen Platforms trading functionality.

Kashiouris and the management team understand the importance of connecting the trader seamlessly anytime, anywhere.

The leaders of IronFX do not think small.

The company will continue to grow until it reaches its goal of obtaining the number one position in online trading. With clients from over 180

countries and another 30 offices opening worldwide in 2014 alone, all indicators point to IronFX’s continued acceleration. Coupled with the promotion of its global branding and exponential growth of dedicated account managers, the company is well on the way towards its ambitious goal.

State-of-the-art execution systems and in-house technologies have not escaped critical acclaim.

IronFX utilises powerful technologies to enable clients to instantly access their unique client portal with just one click, via computer, tablet or smartphone, making trading easy and hassle-free. “We allocate a lot of time, effort and resources to technological innovations that will improve trading conditions but also on product innovations in order to satisfy changing and evolving customer needs” explains Kashiouris.

And so, it is the marriage of cuttingedge technology with client needs that has propelled IronFX Global from industry newbie in 2010 to becoming the world’s fastest growing FX firm. Clients benefit from daily market analysis and frequent commentary, delivered by a worldclass strategy team headed by Marshall Gittler. Ongoing remarkable incentive schemes also help to pique client interest and loyalty.

Known as the ‘biggest live trading competitions in history’, online trading competitions with extraordinary prizes are a regular feature of the IronFX Global campaign.

The rapid rise of IronFX Global, compounded with uncompromised levels of service has not escaped the international spotlight.

Most Trustworthy Broker, Best FX Broker, Best Fundamental & Tech Analysis, Best Customer Service

Provider, Best Trading Execution and Best Partner Program Asia are just a few of the well-earned accolades that decorate the IronFX Global mantelpiece. In conjunction with these honours, Markos Kashiouris’ exemplary leadership in challenging investment environments was rewarded with the CEO of The Year title for Western Europe, by European CEO Magazine in 2013. This, alongside the decision of the World Finance Magazine to include IronFX in the World Finance 100 list, cements the company’s crashing impact on the Forex industry and on the world’s global financial stage.

Evidencing the leadership of IronFX in the online trading arena the company announced its official partnership with FC Barcelona, the most successful football club in the world. According to Kashiouris “The FC Barcelona motto ‘més que un club’ (more than a club), embodies the philosophy upon which IronFX was founded: fair practices, pioneering attitude, innovation and top quality in every aspect of our operations”.

At IronFX, client is king. The vision of management to provide excellent level of satisfaction, undiluted by the company’s exponential growth is characterised by its iron-fisted client-oriented strategy. With customer service at the forefront of the IronFX strategy, it is justifiable that every decision is made with the client in mind. Having round-theclock access to the world’s largest and most multilingual team of account managers combined with the widest suite of products with second-to-none standards in trade execution, IronFX customers can truly benefit from the best trading conditions globally.

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That’s how change can be achieved

by Konstantinos Frouzis, President of the Hellenic Association of Pharmaceutical Companies - SFEE

We have the obligation to be optimistic.

We should see the positive side in any difficulty. We should recognize and extract the opportunity out of adversity. And that’s what I will do in this brief article concerning the pharmaceutical industry in Greece in times of crisis. However, we should not shy away from reality and its dismal facts. Acknowledging them is the only path towards change. Let’s start over by accepting that investing in health is the pillar of any respectful society. Western countries and the advanced economies of the word have firmly based their prosperity in safeguarding and raising health standards for the general population. It has been observed that declining health standards lead to a spiral where poor health and social inequality lead to diminishing economic results and vice versa.

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It

would have been expected that this scientific observation would have been the fundamental point of reference. This common truth should have had the capacity to guide minds in every decision making process about the stabilization of the economy in times of crisis. It didn’t happen in Greece.

SFEE is concerned that despite the dire warnings from all fronts, pharmaceutical expenditure for 2014 is about to drop below the 2,3 billion euro threshold dimmed as the lowest possible by most experts for sustaining a European health system. Indeed, it is about to reach only 1,92 billion, which is utterly insufficient. If it materializes, then from 2014 Greece gets far below the 50% of the European average expenditure for medicines.

Hence, the public health deterioration in Greece is an alarming reality. There is clear evidence that the cuts in State drug budget did not focus on “fat”. Cuts were not designed in a way to ensure the sustainability of health care. Instead, they have directly affected the investment on

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health - which is translated in a deterioration of life expectancy and quality of life. This is socially unacceptable and it should be stopped.

Medicines are the pinnacle of the health revolution of the last 4 decades. When pharmaceutical expenditure is over squeezed, the general health structure is severely hit because insufficient access to medicines leads to a number of negative developments: Deceases getting stronger, more people get ill and unproductive and the health system is stressed by more days of care in hospitals for each patient. This is particularly true for new and innovative medicines that Greece has practically lost access – especially for new medicines released in the last 3,5 years. Through an elaborate web of bureaucratic decision processes, innovative medicines are effectively banned as doctors are prevented to prescribe while in some cases pharmaceutical companies are prevented to distribute.

This strategy on pharmaceuticals has been adopted as an emergency way to cut the general expenditure in the national budget. However, it has not been realized that the qualitative aspect of cuts is far more important that the cuts themselves. Unrealistic pharmaceutical cuts not only generate suffering and social injustice but also create an even higher indirect fiscal expenditure as far more people get hospitalized and drop themselves out of the economic activity.

All the above should be seen in light of the dire situation in hospitals where a diminishing number of health professionals find themselves in a constant quest to defend health standards – sometimes without the proper medicines and general infrastructure. This policy is self-defeating and it should be changed. The ever shrinking health expenditure leads to shrinking health standards and life expectancy. A stabilization process where the benefits of shrinking expenditure are written off by the combined human, social and financial costs is a process in urgent need of review and redesign.

SFEE, the industry Association, has shown a high sense of responsibility in the five-year crisis. Pharmaceutical companies are the most badly hit by a number of unjust, often horizontal, state decisions (pricing below the average of 3 lowest pricing EU countries, severe delays in pricing for new medicines, deep haircuts of state bonds,

clawbacks, recession in the market and heavy taxation). However, in an insecure financial environment where refinancing operations are few and limited, the pharmaceutical sector not only defended public health by fulfilling its role in the Health System but it also supported Greek production and has given new opportunities to most of its labor force. Greek pharmaceutical companies even expanded in new research projects and clinical trials that attracted funds, respect and recognition from the global industry and the international scientific community.

There’s no question that we have actively helped to balance the public pharmaceutical budget while we ensured patient’s access to innovative treatments and generic medicines. We have put special emphasis to the fact that the fund given to Health Care consists an investment for a productive society and not an expenditure for the accounting system at the state. The result of this investment is the added value for the Economy and the social cohesion, through the seamless patients’ access to therapies and new medicines.

According to more recent studies the total contribution of the pharmaceutical industry in the national economy (direct, indirect and induced effect) is estimated to 7,55 billion euros while the total number of the job positions supported by the development of the industry in Greece is 132.780.

What all these mean? It means that pharmaceutical industry, while the most badly hit by the crisis, it endured and fulfilled its role as a pillar of public health. It also means that repairing the damage and raising health standards, which is a fundamental need in today’s Greece, cannot be done without the active partnership between the state and the industry. The most bold and forward looking decision would have been the cooperation of the Industry with the government and, with the contribution of other health experts, to redesign the Health System in a way that would have been modern, strong and cost-effective. What is less acknowledged is that the Greek Pharmaceutical Sector incorporates the knowledge of the best practices that are followed across the world. Today is the day to join our forces so to transcend past defects and build a Greece Health System and Health Sector for the decades to come. That’s how change can be achieved.

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SPECIAL REPORT

SPECIAL REPORT: EU needs CHANGE!

by N. Peter Kramer, Editor-in-chief, European Business Review

The EU is in disarray. Internal functioning, for example the relation between the institutions, is not transparent at all.

The relation between these institutions and the member states is not in balance. In the meantime is solving of the real problems out of sight. Also outside the Brussels bubble.

The process of de-industrialising of the Union seems unstoppable. To put a necessary restraint on the excesses of the banking world doesn’t make proper progress.

Security in EU relations with big powers is hardly existing.

European Business Review collected some interesting articles on a scala of subjects. Just to show you, that there are ideas and thoughts about how to attack the problems.

This special report is indeed eclectic in the choice of subjects.

But we just wanted to make a start with the discussion.

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SPECIAL REPORT

Europe tries to reverse drift towards de-industrialisation

by Euractiv*

After a lost decade, Europe is trying to reverse a decline in manufacturing which has brought industrial output to a standstill.

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ver the past few years, the European Commission has been the most vocal EU institution campaigning for the continent’s industrial revival, positioning itself as a driver of competitiveness and job creation. Within the EU executive, the commissioner for enterprise, Antonio Tajani, has emerged as the winner of an internal debate opposing supporters of industry to environmentalists, whose policies were blamed for hampering the economy.

The financial and social crisis helped Tajani get his message across. As unemployment rates shot up to beyond the 10% ceiling across the continent, a growing number of EU citizens and leaders became convinced that Europe needed a serious industrial policy to stem the outflow of production towards Asia.

Since 2010, the Commission has produced strategies for the re-industrialisation of Europe every two years, picking technology winners, such as smart grids or 3D printers.

The last such document, published in January, carries the resounding headline of an Industrial Renaissance for Europe, making no secret of its Italian inspiration.

The EU has set a target for industry to make up 20% of the continent’s Gross Domestic Product (GDP) by 2020, though the goal is non-binding, unlike similar targets such as for carbon dioxide emissions reductions.

Industry represented almost 18% of EU GDP at the beginning of the century, but this figure has dropped to around 15%, while manufacturing output is now at the same level as a decade ago. The increased weight of services in the EU economy partly explains the downward trend of manufacturing on the continent, which has been hit by the outsourcing and relocation spree fuelled by high taxes and high energy and labour costs.

Service-based knowledge economy goes down the drain The relocation wave now seems to be falling, or even reversing, as manufacturers realise the drawbacks of China’s state-controlled economy and India’s poor infrastructure base, while labour costs in emerging economies have begun to grow. However, Europe urgently needs to adapt to the new needs of industry if it wants to re-attract the companies that left the continent in search of greener pastures. EU leaders will address all these issues when they meet in Brussels on 20-21 March for their quarterly summit. An extraordinary European Council initially dedicated only to industry was cancelled in February, but the topic still remains on the table of the EU’s top decision makers.

Pro-industry decisions are not going to be neutral for other sectors as it requires aligning the entire EU economy with industry needs. The Commission says it can mobilise regional development funds to help the transition.

A bigger share of EU structural funds can now be used for innovation and industry rather than for the service-

based knowledge economy dreamed of in Brussels ten years ago. For those who are sceptical about such an U-turn, the EU executive provides a formula: “Each additional job in manufacturing creates 0.5-2 jobs in other sectors,” reads the new Commission mantra repeated in statements and official documents.

For the strategy to work, it requires EU leaders to send a clear, unequivocal message of support. Even if this turns out to be the case, it would only be the beginning of the process, as the European elections in May and the new Commission taking office after the summer break may impose new priorities.

Whichever state receives the delicate portfolio of industry in the new EU executive may prove the best indicator of how the strategy will unfold in the coming years.

Industry supporters also hope that Italy, which is set to hold the rotating EU presidency in the second semester of 2014, will help drive the agenda at the time when EU institutions are renewed. The country is the second top manufacturing country in the EU after Germany and the fifth in the world.

POSITIONS: “Europe is still far from the 20% target of industry’s share in Europe’s GDP by 2020. That is why industrial competitiveness has to be at the heart of the March 2014 European Council political agenda,” said European Commission Vice-President Antonio Tajani, responsible for industry and entrepreneurship.

“We need a strong commitment at the EU and national level to ensure coherence and prioritisation of all instruments at our disposal. An industrial strategy must encompass many other sectors, as they are increasingly inter-connected and have a major impact on industrial success,” he added. Tajani’s position was backed by the EU Competitiveness Council held in Brussels last week (20-21 February). «A broad consensus emerged on the importance of intensifying the mainstreaming of industrial competitiveness in other policy areas. The importance of coordinating different European policies was also emphasized,» read the conclusions of the meeting. The Council also “calls for the endorsement of the reindustrialisation efforts in line with the Commission’s aspiration of raising the contribution of industry to GDP to as much as 20% by 2020.”

Europe’s main industry lobby, BusinessEurope, calls for “a 360° strategy to improve industrial competitiveness”.

EU leaders are asked “to give a clear sense of direction, with deliverable priorities, and to ensure that the state of play for the European industry and the progress made in pro-competitiveness reforms are monitored and evaluated every year”, reads a note. *Published at Euractiv – www.euractiv.com

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Think small: How to improve China-EU security cooperation

by Oliver Bräuner*

From a European perspective, a ‘comprehensive strategic partnership’ should also include cooperation on both traditional and non-traditional security issues. However, more than ten years after the establishment of the ‘comprehensive strategic partnership’ between China and the European Union, cooperation on global security issues remains underdeveloped and both sides have a poor record of joining their diplomatic forces to tackle for instance the ongoing conflict in Syria or the Iranian nuclear issue. Military cooperation remains even more limited and so far does not go beyond some cautious exchanges within the UN framework, such as anti-piracy operations in the Gulf of Aden or peacekeeping missions in Africa. This stands in stark contrast to the economic relationship between the two sides, which continues to deepen even in times of a global economic crisis.

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lthough both sides have repeatedly stated their willingness to deepen their cooperation on global security issues and to intensify the ties between their militaries, prospects appear rather bleak for the near- and medium-term. There are a number of obstacles that have proven to be insurmountable in the past ten years and will continue to do so in the foreseeable future.

The first is the very structure of the EU. Despite the establishment of the External Action Service and other reforms of the EU’s Common Foreign and

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Security Policy (CFSP) introduced through the Lisbon Treaty in 2009, the EU remains a supranational entity. Its 28 member states often have diverging interests and thus continue to struggle with the formulation of joint positions on many global security issues. In addition, the EU still does not have a joint military structure independent of NATO and defence spending in the region has stagnated or been reduced as a result of austerity measures related to the eurozone crisis. As the EU also does not have any direct security interests or military assets

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in the Asia-Pacific region, China does not take it seriously as an independent global security actor.

The second obstacle is China’s security agenda. The EU and some of its (mostly larger) member states have a broad international security agenda, with an ambition to play an active role on almost all international issues, and a strong emphasis on human security and non-traditional threats. Beijing, on the other hand, pursues a much more narrow security agenda that focuses largely on traditional threats in the Asia-Pacific region, mostly related to maritime disputes with its neighbours. These interests are usually seen through the lens of Beijing’s increasingly competitive relationship with the Washington. President Xi Jinping’s ‘new type of great power relations’ can be seen as another sign of China’s fixation on the United States. China’s traditional policy of ‘non-interference’ in the domestic affairs of other countries further limits the potential for cooperation. Consequently, the security agendas of China and the EU only overlap on a very limited number of issues.

The third obstacle is a continued and deep-seated lack of trust between the two sides. China perceives the EU arms embargo as a sign of disrespect, even though SIPRI research has documented a considerable amount of militarily-relevant European technology transfers during the 25 years of its existence. On the EU side, disappointment over the perceived lack of political reforms and a deterioration of the human rights situation in China – especially since the 2008 Beijing Olympics – is growing.

While these obstacles will continue to limit China-EU security cooperation, there are still a number of foreign and security policy goals shared by both sides.

However, after a decade of grand expectations and disappointments, both sides need to be realistic about what they can achieve. Cooperation should start on a small scale and be focused on rather specific or technical issues that are both feasible and mutually beneficial. Exchanges between militaries on both sides should be increased, especially through joint education and training programmes for officers at military academies and defence universities on both sides.

This would lead to more transparency and understanding of the other side’s security concerns. China and the EU could deepen cooperation (or at least coordination) on the protection of citizens abroad, and particularly on non-combatant evacuation operations from war zones. A number of EU mem-

ber states have already provided logistical support for the Chinese evacuation operation from Libya in 2011. In this context, the EU should actively support exchanges between Chinese and European energy companies on how to best protect their employees and assets in conflict zones.

Practical cooperation in the area of arms control and disarmament should also be intensified. These efforts could build on successful past cooperation, for example through the EU Outreach programme, and include actors from the state, military and industry on both sides and preferably also from third countries. One option would be to jointly develop best practices to limit the destabilising flow of arms to fragile conflict zones, for example in Africa and the Middle East.

Such a ‘think small’ approach would probably go against the natural instincts of both the Chinese and EU leaders, who usually seem to favour grandiose and much publicised ‘strategies’ and large-scale events. It would also mean that the EU would need to officially relinquish more tasks to its member states.

Nevertheless, it could help circumvent some seemingly immovable obstacles and move the EU-China security relationship on after ten years of disappointments and stagnation. *O liver Bräuner is researcher for the China and Global Security Programme at SIPRI ** S tockholm International Peace Research Institute (SIPRI) is an independent international institute in Sweden, dedicated to research into conflict, armaments, arms control and disarmament. Established in 1966, SIPRI provides data, analysis and recommendations, based on open source, to policymakers, researchers, media and the interested public.

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SPECIAL REPORT

Why a variable banking union is Europe’s best bet

by Juan Carlos Martinez Oliva*

The Eurozone’s fragility exposed by the euro crisis has led many to push ahead with a European banking union. The best way forward is to continue the variable geometry approach that has served Europe well so far.

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he long and complex process of European integration has demanded the creation of new concepts and terminology. Expressions such as “variable geometry Europe”, “Europe à la carte”, “multiple speed Europe”, and “concentric circles” can be viewed as part of the on-going effort to cope with the challenges posed by the gaps between different European countries.

Europe was based on variable geometry since its very inception. It was shaped as a concentric circle structure with a core of six countries based on the German-French axis. After the launch of Willy Brandt’s idea of a two-speed Europe in 1974, the concept provided a formal foundation to European achievements from the “snake in the tunnel” period to the monetary union. “The snake in the tunnel” paradigm proved beneficial in the construction of the European Monetary System (EMS), as it helped to bridge the gap between those countries that were ready to fully adopt the narrow band of the fluctuation mechanism, those who needed a more forgiving rule with a broader band, and countries which did not want to participate at all.

In 1980, Jacques Delors used the concept of a variable geometry Europe as a tool to keep Great Britain tied to the process of European integration. Shortly after the idea was used by Raymond Barre to suggest that the EMS solution might become generalised and extended, allowing the other members to move to a deeper integration. The implementation of this idea came about when

the opting out clause was ratified by the UK and Denmark in the Maastricht Treaty.

When the time was ripe to transform the European Community into the European Union, François Mitterrand launched the paradigm of a union “entre ceux qui le voudront”, which focused on the confrontation between those who were in favour of a European Union, and those who were not.

The multifaceted character of variable geometry is effectively summarised in Tommaso Padoa-Schioppa’s remark that “most of the debate on multiple speeds and variable geometry is about how to combine the two elements of will and performance in determining member states’ participation in projects designed to advance the unification process.”

While there is no doubt about the positive developments that the concept of a variable geometry has achieved in Europe, the term and the corresponding implementation remain characterised by an intrinsic ambiguity. Variable geometry can be viewed either as a means to increase

the system’s flexibility, by creating different layers which can make Europe stronger, or as a factor which might fragment and therefore delay or disrupt the completion of the integration process.

The relationship between non-EU members and those inside the Union has sometimes been characterised by a lack of mutual understanding. This has occurred for example when EU members feared that initiatives to reinforce Europe have been hampered by non-EU members. Non-EU members, in turn, feared that EU members would deprive them of their say in relevant decisions. Such considerations ring particularly true in the recent debate on the banking union.

While the collapse of Lehman Brothers had already highlighted the potential systemic implications of liquidity and funding risks, the euro crisis has strikingly evidenced the intrinsic limits of the original design of the monetary union. In particular, the euro was supported by an integrated financial market which contributed to the smooth transmission of monetary impulses across the EU before the crisis. In the after-

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math of the crisis, banks started to cut cross-border lending and retreat within their national borders. Banking and sovereign solvency crises interacted negatively as a result of strong home biases in the composition of banks’ sovereign bond portfolios, sovereign individual responsibilities for bailing out banks, and the appearance of country risk. Such a vicious circle undermined the foundation and very rationale of the monetary union.

As a response to the fragility of the Economic and Monetary Union (EMU) the banking union project meant to create a broader perspective of financial developments across the whole area. This would help to instantly identify the build-up of systemic risk and to use the appropriate macro-prudential tools to prevent undesired developments.

The euro area is nonetheless only a subset of the EU. It is sometimes suggested that a banking union should be viewed in connection with a single currency rather than as an inescapable implication of the EU single market. For example, the concluding statement of the International Monetary Fund (IMF) mission for the

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2012 Article IV Consultation with the eurozone, viewed a banking union as “critical” for the euro 17, but only “desirable” at the EU-27 level. The position of the UK, the largest EU member country outside the euro area, is far more radical; it holds that, while the banking union proposals are essential to restoring the credibility and integrity of the EU banking sector, a closer integration of an inner core of member states might threaten the integrity of the single market. In this context, according to the UK, further convergence of the EU and other participating member states toward common positions in a number of areas would place an EU-28 single market under severe strain, in particular if a majority of non-EU member states choose to participate in the banking union.

The European Central Bank (ECB) has provided reassurance that the playing field will be levelled and that the banking union is meant to benefit all member states that are part of the single financial market. This is particularly true for the City of London because it is the main provider of financial services in Europe. By simplifying supervisory and regulatory practices, the banking union would expedite the completion of the single financial market by reducing the scope for co-ordination failures between national supervisors and enhancing financial stability in Europe. This would bring considerable advantages for all member states by conveying resources to the real economy, handling risk more efficiently and increasing the pool of financial resources available from Eu-

ropean and foreign investors.

Suggestions state that the banking union should pursue the objectives of preserving the integrity of the single market and ensuring the stability of the euro area. In this light, it is reasonable to argue that the financial integration of the EU and the financial stability of the euro area should be pursued simultaneously, even when they may seem to conflict. The inability of the euro area to pursue financial stability has jeopardised the integrity of the EU financial market.

The effort undertaken so far in the stabilisation of the euro area may be viewed as an attempt to get the best that variable geometry can offer in terms of flexibility and resilience of the system. While there is no doubt that the variable geometry of today’s Europe may entail some problems of governance, a co-operative attitude is the best response to the need of creating a system that carries advantages for all members.

What we need is the creation of a system that is able to be truly European and at the same time cushion and absorb the effects of different national views and settings. Such a system will provide an effective protection to all EU member states and to the internal market against future crises.

To reach this goal, it is essential that the dialogue continues and that it is kept as co-operative and constructive as possible.

* Former visiting fellow at the Peterson Institute for International Economics, Currently director in the Economics, Research, and International Relations Area of the Bank of Italy

SPECIAL REPORT

Why the EU must boost the powers of national MPs

by Eva Kjer Hansen*

Europe’s national parliaments are making the EU an offer it can’t refuse: a package of democratic legitimacy and proactive partnerships that could address a good many of the political problems facing the EU. It’s now up to the European Commission to accept this offer.

L

et’s imagine that Europe’s national parliaments all had the right of initiative. Each member of a national parliament could go to his or her constituency and invite citizens to bring forward good ideas that could, if they have local, regional, national and pan-European support, be turned into EU legislation.

Right now, national parliaments can only obstruct European legislation by handing the Commission a “yellow card”. But why not let the EU’s national parliaments participate in the legislative process by issuing political opinions that EU institutions are obliged to take into account. Why not let national parliaments propose new initiatives just as the Council and the European Parliament can already do today?

Critics might say that the right of initiative is the prerogative of the European Commission, and giving national parliaments this right would require treaty changes. But what I am arguing for is to allow a certain number of national parliaments to invite the European Commission to table legislative proposals that they deem necessary. I am not alone in this argument. In late June of last year, around 40 chambers of national parliaments met at the Conference of European Affairs Committees (COSAC) in Dublin and agreed to invite the Commission to consider any individual or collective legislative proposal requests from national parliaments. With a political commitment from the Commission, I expect

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SPECIAL REPORT

we’d see several innovative and constructive proposals brought forward for the benefit of all.

The participants of COSAC also called on the Commission to give special consideration to opinions from national parliaments on specific proposals that have been issued by at least one third of national parliaments. In other words, we are not happy with the strictly negative role of delaying or obstructing draft laws using the “yellow card” procedure to guard the principles of subsidiarity and proportionality. Yes, these are important principles, but we want to play a more positive and proactive role to help strengthen democratic legitimacy and accountability in the EU. All this talk of democratic legitimacy reflects the growing disillusionment with the EU to be found in many European countries. The latest Eurobarometer saw 72% of Spaniards no longer trusting the EU, and the Pew Research Center has found that 75% of Italians think European economic integration has been bad for their country, as do 77% of the French and 78% of the Greeks.

Even though the unemployment rate in my own country, Denmark, is far less alarming than across southern Europe, support for the EU is at an all-time low, with 39% of Danish citizens wanting to leave the EU altogether.

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As Europe struggles to recover from economic and financial crisis, the question of democratic legitimacy and accountability is becoming ever more relevant. New policies to deal with the effects of the crisis that consist of sometimes harsh but necessary medicines have consisted of bail-out packages with tough conditions, but how are those who have made these decisions to be held to account? The heavy-handed bail-out of Cyprus in March of last year is a clear illustration of the problem.

Commission President Barroso himself has stated that the crisis has made clear that economic governance and democratic accountability “need to move forward hand in hand, keeping pace with one another.” Europe needs a democratic framework that matches the EU’s increased economic governance powers. It is here that the role of national parliaments is crucial.

Some might ask “is democratic legitimacy not secured by the European Parliament?” Although the EP has a very important role as co-legislator and parliamentary control body, national parliaments have a different role to play. National MPs are closest to citizens, know their concerns and can make people’s voices heard at a European level through their own government or through inter-parliamentary co-operation. National parliaments play a special role both in bringing citizens’ concerns to Europe and in bringing Europe closer to its citizens by explaining how EU institutions work and how the work of national governments is scrutinised in European decision-making.

This means sharing responsibility for policy output, and this in turn is vital for increasing citizens’ faith in European policy solutions. There has been too much scapegoating of the EU over the years, so member states should stop pointing the finger at the EU when they are themselves to blame. How else can we bring Europe closer to our citizens, and how better can we enhance our scrutiny procedures to ensure accountability and democratic control?

Democratic control within national governments is all the more important because the EU’s crisis response has been driven by increased inter-governmentalism at the expense on the one hand of the community method and on the other of parliamentarism. The creation of the European Semester and the gradual move towards an integrated budgetary and economic framework is at the heart of national parliamentary democracy. The European Semester

SPECIAL REPORT

process, which to some extent “Europeanises” national economic policy processes and decisions, has changed the economic governance relationship between EU institutions and national parliaments.

New tools will be needed if national parliaments are to fulfil their role as democratic watchdogs. That is why we in the Danish Parliament recently introduced a “National Semester”, as part of which the European Affairs Committee and the Budget Committee will debate with government ministers three important steps in the European Semester. These are the launch of the Commission’s Annual Growth Survey, the government’s submission of the National Reform Programme and Convergence Programme, and the Council deliberations on the Country Specific Recommendations. With this Danish example in mind, I would urge other national parliaments across the EU to consider similar arrangements. Enhancing national parliaments’ roles and exchanging best practices among parliamentarians are important aspects of inter-parliamentary co-operation as there is no “one size fits all” that spans the 28 parliamentary cultures.

To hold governments accountable is just one side of the coin. The other is to maintain the political dialogue with the European Commission. The Commission has agreed in principle to last year’s COSAC request to answer inquiries from national parliaments and to let Commissioners appear before national parliament committees. With this obstacle cleared, we should go ahead and invite them or high ranking EU civil servants to give a technical briefing on particular proposals and use the opportunity to bring forward our own viewpoints.

Parliamentary scrutiny is relevant in a number of other ways. It is, for instance, foreseen that national parliaments will have a role in overseeing the work of Europol, and in an area far removed from that there is the agreement between the Council and the EP on

the new banking supervision proposal that ensures a role for national parliaments as they will be able to invite a representative of national supervisory authorities to discuss the supervision of credit institutions.

On inter-parliamentary co-operation, there is still room for improvement. There are a number of “interparliamentary” bodies that bring together members of national parliaments and the EP, COSAC being the most important. There is also a conference on the CSDP and the fiscal stability treaty set up a conference in article 13 that will gather MPs and MEPs to scrutinise the operation of the treaty and discuss wider economic issues. There has been a lot of talk produced at these meetings, but turning that into useful input for European decision-making is now crucial.

We must reduce these long and inefficient meetings with too many participants, redundant speeches, too little genuine political debate and few ground-breaking decisions. Instead, we have to be operational, innovative and solution-oriented. National parliaments could be organised into clusters of shared interests and common themes to ensure a more constructive impact on European decision-making.

It is of the utmost importance that national parliaments should be part of EU-level decision-making.

This must be done at several levels and in different fora. Their role might evolve further with future treaty changes. The European Commission should include the national parliaments in any considerations on the future of Europe. Then we will in turn engage in debate with the European citizens. That’s part of the offer we’re making that really mustn’t be refused. * Chairman of the European Affairs Committee of the Danish Parliament and formerly agriculture minister and social affairs minister ** This article was first published at “Europe’s World” journal

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LIFESTYLE

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LIFESTYLE

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39

MANAGEMENT

The Seven Myths of Win-Win Negotiations

by Horacio Falcâo*

A lot has been written on the subject of negotiations and even on the relatively recent concept of win-win. Such negotiations happen when at least one party tries to get what she or he wants from the other party without the need to use power. Unfortunately, win-win has, more often than not, been misunderstood.

W

ho has not been told to listen to and trust your counterparty to build a win-win environment? That transparency and fairness can create more value? That being nicer and faithful leads to longer-lasting relationships?

That committing to a win-win outcome generates optimal results?

Indeed, having analysed survey answers from 122 students from all over the world at INSEAD’s Asia Campus in Singapore, it became apparent that there are seven commonly held beliefs about a win-win negotiation: 1) build trust, 2) listen carefully to your counterparty, 3) be transparent, 4) be nice, 5) be fair, 6) be faithful and 7) commit to a win-win outcome.

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On the face of it, these beliefs may only seem to be common sense.

Consistent with this is a guiding principle in Chinese society called guanxi - personal relationships with people from whom one can expect (and who expect in return) special favours and services.

Therefore, given its cultural norms and values, it is often a prerequisite in China to establish a good relationship with a negotiation party with the expectation of reciprocated moves during a negotiation.

The major underlying assumption here is that reciprocation will take place, which naively ignores the risk that it may not. As such, these beliefs - seven win-win negotiation myths - can weaken the ill-advised

win-win negotiator and risk creating a power opportunity for the winlose-minded negotiator to exploit.

It’s time to explore the seven myths and recommend more refined and effective win-win moves.

Trust Building trust seems intuitive in a win-win negotiation; however, trust does not always generate reciprocation. Furthermore, trust is subjective, feels too absolute and requires time to build. A better strategy for an effective win-win negotiator is to promote interdependence instead of trust. Interdependence is very effective because it is built on the understanding of both parties that it is in their self-interest to work together.

MANAGEMENT

Listen

Be fair

Just listening is not very effective because people often listen to their assumptions, do not normally learn listening techniques or find it too passive in a negotiation. Even active listening is too reactive because one needs to follow what the counterparty has to say. In order to remain in the driving seat of a negotiation, one has to master the skill of proactive learning. This emphasises the “question first” approach, allowing the negotiator to lead the process in a direction that will maximise learning and improve decision-making.

Since fairness is often subjective, exclusive or even seen differently by the same person depending on a situation, it is not always effective in a win-win negotiation. Fairness is only powerful when it taps into all parties’ value systems and thus makes sense to all. Instead of being subjectively fair, we suggest an effective negotiator be reasonable, which means to find a common meaning that is validated within each party’s value system. A move that lacks such common meaning might be considered unilateral and thus rejected by the other.

Be transparent Every negotiation has relationship, communication and substance aspects to it. Whereas it is advisable to be transparent with regards to relationship and communication, we prescribe being translucent on substance. Being translucent means revealing just enough information on substance for the counterparty to be motivated to reach a mutually beneficial outcome; this is consistent with avoiding power play and unethical pitfalls as well as not feeling pressured to reveal everything.

Be nice The problem with being nice is not only that it expects reciprocation, but also because it may be misinterpreted as a sign of weakness or conversely as a sign of arrogance, which would invite undesirable power moves. One is advised to be a positive - not naive - negotiator who initiates a balanced, valuefocused dialogue where exchanges get progressively larger as the counterparty reciprocates. This encourages reciprocation and maximises both parties’ value.

Be faithful Being faithful to your negotiating party risks manipulation on their part, induces confusion between the relationship and substance aspects of the negotiation or could negatively affect one’s relationship with the counterparty if the negotiation turns sour. The best approach in a win-win negotiation is to be loyal to the negotiation process instead, which is still consistent with being collaborative and positive towards your counterparty.

This means that you are firm in supporting the negotiation in front of you but not 100 percent committed to the person if the negotiation turns out to be detrimental to you.

Commit to a win-win outcome In committing to the win-win process rather than the outcome, the negotiator focuses on what is within his or her control. Since a win-win outcome can never be guaranteed, an effective negotiator cannot commit to it but can commit to preparing and following a negotiation process that is in the spirit of a win-win mentality.

Let’s look at one of the myths above

to see how it really works in practice.

The story dispels Myth No1 and illustrates how interdependence can be a lot more effective than trust in a win-win negotiation: When Wong heard that her longterm information technology provider, Wan, was 100 percent certain his products would arrive on time, she asked as a guarantee for them to be free in case of delay. Wan refused. Wong asked if he was really 100 percent certain that the delivery would be on time. The provider proudly confirmed it. Wong argued that if the delay risk was zero, so was the risk and the cost of the guarantee. Wan agreed and worked hard to deliver the products on time.

Wong trusted the provider, but did not bet her deal on that trust.

While people may have good intentions, they also make mistakes or are overconfident about their possibilities to deliver. In aligning their incentives, Wong generated interdependence and ensured the deal worked well for her.

The seven myths mean many win-win negotiations are poorly implemented, which might make them appear weak. However, the fundamental tool of a real win-win negotiator is power abstinence, which does not mean weakness but rather a strategic choice often made with the hope of achieving better results.

Win-win negotiators who unravel the seven win-win negotiation myths dramatically enhance their chances of success. * Horacio Falcâo is a Senior Affiliate Professor of Decision Sciences at INSEAD, where he teaches mainly on the topic of Negotiation. ** This article was first published in the South China Morning Post

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SOCIAL BUSINESS

The Decision-Making Edge of Social Business

by David Dubois and Michael Peshkam*

Social media is helping consumers make better purchasing decisions, but it can give companies greater insights to help them make better business decisions.

S

ocial media’s explosion in recent years has been due in large part to its ability to help consumers make better purchasing decisions (BPD) faster. Through social media, consumers can browse product reviews, consult blogs or even watch live demonstrations on YouTube. And, if no information is available about a particular product, they can directly ask their network, or people at large, for advice and recommendations.

Over time, a consumer-induced body of collective knowledge and intelligence about products and services has organically grown which is easy to access and highly advantageous to consumers’ purchasing decisions.

Social business: Making better business decisions (BBD) faster In the same way that collective intelligence helps people make better and faster decisions in choosing the right product for their needs, businesses are starting to realise they can create significant competitive advantage if they can access and leverage the right business know-how from their ecosystem at the right time. Organisations and businesses have a lot in common with people. They live and thrive in their ecosystems comprising myriad interconnected networks: clients, suppliers, employees, customers, partners, and so on. Businesses, like people, also engage in their own daily interactions: buying, designing, manufacturing, marketing, and selling the next product.

Yet, current social media channels offer limited capability for creating business knowledge, intelligence, and the know-how that could give businesses a better business decisions (BBD) advantage. Not only do businesses’ ecosystems comprise many actors of varying size, scope and nature, they also have many types of relationships, such as supplier, partner or endorser.

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In addition, decisions made in business contexts are also very complex. They result from multi-party negotiations and require synthesising information and “connecting the dots” across many domains (for example legal, competition, social, etc). As a result, co-creation is much more iterative and interactive in business settings than in consumer ones.

Altogether, these disparities call for a much more profound integration of platforms specifically tailored to business ecosystems to facilitate crowdsourcing, knowledge creation and sharing as well as connecting and learning. As IBM, one of the initiators of the social business revolution, puts it, businesses should embrace new social and technological tools to fully become social businesses.

Social business and the creation of a BBD advantage Social business refers to the integration of social tools, technologies, and culture into both internal and external processes, practices, operations and management of a business. Transforming a business into a social business simply means creating choice-driven, open or closed online communities to bring together and seamlessly connect people (workforce, customers, and the public), businesses (suppliers, partners, associates, and stakeholders) and expertise (business knowledge, intelligence, and know-how). This enables businesses to create new value by engaging members of different communities to collaborate and innovate new products and services, co-create and build collective knowledge and intelligence, better apply their diverse expertise to solve challenging problems, and learn from each other faster, transcending time and place.

In the end, the social business revolution leads to the emergence of businesses that are more connected, adaptive and intelligent, capable of building greater

SOCIAL BUSINESS

brand loyalty and recognition through designing and making better products and services, and offering greater value to its customers and the society.

To illustrate, consider Threadless, a company that successfully carved a unique BBD advantage for itself by becoming almost entirely social. The company, a popular T-shirt production service, allows anyone to submit a design for its T-shirts through their own platform. It uses social media external channels to build interest and draws the keen ones into their internal software platform where they submit their designs and interact with other customers and members of the Threadless team in multiple ways through different communities.

For instance, communities can co-create a new design or vote on different designs and on which ones get produced. This strategy proved successful as Threadless built a global community of over 2.5 million enthusiasts and designers, who submitted more than 500,000 designs, and approximately 5,000 have been produced to date, raising revenue from US$6 million to more than US$30 million between 2005 and 2012. In other words, the Threadless Social Business model created the BBD advantage through crowdsourcing: accessing crowds of very-low cost enthusiasts, getting wider input of new ideas, enabling faster design, selection, and response time to business needs. And, recognising its strength in its unique organisation around social technologies, Threadless recently decided to refocus on its original social DNA and close physical retail stores. Overall, Threadless, has given back over US$8 million to its designers and expanded its offerings from T-shirts to producing other goods such as pillows, pet stuff, shower curtains and others.

The transformation of a business into social business While some businesses such as Threadless, rely on their own platforms to integrate their activities online, other social business platforms offer a space to transform a business to social business. Examples of such platforms include Microsoft Yammer, IBM Connections, Salesforce Chatter and Jive, which have developed social business software platforms primarily designed for internal collaboration and knowledge sharing. These platforms are successfully adopted by larger corporations with thousands of employees operating in multiple locations around the world. They allow creation of social-intranets enabling a more open interaction among the employees as well as creation and sharing of knowledge across the organisation transcending time and place.

CEMEX, for example, a global provider of building materials with 47,000 employees in 50 countries, created an internal collaboration platform called SHIFT based on IBM Connections. In an effort to increase the use of alternative fuels in its plants, the company engaged 500 of their employees around the world in a collaboration community. According to the management, what they accomplished in six weeks would have normally taken them two years. Put differently, CEMEX created their BBD advantage through internal collaboration of their engineers.

Aside from large companies, small and medium-sized enterprises (SMEs) are often key to value creation. In China alone for instance, SMEs contribute 60 percent of the country’s industrial output and create 80 percent of China’s jobs. Compared with larger corporations, SMEs are embedded in complex networks of often smaller stakeholders, have fewer resources and rely more on external, open knowledge. In the SME ecosystem, small organisations, individual experts or influencers, NGOs and people alike often come together in interconnected communities of interest to engineer and improve products and gain both short-term and long-term competitive advantage. As a result, tapping into the crowds to create their BBD advantage (such as crowdsourcing) might prove an even stronger value creator than for larger companies. To meet these specifications, other social business platforms such as Xincus offer flexible and tailored social technologies to create inter-connected private business communities in a marketplace to better meet the SMEs needs.

So what’s next? The social business revolution is just beginning. In addition to connecting businesses and people to each other, social business platforms will create BBD advantages through connecting businesses with the right collective intelligence at the right time.

In particular, SMEs should be keen on becoming social businesses as they can generate more value from their business ecosystem, relative to larger corporations.

Overall, social business, while in its infancy, promises to have greater economic impact on businesses through innovation, new value creation, and increased productivity, and not only open new doors for the creation of new industries but also transform and revitalise the existing ones. Ultimately, all businesses will become social businesses, so why wait? * David Dubois is INSEAD Assistant Professor of Marketing and Michael Peshkam Founder and CEO of Xincus

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LEADERSHIP

(Still) learning from Toyota

by Deryl Sturdevant*

In the two years since I retired as president and CEO of Canadian Autoparts Toyota (CAPTIN), I’ve had the good fortune to work with many global manufacturers in different industries on challenges related to lean management. Through that exposure, I’ve been struck by how much the Toyota production system has already changed the face of operations and management, and by the energy that companies continue to expend in trying to apply it to their own operations.

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LEADERSHIP

from Toyota. The tool measures a host of categories (such as safety, quality, cost, and human development) and averages the scores on a scale of zero to five.

The executive was describing how his unit scored a five-a perfect score. “Where?” I asked him, surprised. “On what dimension?”

“Overall,” he answered.

“Five was the average.”

Y

et I’ve also found that even though companies are currently benefiting from lean, they have largely just scratched the surface, given the benefits they could achieve. What’s more, the goal line itself is moving-and will go on moving-as companies such as Toyota continue to define the cutting edge. Of course, this will come as no surprise for any student of the Toyota production system and should even serve as a challenge. After all, the goal is continuous improvement.

Room to improve The two pillars of the Toyota way of doing things are kaizen (the philosophy of continuous improvement) and respect and empowerment for people, particularly line workers. Both are absolutely required in order for lean to work. One huge barrier to both goals is complacency. Through my exposure to different manufacturing environments, I’ve been surprised to find that senior managers often feel they’ve been very successful in their efforts to emulate Toyota’s production system-when in fact their progress has been limited.

The reality is that many senior executives-and by extension many organizations-aren’t nearly as self-reflective or objective about evaluating themselves as they should be. A lot of executives have a propensity to talk about the good things they’re doing rather than focus on applying resources to the things that aren’t what they want them to be.

When I recently visited a large manufacturer, for example, I compared notes with a company executive about an evaluation tool it had adapted

When he asked me about my experiences at Toyota over the years and the scores its units received, I answered candidly that the best score I’d ever seen was a 3.2-and that was only for a year, before the unit fell back. What happens in Toyota’s culture is that as soon as you start making a lot of progress toward a goal, the goal is changed and the carrot is moved. It’s a deep part of the culture to create new challenges constantly and not to rest when you meet old ones. Only through honest selfreflection can senior executives learn to focus on the things that need improvement, learn how to close the gaps, and get to where they need to be as leaders.

A self-reflective culture is also likely to contribute to what I call a “no excuse” organization, and this is valuable in times of crisis. When Toyota faced serious problems related to the unintended acceleration of some vehicles, for example, we took this as an opportunity to revisit everything we did to ensure quality in the design of vehicles-from engineering and production to the manufacture of parts and so on.

Companies that can use crises to their advantage will always excel against self-satisfied organizations that already feel they’re the best at what they do.

A common characteristic of companies struggling to achieve continuous improvement is that they pick and choose the lean tools they want to use, without necessarily understanding how these tools operate as a system. (Whenever I hear executives say “we did kaizen,” which in fact is an entire philosophy, I know they don’t get it.) For example, the manufacturer I mentioned earlier had recently put in an andon system, to alert management about problems on the line.

Featuring plasma-screen monitors at every workstation, the system had required a considerable development and programming effort to implement. To

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LEADERSHIP

my mind, it represented a knee-buckling amount of investment compared with systems I’d seen at Toyota, where a new tool might rely on sticky notes and signature cards until its merits were proved.

An executive was explaining to me how successful the implementation had been and how well the company was doing with lean. I had been visiting the plant for a week or so. My back was to the monitor out on the shop floor, and the executive was looking toward it, facing me, when I surprised him by quoting a series of figures from the display.

When he asked how I’d done so, I pointed out that the tool was broken; the numbers weren’t updating and hadn’t since Monday. This was no secret to the system’s operators and to the frontline workers. The executive probably hadn’t been visiting with them enough to know what was happening and why.

Quite possibly, the new system receiving such praise was itself a monument to waste.

Room to reflect At the end of the day, stories like this underscore the fact that applying lean is a leadership challenge, not just an operational one. A company’s senior executives often become successful as leaders through years spent learning how to contribute inside a particular culture. Indeed, Toyota views this as a careerlong process and encourages it by offering executives a diversity of assignments, significant amounts of training, and even additional college education to help prepare them as lean leaders. It’s no surprise, therefore, that should a company bring in an initiative like Toyota’s production system-or any lean initiative requiring the culture to change fundamentally-its leaders may well struggle and even view the change as a threat. This is particularly true of lean because, in many cases, rank-and-file workers know far more about the system from a “toolbox standpoint” than do executives, whose job is to understand how the whole system comes together. This fact can be intimidating to some executives.

Senior executives who are considering lean management (or are already well into a lean transformation and looking for ways to get more from the effort and make it stick) should start by recognizing that they will need to be comfortable giving up control.

This is a lesson I’ve learned firsthand. I remember going to CAPTIN as president and CEO of the company and wanting to get off to a strong start. Hoping to

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figure out how to get everyone engaged and following my initiatives, I told my colleagues what I wanted.

Yet after six or eight months, I wasn’t getting where I wanted to go quickly enough. Around that time, a Japanese colleague told me, “Deryl, if you say ‘do this’ everybody will do it because you’re president, whether you say ‘go this way,’ or ‘go that way.’ But you need to figure out how to manage these issues having absolutely no power at all.”

So with that advice in mind, I stepped back and got a core group of good people together from all over the company-a person from production control, a night-shift supervisor, a manager, a couple of engineers, and a person in finance-and challenged them to develop a system. I presented them with the direction but asked them to make it work.

And they did. By the end of the three-year period we’d set as a target, for example, we’d dramatically improved our participation rate in problem-solving activities-going from being one of the worst companies in Toyota Motor North America to being one of the best. The beauty of the effort was that the team went about constructing the program in ways I never would have thought of. For example, one team member (the production-control manager) wanted more participation in a survey to determine where we should spend additional time training. So he created a storyboard highlighting the steps of problem solving and put it on the shop floor with questionnaires that he’d developed. To get people to fill them out, his team offered the respondents a hamburger or a hot dog that was barbecued right there on the shop floor. This move was hugely successful.

Another tip whose value I’ve observed over the years is to find a mentor in the company, someone to whom you can speak candidly. When you’re the president or CEO, it can be kind of lonely, and you won’t have anyone to talk with. I was lucky because Toyota has a robust mentorship system, which pairs retired company executives with active ones. But executives anywhere can find a sounding board-someone who speaks the same corporate language you do and has a similar background. It’s worth the effort to find one.

Finally, if you’re going to lead lean, you need knowledge and passion. I’ve been around leaders who had plenty of one or the other, but you really need both. It’s one thing to create all the energy you need to start a lean initiative and way of working, but quite another to keep it going-and that’s the real trick.

LEADERSHIP

Room to run Even though I’m retired from Toyota, I’m still engaged with the company. My experiences have given me a unique vantage point to see what Toyota is doing to push the boundaries of lean further still.

For example, about four years ago Toyota began applying lean concepts from its factories beyond the factory floor-taking them into finance, financial services, the dealer networks, production control, logistics, and purchasing. This may seem ironic, given the push so many companies outside the auto industry have made in recent years to drive lean thinking into some of these areas. But that’s very consistent with the deliberate way Toyota always strives to perfect something before it’s expanded, looking to “add as you go” rather than “do it once and stop.”

Of course, Toyota still applies lean thinking to its manufacturing operations as well. Take major model changes, which happen about every four to eight years. They require a huge effort-changing all the stamping dies, all the welding points and locations, the painting process, the assembly process, and so on. Over the past six years or so, Toyota has nearly cut in half the time it takes to do a complete model change.

Similarly, Toyota is innovating on the old concept of a “single-minute exchange of dies” and applying that thinking to new areas, such as high-pressure injection molding for bumpers or the manufacture of alloy wheels. For instance, if you were making an aluminum-alloy wheel five years ago and needed to change from one die to another, that would require about four or five hours because of the nature of the smelting process. Now, Toyota has adjusted the process so that the changeover time is down to less than an hour.

Finally, Toyota is doing some interesting things to go on pushing the quality of its vehicles. It now conducts surveys at ports, for example, so that its workers can

do detailed audits of vehicles as they are funneled in from Canada, the United States, and Japan. This allows the company to get more consistency from plant to plant on everything from the torque applied to lug nuts to the gloss levels of multiple reds so that color standards for paint are met consistently.

The changes extend to dealer networks as well. When customers take delivery of a car, the salesperson is accompanied by a technician who goes through it with the new owner, in a panel-by-panel and optionby-option inspection. They’re looking for actionable information: is an interior surface smudged? Is there a fender or hood gap that doesn’t look quite right?

All of this checklist data, fed back through Toyota’s engineering, design, and development group, can be sent on to the specific plant that produced the vehicle, so the plant can quickly compare it with other vehicles produced at the same time.

All of these moves to continue perfecting lean are consistent with the basic Toyota approach I described: try and perfect anything before you expand it. Yet at the same time, the philosophy of continuous improvement tells us that there’s ultimately no such thing as perfection. There’s always another goal to reach for and more lessons to learn.

* Deryl Sturdevant, a senior adviser to McKinsey, was president and CEO of Canadian Autoparts Toyota (CAPTIN) from 2006 to 2011. Prior to that, he held numerous executive positions at Toyota, as well as at the New United Motor Manufacturing (NUMMI) plant (a joint venture between Toyota and General Motors), in Fremont, California.

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EVENTS

Committee’s President, Ramόn Luis Valcάrcel Siso

“Athens Declaration” of Committee of the Regions on EU’s growth strategy: Too little progress - change now or fail again

by N. Peter Kramer

In Athens on March 7, the Committee of the Regions was resolute when it warned that delivering the EU’s economic growth strategy – “Europe 2020” – was being undermined by a clear lack of involvement of local government. Dismissing the current approach as “territorially blind”, the Committee – which represents local and regional authorities in the EU – adopted its so called “Athens Declaration” setting out a seven-point plan for reform. The political declaration argues that the EU must rethink its approach and alter its direction if it is to keep its promise of creating a “smart, sustainable and inclusive economy” by 2020.

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EVENTS

T

he Declaration was approved by the Committee’s members during the 6th European Summit of Regions and Cities and argues that the future success of the EU’s growth strategy hinges on better engagement of local and regional authorities. The political document is based on the findings of a mid-term review of Europe 2020, also published by the Committee, which is based on extensive consultation of Europe’s regional and local governments.

During his opening speech at the Summit the Committee’s President, Ramόn Luis Valcάrcel Siso, said, “The latest economic forecast shows that though there are signs growth is back in Europe, there are unacceptable disparities between regions. We now need to reconsider our direction making it easier for our cities and regions to shape the strategy and take ownership.

If we don’t want to fail again, the EU’s growth strategy needs regional targets, partnerships between all levels of government and sufficient funding to make recovery real for all our citizens”.

Ioannis Sgouros, Governor of the Greek Region of Attica and Head of the Committee of the Regions’ Greek delegation said: “In these critical times, we are called to review the role of the Committee of the Regions and regional and local government in economic development, innovation and social welfare. The prolonged recession experienced by Member States, the unprecedented unemployment, poverty, and social exclusion of increasingly larger social groups are facts that create new challenges for both regional and local government as well as the European institutions. It is now evident that the crisis Europe is cur-

rently experiencing is not solely a financial crisis. It is primarily a political and institutional crisis.

Never before have indifference and scepticism among European citizens regarding the EU proceedings been so intense. Europe should take a big decision right now: to change its policy, namely its way of thinking and acting, in order to regain the trust and confidence of its citizens”.

The Committee of the Regions’ Seven-point plan for Europe 2020 1. Give the strategy a territorial dimension: Though the strategy has provided a framework for action, it ignores the strengths, weaknesses and development opportunities of European regions.

There is a need to set territorially differentiated objectives and targets with updated and extended EU-wide regional data to measure progress locally.

2. National Reform Programmes in partnership: There is limited involvement of local and regional authorities in preparing National Reform Programmes: they are consulted but not viewed as partners in setting goals and targets.

3. Making multi-level governance the standard approach: Multilevel governance allows for coordination between different levels of government and is a precondition for the Europe 2020 Strategy to bring added value in terms of growth, jobs and cohesion. Territorial Pacts and multi-level arrangements involving public authorities at all levels can help deliver a renewed Europe 2020 Strategy.

4. Aligning the European Semester with genuine long-term investment: The European Semester - the annual exercise of coordination of fiscal and structural policies

by the EU’s member states - must be more aligned with Europe 2020 goals covered by the Flagship Initiatives, including related need for long-term investments.

5. Using the Europe 2020 Flagship Initiatives for enhanced policy coordination: The seven Flagship Initiatives should become a lever to enhance policy coordination at all levels in view of achieving the Europe 2020 targets.

6. Mobilising funding for longterm investment, ensuring better spending: the European Commission should publish a Green Paper on budget synergies between all levels of government which would allow them to “do more with less”. The European Investment Bank should strengthen its support for local and regional authorities. Private funds should be mobilised through innovative financial instruments. The quality of public spending should improve, to make public investments more effective.

7. Strengthening administrative capacity for more effective implementation: Benchmarking, exchange of experiences and peer learning between regions and cities should be supported by the EU and Member States, also by using EU instruments such as the European Territorial Cooperation programmes. A Public Sector Innovation Platform, aiming at supporting and coordinating public sector innovation, should be established.

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ECONOMIC OUTLOOK

Fail2Succeed Campaign

by Alessandro Niccol÷ Tirapani*

T

oday entrepreneurial failure is rarely associated with positive concepts such as learning, experience and opportunity. When failure is mentioned, often this leads to the idea of disappointment, sadness and depression. This stigma has perforated the very essence of entrepreneurship in the EU. On December 18th ThinkYoung, a Brussels-based think tank committed to lobbying for young Europeans, launched its Fail2Succeed Campaign at the European Parliament. The conference served to shed light on the characteristics and causes of stigma failure among European entrepreneurs. The campaign is based on the results of a research study conducted, which includes a European youth survey. The survey of more than 1,200 responses revealed that the stigma of failure plays a central role in restraining young entrepreneurs from starting a business both at an institutional and social level. The campaign aims to empower young people with the tools to learn from failure and to grasp what can be improved with entrepreneurial failure Our research has shown that in terms of personal growth young people perceive failure positively, but in terms of reputation failure is generally perceived as negative.

Data highlighted a striking gap: on one hand, 83% perceive failure as positive for personal development, more than 70% would give someone who failed a second chance,

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and one out of two prefer financing a project for an individual who has experienced failure. On the other hand, 50% are convinced that after failure future professional partners will perceive them negatively and 62% think that individuals close to him/her will not grant them a second chance. Ultimately 75% is convinced that social expectations are the main cause hindering the recovery after a failure.

In the EU the consequences of bankruptcy makes loan eligibility difficult for individuals suffering from low credit scoring. In accordance with the present day credit crunch, entities like the European institutions are posing questionable efforts in alleviating loan qualification. Furthermore the European legislation is not harmonized: the European Commission is taking action based on studies showing that the request to repay debts for a period exceeding three years strongly discourage the decision to start a new business.1 Nevertheless, the real need to intervene is on a national level. MEP Jedrzejewska, of Poland, contends that stigma of failure is manifested in the lack of social security for the self-employed, a scenario similar in countries like Italy and Spain.

Regarding access to finance, banks by definition are risk averse: the lack of venture capitalists further restricts access to credit for those who do not hold a perfect credit record. Eventually, in the business world the stigma of entrepreneurial failure is harmful in terms of innovation: the whole notion of ‘failure’ inhibits individuals from abandoning a given project in order to embark on a new one that could in essence be riskier but more innovative. The stigma could also inhibit financing for a potential new innovative project.2

ThinkYoung has consulted several experts and developed solutions.

At an institutional level, we are collaborating with the Centre for European Studies and the European Commission to harmonize the bankruptcy legislation, especially for those companies based in more than one Member State.

But, as a think tank, our vocation is to give birth to an informed debate, connect ideas and reshape the image of the entrepreneurs.

Changing the reputation of entrepreneurs in Europe is one of the objectives of our campaign to overcome the stigma of entrepreneurial failure, along with the role of entrepreneurs as a whole.

According to the Eurobarometer,3 57% of Europeans think that entrepreneurs take advantage of the others’ work, percentage getting higher and higher as the crisis unfolds. As well, the European educational system often punishes mistakes, either directly, by instilling a whole culture of ‘there is only one right way to do things’, or indirectly, by not offering an environment where youngsters can fail safely.

As a direct consequence, young Europeans have little experience of failure: only 10% of respondents faced it directly. And when we are to face something obscure, stereotypes and fears proliferate. *Think Young researcher 1.http://ec.europa.eu/ enterprise/policies/ sme/business-environment/files/second_chance_final_ report_en.pdf 2. Prof. Landier works a lot on the topic. See i.e. https://www.frbatlanta.org/filelegacydocs/academic_landier.pdf?redirected=true 3.http://ec.europa.eu/public_ opinion/flash/fl_354_en.pdf

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Vagit Alekperov CEO of Lukoil

May 2014

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H.R.H. King Philippe of the Belgians Carlos Brito CEO AB InBev

William Kennard, Former Ambassador of the USA to the EU

Pascal Lamy, Former Director-General of the WTO

Dominique Reiniche,

Mario Monti > Former Prime Minister of Italy

Former Chairwoman of Coca-Cola Europe

Lakshmi Mittal, CEO of Arcelor-Mittal

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THE BUSINESS AGENDA 2014 - 2019 : REBUILDING A COMPETITIVE EUROPE

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Jürgen Thumann, Former President of BUSINESSEUROPE

Brussels, 14 – 15 May 2014

Catherine Ashton,

The European Business Summit (EBS) is the annual networking and lobbying forum for business leaders and policymakers in Europe. This is the ultimate meeting place where international business and European politics shape the future and set the agenda.

High Representative of the EU for Foreign Affairs

Wilhelm Molterer, Vice-President of the European Investment Bank

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Malcolm Harbour,

The EBS attracts 1,500 leaders from 60 countries and across all sectors; CEOs, industrialists, the European Commission & Parliament, Heads of State, international financing institutions and 200 journalists. This is all hosted at the prestigious Palais d’Egmont in Brussels.

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