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Europe’s New Walls

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EDITORIAL

Tsipras gambled, won and got a fresh mandate By N. Peter Kramer

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he leftist party Syriza became the irrefutable winner of the Greek parliamentarian elections although opinion pollsinaccurately as it turned out indicated till the last moment a neck-and-neck race with the conservative opposition party New Democracy (ND). 35% of the Greek voters let it be known that Syriza’s leader, Alexis Tsipras, had to stay in power and endorsed his decision to agree with a harsh bailout agreement, after being crushed by the other Eurozone leaders under the command of German minister Schauble. It wasindeed a U-turn by Tsipras, after promising to end the austerity politics of the EU and the IMF. But he noticed that the Greek people wanted to stay in the Euro-zone. In ballet terms, the Syriza leader was in a real ‘split’, an untenable position, was forced to make a choice and … signed the deal. He explained later that by making this choice he was placing the interests of his country above those of his party.Risks of national bankruptcy and beingthrown out the Eurozone were too big. Thanks to the conservative opposition, New Democracy, Tsipras was able to find a majority in the Greek parliament for the deal with the Eurogroup. A group of Syriza hard liners, who voted against, started their own party,urging Tsipras to ask for new

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elections, in the hope of forging a new power base. He gambled, his opponents said expecting that the elections would show a fall of the Syriza leader as profound as was his victory in January of this year! But Greek voters decided differently from conservatives’ hopes and opinion polls predictions. Syriza kept its ground and left the New Democrats behind with a clear margin. The dissidents who left Syriza were unable to take possession of a single seat in the parliament. Greek voters have resoundingly re-elected the selfsame Alexis Tsipras, only this time with a mandate to manage austerity. In the meantime the Syriza leader is being sworn in as prime minister after he renewed the cooperation with right-wing Independent Greeks. Hard times lie ahead for the new government. Is it prepared to tackle the reforms Greece needs: deregulation, privatisation, liberalisation of the economy, a stop toclientelism and slimming of the bloated public sector?

‘Brussels’ is waiting: no reforms no money!


Eurozone’s enforcer ready to keep Greece’s new leader in line Dutch economist Maarten Verwey has unprecedented powers as his task force oversees the implementation of Greece’s cash-for-reforms rescue package.

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aarten Verwey, a senior civil servant at the Dutch finance ministry who joined the commission in 2011 and led its Cyprus assistance programme, heads what amounts to an EU taskforce for Greece. His powers are unprecedented. And if few voters on the streets of Athens have heard his name, many understand that how they casted their ballot in the elections makes little difference to what happens next. Under the draconian conditions of Greece’s third cash-for-reforms rescue package, Athens effectively surrendered control over great swaths of economic and social policymaking to its eurozone lenders. The memorandum of understanding detailing the threeyear, €86bn (£63bn) deal requires the government “to consult and agree with the European Commission, European Central Bank and International Monetary Fund on all relevant actions ... before these are finalised and legally adopted.” In exchange for the bailout funds, Greece, which needs to repay about €1.3bn in loans this December and another €6bn in 2016, has pledged to radically overhaul its economy and make far-reaching changes to the health, welfare, pensions and taxation systems. Some 120 pieces of legislation must be passed this year – with future bailout payments dependent on satisfactory quarterly progress reviews. “There will be no further transfer of funds to Greece unless Greece starts changing basic patterns of the way the pension system works, taxation is enforced, and so on,” said Dimitri Sotiropoulos, a political scientist at the University of Athens. Verwey’s 20-strong staff will essentially write the legislation for almost all areas of government policy, from corporate income tax and labour market policy to the health and welfare system … and prepare interim reports during the evaluation of the economy. A previous Greek task force was disbanded after the former Syriza government refused flatly to cooperate with it. This time, Verwey would have a direct line of communication with the prime minister’s office, as requested by

the commission president, Jean-Claude Juncker. The government is committed to meeting a series of tough targets, including turning round a projected primary deficit of 1.5% to one of just 0.25% by the end of the financial year, and reaching a 3.5% primary surplus in the medium term.It must improve tax compliance and “public financial management”, as well as raise more money through measures as disparate as abolishing tax breaks for farmers, increasing VAT and centralising health procurement. Changes to pensions are expected to save 1% of GDP by 2016, and benefit reforms 0.5%. Labour market laws must be overhauled, consumer markets including energy deregulated, and restricted professions such as notaries, actuaries and bailiffs opened up. To “modernisethe state and public administration”, the judiciary will be reformed, civil service perks slashed, and the bureaucracy “depoliticised”. As part of a highly specific and at times frankly odd “toolkit” seen by some as a free-market bonanza for multinational businesses, ownership rules for Greek pharmacies, marketing laws for milk and the regulations governing who can call themselves a baker are also up for reform. The lenders will have a particularly big say in the rescue of Greece’s ailing banks, with bank boards to be overhauled to ensure members have adequate expertise and international experience. Despite campaign pledges from both leading parties that, if elected, they will try to cushion the blow, the measures add amount to a daunting legislative programme from which Greece’s prime minister will find it difficult, if not impossible, to deviate. “This time, we all need to realise that we are serious and for real,” commission president Juncker reminded Athens in September. “We require respect of the arrangements and agreements that have been reached. If they are not respected, the reaction of the European Union and the eurozone will be different.”

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OPINION

Europe’s New Walls By Judy Dempsey*

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o be free to travel. That was the dream of the millions who had lived under the Communist regimes in Eastern and Central Europe. That dream came through in summer 1989 when the Hungarian government cut the barbed wire fence that divided the country from Western Europe. Thousands of East Germans who had made their way to Hungary crossed into Austria. It was the beginning of the end of a divided Europe. A few months later, the Berlin Wall, which symbolized the division of Europe into two ideological and physical blocs, was torn down. Europe was finally whole and united. Then came the introduction of the EU’s Schengen system, which abolished border controls between most European Union countries. That gave Europeans from Eastern, Central, and Southeastern Europe a real sense of living in an open and seamless Europe. But that open Europe is now in jeopardy as governments build walls against refugees, against Russia, and against the Roma. The more governments build such fences, the more they undermine the EU

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as an open, democratic, and free space—qualities and values that have made Europe attractive and a beacon to others. And the more EU governments build barriers, the more they will play into the hands of authoritarian regimes in Europe’s Eastern and Southern neighborhoods. A closed and divided Europe could lose its attraction for people wanting the freedom to travel, work, and study in Europe. Right now, Hungary is building a 12-foot-high (4-meter) fence along its 109-mile (175-kilometer) border with Serbia to prevent refugees fleeing the wars in Syria and Iraq from entering the country. Britain is building a new security fence around the Channel Tunnel terminal in Calais, France, for the same reason. In 2014, Bulgaria started building a metal fence along its border with Turkey to stop smugglers from bringing asylum seekers to Europe. And during the 1990s, to prevent refugees and migrants from entering Spain, Madrid built massive walls around the cities of Melilla and Ceuta, Spanish exclaves that border Morocco.


OPINION

It’s not only against refugees that some European governments are building new fortifications. Estonia announced on August 28 it was building a fence along its eastern border with Russia. Interior ministry spokesman Toomas Viks said the barrier was designed to protect the Schengen Area. In practice, the fence is about protecting Estonia, which joined the EU and NATO in 2004, against Russia. Russia’s invasion of eastern Ukraine in 2014 and its annexation of the Crimean Peninsula has made Estonia and the other Baltic states extremely nervous about Russia’s intentions in this part of Europe. And no wonder. Nearly a year ago, Russia kidnapped EstonKohver, an Estonian security official who had been investigating a smuggling ring on the EstonianRussian border. On August 24, Kohver was given a fifteen-year prison sentence. There are walls too being built to isolate Roma communities. Slovakia has constructed more than a dozen walls to separate the country’s Roma from the locals. Back in 2009, the mayor of the Slovak village of Ostrovany built a 492-foot-long (150-meter), 7-foot-high (2-meter) concrete wall to distance the Roma from the rest of the community. The Czech Republic has also put up walls between the Roma and non-Roma local inhabitants. In Baia Mare, Romania, the local authorities also built a wall against the Roma community. Nongovernmental organisations including the Center for Legal Resources described the wall as an initiative that belonged to the Nazi era. “The idea to separate a community with severe social problems . . . amounts to institutionalised racism,” the center stated. Yet some EU countries—especially Germany, which expects up to 800,000 asylum seekers by the end of 2015—has refused to build new walls. Not only that. Berlin has dropped all restrictions for Syrians fleeing the war in their country. Germany is speeding up the asylum procedure process and intends to integrate those who remain in Germany as quickly as possible.

Neighboring Poland has opened its doors to Ukrainians. During 2014, Warsaw received 2,318 asylum applications from Ukraine, compared with 46 the year before. It also issued 830,553 shortterm visas for Ukrainian border traders and migrant workers, compared with 720,125 in 2013, according to EUobserver. More importantly, Poland was instrumental in obtaining a special status for the Russian exclave of Kaliningrad, which is sandwiched between Lithuania and Poland. Since 2011, with the support of Germany, Russia, and the European Commission, inhabitants of Kaliningrad have the right to travel to Poland without a visa. Poland’s center-right Civic Platform government, particularly the former foreign minister Radek Sikorski, believed it was crucial to give these Russian citizens an opportunity to see how Poland’s political, social, and economic structures functioned. By keeping its doors open, the EU can also encourage change. When in January 2014 Romanians were given the freedom to work in any EU country, thousands of young and old jumped at the opportunity. Their experiences were enough to convince them of the need for real change in a country mired in corruption and weak governance. Later that year, Romanians turned up in their droves to vote for the anticorruption campaigner Klaus Iohannis. Against all the odds, he was elected president of Romania in November 2014. Open Europe was vindicated.

*Judy Dempsey is non-resident senior associate at Carnegie Europe and editor in chief of Strategic Europe

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OPINION

Europe matters in Iran’s search for its identity By Tarja Cronberg*

The debate in the aftermath of the Iran deal has concentrated on what happens after 15 years, when the rigorous inspection regime expires and Iran becomes a normal member of the Nuclear Non-Proliferation Treaty.

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he question many focus on is whether Iran will expand its uranium enrichment programme and soon have enough fissile material to create a bomb. Instead, the debate should be about what happens during those 15 years. Will Iran cooperate and respect the agreements it has signed, or will we see an Iran that continues to support terrorism and build clandestine nuclear facilities? The outcome is by no means given, although conservatives in the US Congress and the Prime Minister of Israel seem to believe so. The deal creates an extremely delicate balance between control and autonomy, between intervention and sovereignty. Inspections over the next 15 years will be intrusive, and much more rigorous than the most extensive control regime of

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the International Atomic Energy Agency (IAEA). Military facilities will be inspected, though there is a 24-day access waiting time. The whole world will be waiting for signs of non-compliance and the networks of Israeli intelligence will no doubt be extremely effective in detecting them. Nuclear programme-related economic sanctions will be removed. Trade relations with foreign companies in the oil and gas sector are already under way. Other sectors will no doubt follow. During isolation, Iran’s economy has been one of resistance, emphasising its indigenous nature. The political balance between integration into the world economy and the economy of resistance will no doubt create ideological clashes. Here, the Revolutionary Guard will be a critical actor. Will


OPINION

they gain or lose by the transformation? It would be naïve to expect Iran to change overnight. But it is equally so to assume that bombing Iran would change its behaviour. The implementation of the deal will be critical for the new balance of power. The regime will fight for its survival, and if it suspects that the West is hindering its development by limiting R&D or by threatening the return of sanctions, the hard-liners will gain support. If the Islamic revolution is not threatened and the economy improves, the pragmatist policies of the current president will be at the forefront. “The best solution to the problem of proliferation of WMD is that countries should no longer feel they need them. If possible, political solutions should be found to the problems which lead them to seek WMD. The more secure countries feel, the more likely they are to abandon programmes: disarmament measures can lead to a virtuous circle just as weapons programmes can lead to an arms race.” This statement is at the core of the European Union’s WMD strategy, approved in 2003. Furthermore, the strategy underlines the need to use all EU instruments to achieve a broad approach. This includes a versatile tool- box ranging from trade agreements to human rights dialogues, from cultural exchanges to R&D cooperation. In 2003-2005 as part of the diplomatic effort, the EU offered a dialogue on trade and support for Iran’s membership in the WTO. In contrast, the later phases of the negotiation process dealt only with the nuclear file; even questions of human rights were deliberately excluded. This was a choice made to increase the West’s leverage in relation to Iran. Now is the time to rethink a broad EU approach to Iran. How can the EU ensure that Iran, after 15 years of inspections and restrictions, no longer feels the need for nuclear weapons? The first objective should be cultural exchanges and people-to-people contacts to break the past isolation on both sides. Student

exchange programmes and R&D cooperation should be designed for young people in Iran and the EU. Common interests exist, among other things, in drug trafficking, as drugs from Afghanistan reach Europe through Iran. While the US has not had any diplomatic relations with Iran since 1979, EU member states have embassies in Tehran to enable information exchanges and contacts. As a result of the European Parliament’s official delegation to Iran in December 2013, there was support for an EU representation in Tehran. This should be given renewed consideration. The Iran deal is not only about whether the nuclear programme is peaceful or not. I agree with those, and especially with Robert Litwak of the Wilson Center, who see the nuclear negotiations as part of Iranian identity politics. More than thirty years have passed since the revolution. The Iran-Iraq war ended more than twenty years ago. Half of the population is under 30 years. Iran is at a crossroads in its relations with the international community. Only Iranians themselves can determine the outcome of this soulsearching. But the process can be destroyed from the outside. A new EU approach to Iran has to respect the sensitive balance created by the deal. Iran has accepted intrusive inspections but will guard its sovereign rights. While trade delegations are rushing to Tehran, the country is not going to abandon its resistance economy overnight. The West has a history of regime change in Iran, both implemented (1953) and planned (2003). With this in mind, it is no surprise that the western form of democracy is not held in high esteem in Tehran. Cautious engagement will be better than coercive containment.

*Tarja Cronbergis Distinguished Associate at the Stockholm International Peace Research Institute (SIPRI), and former chair of the European Parliament’s Delegation for Relations with Iran

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OPINION

EU institutions are less transparent than many member states by Daniel Freund and Alex Johnson*

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roviding access to legislative documents should be standard practice for a well-functioning democracy, but the European Union is less transparent than many of its member states. During the summer break the European Commission published its annual report on public access to institutional documents. The information reveals some interesting facts about the EU legislative process. Over 500 requests a month for documents were sent to the three institutions (Council, Parliament and Commission) in 2014, that’s 6,227 for the year. Almost 300 fewer than in 2013. Full disclosure was granted for three quarters of requests. Sounds good right? Or does’n it? With access to documents and freedom of information (FOI) it’s hard to draw direct comparisons with national approaches. For example, the UK’s FOI rules cover almost all public institutions, from universities to local councils. In Slovakia every public contract is covered by an FOI act, which is considered among the best in Europe. However, access to information in the three main decision making bodies of the EU is rather limited. There are two important lessons in the numbers. Firstly, there is a lack of access to information about EU decision making. Citizens should not have to request legislative documents in the first place. All documents that are part of the legislative process should be public by default. That includes documents outlining the negotiating positions of the three EU institutions or ‘four column documents’ when they meet behind closed doors during ‘trialogues’ - the three way talks to reach compromises on EU law. In 2013 the European Court of Justice ruled that the Council must release documents disclosing member states’ positions in Council working groups. To get around the ruling, the Council simply stopped recording the names of individual countries, making it once again impossible for an outsider to know what position their member state is taking in their name. Secondly, the institutions must do more to ensure that already published documents can actually be found. In the EU Integrity Study we published last year, we found that 78% of access to document requests were for files that were already in the

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public domain. Citizens, journalists and civil society organisations simply could not find them. Of the people who requested documents in 2014, 20% were academics and 12.8% of applications were from other EU institutions. If even ‘Eurocrats’ and university professors struggle with trawling through clunky EU document libraries, then surely that says something about accessibility? Access to information is vital for any well-functioning democracy. It should be standard practice for the EU institutions to publish all documents from each step in the legislative process. They should not wait for someone to request them, but rather put them online proactively. Not only would this reduce the administrative burden on the under-staffed Transparency Unit at the Commission, but it would also greatly improve the transparency of EU decision making. Finally, it would mean that the institutions would comply with the spirit of Article 10 of the EU treaties: “Decisions shall be taken as openly and as closely as possible to the citizen.”

*Daniel Freund and Alex Johnson are policy officers for Transparency International EU **First published at Euractiv.com


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EU AFFAIRS

Europe’s populists: A present and rising danger By Edward McMillan-Scott*

Although there is a strong element of grievance in the politics of populism, one factor which is common to almost all of the continent’s populist parties is an anti-EU sentiment. It is the degree of this – and fundamentally its effect on governments – which is causing most concern among mainstream parties.

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fanciful book, Apocalypse 2000, written in 1987, features the use of the European Parliament as a continental political platform for a populist Left/Right demagogue elected in Britain – Olaf D. Le Rith (Adolf Hitler) – who eventually seizes power across Europe. With centrist parties like the British Conservatives giving ground to populists at home and now across Europe, we should all be watchful. Let’s look at some of the most recent, worrying developments.

The populist challenge to the UK In the UK’s May general election, the Eurosceptic

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UK Independence Party (UKIP) came second in 120 of the 650 constituencies and third in the popular vote, garnering nearly 4 million votes, although it won only a single seat. David Cameron’s tour of EU capitals seeking a redefinition of the UK’s relationship with the EU does not stem from any conviction on his part – Cameron has always been content-free on Europe – it comes about because of his fear of UKIP, and of the hardline Eurosceptics in his own party. I was involved in a minor skirmish at the beginning of the Conservatives’ European turmoil when, as leader of the 36 Conservative members of the European Parliament in 1999, I was tasked with negotiating a more detached relationship with the Christian Democrat/Conservative European People’s Party (EPP) Group. Ten years later, David Cameron, under yet more pressure from the Right, pulled the Conservatives out of the EPP and created the European Conservatives and Reformists group with nationalists like Poland’s Law and Justice and controversial fringe parties such as Alternative for Germany (AfD), to which Cameron’s grouping


EU AFFAIRS now gives credibility. I left the Conservative Party in protest. Cameron’s split with the mainstream only adds to his negotiating task ahead of the UK’s EU membership referendum. Within the EPP, he would have had direct access to most of the EU’s top leadership in Brussels and national capitals.

The populist challenge to Europe The rise of populism, especially on Europe’s Right, began to cause international concern after the European Parliamentary election of 2009, when Time magazine’s cover story, ‘Far Right Turn’, argued that “extremist parties in Europe are feeding off the economic crisis and the loss of trust in mainstream politics to extend their reach”. In May of last year, following the next and even more shocking European election, Time wrote, ”Anti-E.U. populists may have scored big at the ballot box, but they’re wrong on foreign policy”; not just wrong, but dangerous. By last summer, one-third of the 750-member European Parliament was of the Right, largely a consequence of the continuing Eurozone crisis and economic stagnation across much of Europe. A new phenomenon had also emerged: populism of the Left, represented notably by Greece’s Syriza and Podemos (‘We can’), a Spanish party founded in early 2014 based on the radical Indignados movement. The success of Podemos in Spain’s recent regional and local elections, coupled with the success of the antiestablishment Ciudadanos movement, has shattered previous expectations for the general election later this year.

The populist opportunity for Putin While Europe’s mainstream was anxious, these results encouraged Vladimir Putin’s international ambitions. His developing support for populist parties of Left and Right came into its own over his annexation of Crimea, which many supported. Putin’s strategy is based on his continental ‘Eurasian Union’, the brainchild of Moscow guru AleksandrDugin. Decrying liberalism, the aim is to break up the EU, sever transatlantic links and promote nationalism. Marine Le Pen is the most prominent of a troupe of populist or extremist leaders to visit Russia or Crimea. Tellingly, a resolution criticising Russia in the European Parliament on the 10th of June drew out these populist parties. UKIP and the Front National teamed up with other anti-EU parties to vote against the non-binding resolution, which ultimately passed by 494 votes against 135 with 69 abstentions. Like the totalitarian dictators of the 1930s who funded foreign populist movements, whether Mussolini, Hitler, or indeed Stalin’s early funding of Hitler through Kurt

von Schleicher, Time magazine’s ‘Man of the Year’ in 1932, Putin has been funding today’s extremists. Last November, French investigative journalists revealed that the Front National have received at least €9 million in loans from a Kremlin-linked bank. German media and the Austrian opposition say the AfD and the far-Right Freedom Party of Austria (FPÖ) are also financed by Russia; allegations they each deny. And in Greece, Putin’s funding of the neo-Fascist Golden Dawn did not stop Syriza’s Alexis Tsipras making Moscow his first port of call as premier, resurrecting old geostrategic fears.

Reversing the trend German political scientist Florian Hartleb, who specialises in the rise of populism, has written that “while there is no incontrovertible proof that demystification through participation in government is an effective strategy for successfully combating Right-wing populists, there is no doubt that the worst response strategy is ‘toleration’ because this allows populists directly to exert influence on a country’s political decision-making without being directly held to account for it.” Polish columnist Paweł Świeboda has called for more pro-EU activism, saying “Much of the frustration of European citizens has to do with the policy that originates in Brussels. The institutions have tended to assume that they are bound to be on the virtuous side and their case will prevail. They have feared becoming embroiled in national party political squabbles. This strategy has run its course and will need to be replaced by more active messaging.” What we can be clear about is that far-Right populism will not disappear of its own volition. Ms le Pen has announced the formation of a new Europe of Nations and Freedom group in the European Parliament. This gives her a front row seat and her far-Right team a platform, and €17.5m of public money over four years. As le Pen put it, “far more firepower than ever before”. *Former MEP and Vice-President of the European Parliament with responsibility for Democracy and Human Rights (2004-2014)

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EU AFFAIRS

UK: The EU referendum campaign is likely to be defined by shades of grey and fine margins By Stephen Booth*

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he short campaign is still several months off but the contours of the EU referendum debate are beginning to take shape. With the economic argument far from clear cut, we could be in for an unpredictable contest. According to The Sunday Times, the ‘No’ campaign is beginning to take shape and is due to launch in the next month or so. Meanwhile, the ‘Yes to Europe’ campaign has reportedly already recruited its campaign team. The Sunday Times quotes a No campaign source as saying its strategy will be based on internal polling which suggests that, while one third of the electorate will vote to stay no matter what in the upcoming EU referendum, and one third will vote to leave no matter what, “We need to talk to the onethird of the country who don’t like the EU and would like to leave, are frightened of the consequences

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and are not persuaded by Ukip.” There is undoubtedly a large swath of voters up for grabs who are at this stage either unconvinced of the case either way or have yet to engage with the issues (this is a familiar story in polling going back some way). Exactly which issues and arguments will bring these people into play will be crucial but, reading between the lines, it seems the No campaign is likely to focus less on immigration than on neutralising the perceived economic risks of withdrawal, the benefits of returning democratic control from Brussels and casting doubt on the substance and/or form of the reforms secured by the Government. How this pans out will be crucial in the campaign as so far neither side has offered anything of substance to swing voters, with both sides preaching to the converted.


EU AFFAIRS

Economics could be less important than many think

The public is sceptical that major reform will be on offer

The extent to which even the business community thinks the economic argument is finely balanced is illustrated by an article in The Daily Telegraph today by Dr Alexander Moscho, the UK and Ireland Chief Executive of German pharmaceutical company Bayer. Echoing the conclusions of our work on Brexit, he argues that: “Accountants make much of the potential economic consequences for both the UK and the EU of a ‘Brexit’. Depending on who you believe, the impact could be disastrous or positive. I believe it could also be neutral; if Britain can set up a working free-trade scheme with the EU, then the economic consequences might actually even be positive. Britain would survive. But life would be more difficult for companies that need and want to employ people from across Europe: just look at the impact the Swiss referendum had against their remaining part of the EU labour market.” While arguing that a reformed EU would be good for business his concluding arguments for Britain remaining inside are about maintaining Britain’s influence in global affairs and over its European markets. This then, in Dr Moscho’s view, is not necessarily clear-cut but a question of trade-offs. In such circumstances, the case for staying in is much easier to make if the EU reform process initiated by the UK is seen by voters to be ambitious and successful. On the other hand, it is far easier to make the case that it is worth taking a gamble and putting up with the initial disruption of Brexit if ‘reform’ is perceived to be superficial and/or a failure.

Of course, yet to take the field is David Cameron, George Osborne and the other members of the Government expected to lead the In campaign on the basis of the forthcoming negotiations with the rest of the EU. Previous polling suggests that the likes of Cameron, Osborne (and, interestingly, Boris Johnson) are likely to have sway with swing voters and much is likely to be staked on the personal authority of the Prime Minister and the Chancellor, but this is not unlimited. According to a recent YouGov poll, 22% of British people think David Cameron is trying to get major changes to Britain’s relationship with the EU. 36% say his efforts are for modest but significant changes and 25% suspect he is only pushing for minor tweaks. This suggests a solid 58% of the population are willing to give his reform push a chance and believe it is a serious effort. He should not waste this goodwill. However, most British people (67%) also believe other EU countries would rather Britain stayed in, but won’t offer Cameron much to ensure it does. This all suggests there remains much to play for and that while Yes currently has a lead in the polls, this could be far from insurmountable.

*Stephen is Co-Director at Open Europe. He holds an undergraduate degree in political science and was awarded the Jean Monnet Prize for his master’s degree in European studies from the University of Sussex.

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GEOPOLITICS

Putin’s deceptive pause: What are Russia’s next steps in Ukraine? By Marvin Kalb*

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deceptive late-summer pause has settled over the Ukraine crisis. At least, in the coverage of it. For many weeks now, the war in the Donbas has slipped off the front page. Although leaders such as Germany’s Chancellor Angela Merkel and Ukraine’s President Petro Poroshenko still search for an acceptable formula to end the war, it has continued in the southeast corner of Ukraine, with casualties mounting. Who fired first is no longer a relevant question. The point is that the war stumbles along with no end in sight. The twin rebel “republics” of Donetsk and Luhansk have slowly frozen into a Russian stronghold, effectively detached from the rest of Ukraine. They are always available to be manipulated as a pro-Russian weapon in the East-West battle for Ukraine’s future.

Warming up? Ukraine is no longer the top priority for American diplomats. They are understandably absorbed with selling the Iran nuclear deal to a reluctant Congress. But, if Russian Foreign Minister Sergey Lavrov is to be believed, there are a number of senior officials 20

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who have also been sending signals to Russia suggesting that President Obama wants to turn a page and improve his frosty relations with President Vladimir Putin. “We are already getting such signals from the Americans,” Lavrov said, “though for now not very clear.” Would Russia be open to better relations? Russia, responded the foreign minister, would “consider constructively” any such possibility. Putin seemed more positive. As he told American former boxing champion Roy Jones, Jr. last week: “We have had different kinds of relations at different times, but whenever America and Russia’s higher interest demands it, we always found the strength to build relations in the best possible way.” One possible translation: Putin now wants to emerge from the shadows of the Ukraine crisis and restore better relations with the West. But, Obama and his top advisers, burned once by Putin when he shocked everyone and seized Crimea in late February 2014, do not want to be burned again. They realize that Putin—once a KGB colonel, now a modern Peter the Great (with a smidgen of Stalin)—is still capable, if he chooses, of throwing Europe and the world into a Cold Warstyle confrontation. If left unchecked, that could


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quickly dominate not only newspaper headlines but also global calculations about war and peace. He has that kind of clout.

Managed instability Though Russia is not the Soviet Union, it still remains the boss of Eastern Europe. When it sneezes, as we have learned, Ukraine can catch a bad cold. These days, everything in and around Ukraine seems to be in what one journalist called “managed instability.” Putin can bring the crisis closer to a possible solution or he can widen the war. Or, more simply, he can “freeze” it. The key question is: What does Putin have in mind? What are his plans, assuming that he has plans, and is not winging the crisis day by day? One line of reasoning, comforting to an extent, is that for the moment Putin has a plate full of challenges, more than enough to keep him busy. This makes him less inclined to shoot from the hip and more interested in an accommodation with the West. What else explains his and Lavrov’s overtures to the United States? Putin knows (or should) that Russia’s economy is a mess, caused in part by Western economic sanctions against Russia and by falling oil prices. Official statistics show a 4.9 percent decline in gross domestic product in the second quarter of 2015, compared to the same quarter a year ago. Inflation may soar to 17 percent this year. Incomes have had to be drastically reduced, setting off ministrikes in different parts of the country. With respect to Ukraine, Putin’s position is hardly ideal, but it is still manageable. He now owns Crimea and controls two rebellious provinces in the southeast Donbas region. He knows Ukraine faces the possibility of economic collapse, even though it has made some progress. The more it slips toward the abyss, the better his chances, he thinks, of keeping Ukraine out of the Western orbit, which has always been one of his principal goals. Putin has the assets to throw Ukraine into further chaos at any time. Another line of argument, much less comforting, is that Putin has merely been waiting for the right moment to widen the war in Ukraine and perhaps elsewhere. Rebel fighters in the Donetsk and Luhansk provinces, supported by Russian forces, have recently been engaged in non-stop maneuvers, perhaps preparatory to a move on the strategic port of Mariupol, still in Ukrainian hands. If Putin decided to strike, Western analysts believe that it would be a tough fight but that ultimately the pro-Russian forces would win. The Poroshenko regime would then be pushed to the edge of collapse.

How far would the West go? But far more threatening to the West—specifically to NATO—is that Putin might launch a sophisticated hybrid attack into the Baltics, starting with Estonia, where 24 percent of the population is Russian. Because Estonia is a member of NATO, it can and would almost certainly invoke Article V, which says that an attack on one NATO member would be regarded as an attack on all. President Obama promised last year during a visit to the Baltics that the United States would honor Article V. In recent weeks, apparently concerned about expanding NATO maneuvers, Russian generals have gone out of their way to deny that they have any intention of invading the Baltics. Would Putin really go that far? Would the United States, tired from non-stop wars in the Middle East, really roll up its sleeves and fight for Estonia? Neither is very likely. So, what now? Unfortunately, so much of the answer lies in Putin’s strategy, so murky and unpredictable to outsiders and maybe to him and his advisers as well.

*Marvin Kalb is a nonresident senior fellow with the Foreign Policy program at Brookings, and senior advisor at the Pulitzer Center on Crisis Reporting. He focuses on the impact of media on public policy and politics, and is also an expert in national security, with a focus on U.S. relations with Russia, Europe and the Middle East.

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Europe Rethinks the Schengen Agreement By Stratfor*

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hen France, West Germany, Belgium, the Netherlands and Luxembourg signed the Schengen Agreement in 1985, they envisioned a system in which people and goods could move from one country to another without barriers. This vision was largely realised: Since its implementation in 1995, the Schengen Agreement eliminated border controls between its signatories and created a common visa policy for 26 countries. The treaty was a key step in the creation of a federal Europe. By eliminating border controls, member states gave up a basic element of national sovereignty. The agreement also required a significant degree of trust among its signatories, because it put the responsibility for checking foreigners’ identities and baggage on the country of first entry into the Schengen area. Once people have entered a Schengen country, they can move freely across most of Europe without facing any

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additional controls. The Schengen Agreement was implemented in the 1990s, when the end of the Cold War and the prospect of permanent economic prosperity led EU members to give up national sovereignty in many sensitive areas. The creation of the Eurozone is probably the most representative agreement of the period. But several things have changed in Europe since then, and member states are beginning to question many of the decisions that were made during the preceding years of optimism. The most important change of the past six years is probably Europe’s economic crisis and its byproduct, the rise of nationalist political parties. Not far behind, though, is the substantial increase in the number of asylum seekers in Europe, which is putting countries on the European Union’s external borders (such as Greece and Italy) and countries in the Continent’s economic core (such as France


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and Germany) under significant stress. This is not the first time the Schengen Agreement has been questioned, but the combination of a rising number of asylum seekers, stronger nationalist parties and fragile economic recovery are leading governments and political groups across Europe to request the redesign, and in some cases the abolishment, of the Schengen Agreement. On the one hand, countries in northern Europe criticize countries on the Mediterranean for their lack of effective border controls and for their failure to fingerprint many of the asylum seekers that reach EU shores. This means that the migrants can move elsewhere in the Continent to apply for asylum. In recent months, French and Austrian authorities accused Rome of allowing (and even encouraging) asylum seekers to leave Italy and threatened to close their borders with Italy; indeed, France followed through with its threat and briefly closed its border in late June. On the other hand, countries in southern Europe criticize their northern peers for their lack of solidarity. Italy and Greece have repeatedly demanded more resources to patrol the Mediterranean and rescue immigrants, more funds to shelter asylum seekers and the introduction of immigration quotas in the European Union. Central and Eastern European countries, which think asylum seekers should be distributed on a voluntary basis, rejected the idea of quotas. The migration crisis has also led to greater friction between Schengen members and their non-Schengen neighbors. The recent dispute between France and the United Kingdom (which is not a member of the Schengen zone) over immigrants trying to cross the English Channel at the French port of Calais was perhaps the most visible example of the growing tension, but the situation also led Hungary to build a fence at its border with Serbia and issue threats to militarise the border.

Rising Migration and Schengen’s Shortcomings The European Union is dealing with two overlapping problems. The first is its struggle to come up with a new immigration policy. Between September and December, EU members will hold a number

of meetings and summits to reform the bloc’s immigration rules. Germany, a country that only a few months ago was reluctant to change the Dublin regulations (according to which asylum requests should be processed in the country of a migrant’s first entry) is now leading the push for a change. Germany expects to receive some 800,000 asylum seekers this year; meanwhile, attacks against immigrant shelters in Germany are spiking. Berlin’s proposals include the creation of a common list of countries considered safe, which means their nationals, in principle, should not be allowed to request asylum in the European Union. This list would largely include countries in the Western Balkans, such as Albania and Macedonia, which are not experiencing a civil war or any particularly serious humanitarian crisis that would justify a request for asylum. Germany’s second proposal is the allocation of more funds and staff to centers in Greece and Italy to identify immigrants and process their applications. Finally, Berlin will also push for a proportional distribution of migrants across the European Union. Each of these points is highly contentious. Asylum requests are a case-by-case issue, and it often takes a long time for authorities to determine who is truly seeking asylum and who is an economic migrant. Deportation will also remain problematic, since most countries in Mediterranean Europe lack the financial and human resources to expel illegal immigrants. In addition, Mediterranean countries are unlikely to simply accept the construction of larger immigration centers within their territory without a clear system to redistribute immigrants across the Continent. Several Central and Eastern European nations opposed a recent plan by the European Commission to introduce mandatory quotas of immigrants, and that opposition is not likely to end. The European Union’s second problem is what exactly to do with the Schengen Agreement. The treaty makes it possible for illegal immigrants to move freely among member states and raises some security questions. Several member states have expressed concern that some of the thousands of migrants arriving in Europe could be terrorists. Recent episodes, such as the attempted attack on a French train in which the attacker obtained weapons in Belgium before trying to kill people on a train going from the Netherlands to France, illustrates

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the problems linked to the lack of border controls. Although authorities do not have the resources to place every single potential terrorist under surveillance, the lack of border controls eliminates a layer of potential threat detection. The rise of nationalist parties is also a threat to the Schengen Agreement. In Finland, a nationalist party is already a member of the government coalition, and Eurosceptic and anti-immigration parties are influential in countries such as Denmark, Sweden and Hungary. In France, most opinion polls show that the Eurosceptic National Front will make it to the second round of the presidential election in 2017. All of these parties believe that national immigration laws should be toughened and the Schengen Agreement should be revised, if not abolished.

The Future of Schengen The European Union probably will not abandon the Schengen Agreement anytime soon. Despite the criticisms, the treaty has reduced the time and cost of moving goods across Europe because trucks no longer have to wait for hours to cross an international border. It also benefits tourists and people living in border towns, because passports and visas are no longer needed. Finally, the agreement allows countries to save money, because governments no longer need to patrol their land borders. The Schengen Agreement will probably be reformed before the end of the decade to make it easier for countries to reintroduce border controls. The first step in this direction happened in 2013, when signatory members agreed that border controls could be temporarily reintroduced under extraordinary circumstances (such as a serious threat to national security). But the reform is limited in its scope (border controls can be reintroduced for a maximum of 10 days, and only after consultation with the European Commission) and it explicitly says that a spike in immigration should not, in itself, be considered a threat to internal security. In the coming years, member states will push to be given more power and discretion when it comes to reintroducing border controls. EU countries in northern Europe will also push for the suspension or even the expulsion of countries along the European Union’s external borders that are seen as failing to effectively control their borders. New EU member 24

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states will have a hard time entering the Schengen zone, and the resistance from some countries to accept nations like Romania and Bulgaria (which have been in the European Union for almost a decade but are still waiting to join the Schengen area) will become the new normal. Even without a proper reform of the Schengen Agreement, member states will continue to enhance police controls at train and bus stations and at airports. Several countries already employ sporadic police controls on trains and buses, a practice that is likely to grow. Under pressure from conservative forces, many EU countries (mostly in northern Europe) will also toughen their migration laws to make it harder for immigrants to access welfare benefits. To a certain extent, the weakening of the Schengen Agreement is linked to the weakening of the free movement of people — one of the key liberties of the European Union. The treaty and the principle of free movement are not the same thing; any EU citizen has the right to transit and remain in any member state regardless of the existence of border controls. But the Schengen Agreement was designed to strengthen the free movement of people and create a Continent without borders. The likely reforms to the Schengen Agreement will hurt this basic principle. Once a basic principle is weakened, the door is open for other freedoms to be similarly affected. The main threat to the European Union is that the weakening of the free movement of people could precede the weakening of the free movement of goods, which would end the European Union in its current form. *”Europe Rethinks the Schengen Agreement” is republished with permission of Stratfor. Stratfor provides global awareness and guidance to individuals, governments and businesses around the world.


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Athens Democracy Forum 2015 The International New York Times organised, September 13-15, the 3rd Athens Democracy Forum, in cooperation with the United Nations Democracy Fund and with the UN Secretary-General’s endorsement. European Business Review, as one of the mediapartners, likes to present to you in this Special Report three of the important contributions to the subject of the Forum. N. Peter Kramer Editor-in-chief EBR

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The capacity to compromise: an ultimate requirement for any effective democracy By His Highness the Aga Khan *

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he topic of democracy and its challenges is one that I have followed closely for a long time, most intently in the developing world of South and West Asia, the Middle East and Africa, where so many members of the Ismaili community live and where so much of our development work takes place. I assumed my role as Imam of the Shia Ismaili Muslims in 1957. It was a time when old colonial empires were crumbling and democratic hopes

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were rising. But too often, high expectations were not fulfilled. At the same time there was a crisis only a few years later, following the collapse of communist hegemonies. It was expected that newly independent countries would be able to make huge economic and diplomatic choices between capitalism, socialism, alignment and non-alignment, even while they were fashioning new frameworks of governance. But it was a tough assignment. Often, when old


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autocratic orders yielded, new democratic orders were not ready to thrive or were walled in by political and ideological dogmas. Today, all across the world, we continue to hear increasingly about “a crisis of confidence” in governments. While the pace of history accelerates, democratic governments often deadlock. Scholars now count a growing percentage of countries as failed democracies. The Fund for Peace reports that in more than two-thirds of the countries regarded as the world’s most fragile, conditions have actually worsened this year. The enormous refugee crisis that now confronts us is one manifestation of that challenge. I believe that the progress of democracy in our world is fundamentally linked to improving the quality of human life. The promise of democracy is that the people themselves best know how to achieve such progress. But if that promise is disappointed, then democracy is endangered. A UNDP survey of South American publics some years ago demonstrated that most people preferred an effective authoritarian government to an ineffective democratic one. Quality of life was the prime concern. But what can we say then, about why democratic systems often fall short in their efforts to improve the quality of their constituents’ lives? Let me suggest four elements that could help strengthen democracy’s effectiveness in meeting this central challenge. They are: improved constitutional understanding, independent and pluralistic media, the potential of civil society, and a genuine democratic ethic. My first suggestion is that the current challenges to governance should be seen less as problems of democracy than as problems of constitutionality. There are more countries today than I can ever recollect before that are grappling with outdated constitutions – frameworks that seem unable to reconcile opposing factions, advance economic priorities, encourage civil society, or protect human rights. But constitutional revision, especially in developing countries, is not easy. One problem is a poor understanding of comparative government systems. That subject is not part of most educational curricula, and in the countries I know best, the media rarely explain the logic or the options of constitutional change. In some countries there actually is no clear constitutional means for constitutional change. Even when a referendum is held to validate such change, most people are neither prepared nor willing to

express a considered judgment. The result is that governments in power often have an open field. In my view then, a first step to better democratic governance is a better public understanding of constitutional principles. It is easy for example, to say that we want government “of, by and for the people” – that governments should be servants of the people, and ultimately responsible to them. But that does not mean that most governmental decisions must be made by an enormous range of far-flung participants: by vast plebiscites, or popular referenda, or public opinion polling, or the number of hits on an internet blog. Such misapplied versions of democracy can produce irrational leadership choices and poorly informed policies. Sometimes, efforts to impose simplistic popular democracy can create voids of governance, which can be exploited to dangerous ends – and I have seen this in various countries in the developing world. But then, who should make various governmental decisions? My response would emphasise the idea of balanced authority, including the concept of healthy federalism. For increasingly diverse societies, a constitution that divides and balances power is essential. In discussing constitutional challenges, it is impossible to ignore the recent revival or creation of new theocratic political parties in the Islamic world. The question is how theocratic principles of governance can operate constitutionally in increasingly secular political environments. It seems essential to me that such principles should be regularly tested by the electoral process, if only so that the Muslim world can have a better understanding of the secularisation processes, which are inherent in western democracy. And democratic principles in turn, must respect the broad diversity of human faiths and cultures. Finding the right constitutional balance is no easy matter, and we make a great mistake if we think that one size can somehow fit all. Effective constitutions must be adapted to a variety of cultural and demographic realities. But it can be done. One recent example is that of Tunisia, where after intense and arduous negotiation, a promising new constitution won broad public support. My central point, in sum, is that we cannot build better democratic performance over time without a better understanding of constitutional values. A second key variable for enhancing democratic effectiveness is the critical role of competent and independent media voices. We often forget that EUROPEANBUSINESSREVIEW

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ancient Greek democracy required a highly compact community living within the sound of a “crier’s voice,” as Aristotle said. Under such conditions, face-to-face dialogue could foster a sense of trust and political accommodation. But these ideal conditions now obtain only rarely. Populations are much larger, more widely scattered, and more diverse. They can most easily be mobilised around vivid but superficial symbols and negative propositions. Often what counts most in our extended societies is not what one is for, but whom one is against. In such circumstances, polarisation and impasse are constant risks. Nor can we rely on advances in communication technologies to overcome the obstacles of distance and diversity. In fact, new media technologies have often made matters worse (and I don’t mean the New York Times!) From the development of written language to the invention of printing, to the development of electronic and digital media – quantitative advances in communication technology have not necessarily produced qualitative progress in mutual understanding. To be sure, each improvement in communications technology has triggered new waves of political optimism. But sadly, if information can be shared more easily as technology advances, so can misinformation and disinformation. If truth can spread more quickly and more widely, then so can error and falsehood. Throughout history, the same tools – the printing press, the telegraph, the microphone, the television camera, the cell phone, the internet – that promised to bring us together, have also been used to drive us apart. The age-old promise of democracy is that social cohesion and public progress could be achieved by consensus rather than by coercion. But genuine democratic consent depends on dependable public information. The danger in an age of mass media is that information also can be misused to manipulate the public. All around the world, authoritarian rulers increasingly use media to “coerce” the consent of the governed. Our hosts today, the International New York Times, recently published a remarkable description of this phenomenon under the headline, “The Velvet Glove.” The power of a leader’s reasoning or the truth of his arguments, the report suggests, are often less 30

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important than his command of media influence. What results can be the illusion of democracy, but not its substance. No, our technologies alone will not save us. But neither need they ruin us. It is not the power of our tools, but how we use them that will determine our future. Among other things, this means prioritising the role of independent media, and indeed, of a multiplicity of independent voices. Demographic pluralism must be reflected in healthy media pluralism. I mentioned earlier my own involvement in the African media scene – as founder of the Nation Media Group. It was launched at the time of Kenyan independence, and for nearly six decades media independence has been its watchword – a sine qua non for democratic health. This leads me to my third observation. Government, while critical, can only take us so far. At a time of


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democratic disappointment, we must re-emphasise the immense potential of those non-governmental institutions that we call “civil society.” Too often, our thinking is trapped in a false dichotomy. We talk about the public sector and the private sector, but we often undervalue a third sector – that of civil society. Civil society is powered by private energies, committed to the public good. It draws on the ancient, classical link between democracy and the publicly-committed citizen. It includes institutions of education, health, science and research, embracing professional, commercial, labour, ethnic and arts organisations, and others devoted to religion, communication, and the environment. It seeks consensus through genuine consent. It can experiment, adapt and accommodate diversity. It can in the fullest sense be “of, by and for the people.” It can in the fullest sense be a remarkable support – but only on condition that is it sustained, accepted and encouraged by government. Finally, let me mention a fourth concern that underlies this entire discussion – the central importance of fostering a “democratic ethic.” At the heart of a democratic ethic is a commitment to genuine dialogue to achieve a better quality of life,

even across new barriers of distance and diversity. This means a readiness to give and take, to listen, to bridge the empathy gaps as well as the ignorance gaps that have so often impeded human progress. It implies a pluralistic readiness to welcome diversity and to see our differences not as difficult burdens but as potential blessings. One ultimate requirement for any effective democracy is the capacity to compromise. Social order rests in the end either on oppression or accommodation. But we can never find that balancing point – where the interests of all parties are recognised – unless competing leaders and their diverse followers alike, are committed to finding common ground. That common ground, in my view, is the global aspiration for a better quality of life – from the reduction of poverty to quality longevity – built upon opportunities that will provide genuine hope for the future. Democracy can only survive if it demonstrates – across the years and across the planet – that it is the best way to achieve that goal. *Adapted by his speech at the International New York Times “Athens Democracy Forum” on September 15th, 2015 - http://athensdemocracyforum.com/

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Democracy and the Revolution of Values By Athanase Papandropoulos*

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uring the last century, democratic governments and large corporations commanded respect and were regarded as leaders of society. But nowadays they have lost their gloss. People of the Western world, are living in democratic and peaceful societies, but everyday trust in government and the political process and businesses is declining. The financial crisis, government profile scandals, corruption and the apparent lack of accountability have led many to question the authority vested in organisations long regarded as the Establishment. In many parts of the world, today’s public –whether as consumers, employees, health service patients, or members of local communities– is more willing and more able than ever before to question what it is being told. Information about workings and failings of institutions is readily available alternative views. Values, the concepts people believe in, the standards they live by, and the views they hold and by which they measure others, are shifting. Business, as the principal motor for growth and development, is now firmly centre stage, bringing with it greater responsibilities and changing expectations of its conduct. As a consequence, it is increasingly in the spotlight and is open to the glare of public and media scrutiny. How a business acts

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in the light of those responsibilities, changing expectations and intensive scrutiny, is crucial of its on-going success. The institutions that have held power for many years are under increased scrutiny: who is leading whom in the 21st century, ant to what end? All around the globe people clearly express the view that the most important source of leadership for achieving national goals will come from government. However, there is a split between whether national goals should be focused on economic concerns or on social and environmental issues. In several parts of the world, opinion polls tests have defined this trend as a decline in deference to authority, which is attributed to a loss of trust in established institutions and organisations. This loss of trust is caused by a number of developments converging: *Traditional political parties no longer appear to reflect issues voters want tackled, *Institutions that are slow to respond to technological and social developments, s uch as shifts in attitudes towards feminism or the banking sector, may lose their relevance, *Values are shifting in many parts of the world in relation to the role of women in society. They are also changing with regard to discrimination against


SPECIAL REPORT race, gender, sexual orientation, age, and so forth, *Minorities are more assertive about their rights, and the perceived abuses of those rights, *Much of the media is new and international, making it easier for individuals to search out information for themselves. The effect of this is that it reduces the old inequality between experts and the general public, *Post-Cold War, the old ideological battles that kept people loyal (or normally loyal) to their respective authorities, have largely collapsed, *The end of communism and the move to more open, democratic societies has contributed to extra information being made available to many more citizens, especially as more of the media around the world has become free to report current events more accurately and provide a plurality of views and ideas, *As new information becomes available about the past lies, incompetence, and corruption of many totalitarian regimes, there is a backlash against authority, *Much of the media is new and international, making it easier for individuals to search out information for themselves. The effect of this is that it reduces the old inequality between experts and the general public, *There are now more educated people across the world,who think for themselves and can access and evaluate information from different sources, *As part of globalisation, the rapid rise of a global youth culture encourages more self-expression, with people conceiving, developing, and expressing their own ideas, *Greater affluence in emerging countries leads to greater choice and heightened expectations of standards of service. Once these higher standards are experienced in the private sector, expectations spread to the public sector and to newly privatised services. Independently of the financial crisis, this is a very important shift in consumers’ behavior.

Challenging authority The internet in particular allows individuals to find out more about institutional behavior and enables them access to information previously restricted to experts and those in authority. Patients, for example, can find the latest medical research written about their condition –perhaps even ahead of their own doctors. The result is a greater willingness of consumers to question decisions, rather than passively accept what they are told. It also makes them better equipped to argue with establishment figures and institutions. In Asia, for example, the internet is used to expose corruption and promote alternative political views, even in societies more used to deferential politics.

Governments used to keeping a tight control on traditional media have generally been almost powerless to prevent dissenting views being spread via web sites and e-mails. An old lop-sidedness in democracy (big business and big governments are better informed than individuals, so win most of the big arguments) is suddenly corrected. It used to be that executives and bureaucrats could assure small-fry citizens that problems have been analyzed, scientists consulted, safeguards put in place. Now citizens no longer need to accept those assurances helplessly. They can log on to the internet and check them with a few clicks of the mouse. In this new world order some NGOs have also emerged as the institutions the public feels that can be trusted. A survey**in the Western world found that NGOs are trusted two to one “to do what is right” compared to governments, media or corporations. According to the same surveys: *NGOs ranked significantly higher as a source of credible information than media outlets or companies on issues including: labor and human rights; genetically modified food; environmental and health issues. *NGO influence has increased significantly over the past decade, according to 64% of those surveyed. *NGOs such as Amnesty International, Greenpeace, Sierra Club, and World Wildlife Fund have greater credibility with the public than corporations such as Exxon, Ford, Microsoft, Monsanto and Nike. Greenpeace is viewed by 80% of US respondents as highly effective and the figure is 78% for Amnesty International. The consequence of a loss of standing for institutions –including business institutions– is that they can no longer expect automatic deference and trust. Trust and authority have to be constantly earned and re-earned, which requires a higher degree of accountability compared to that demonstrated by most today. I think that trust is a big challenge for democracy. *Athanase Papandropoulos is Chairman of European Business Review and Honorary International President of the Association of European Journalists **Human Capital Report – World Economic Forum

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The continuous Ideal and Challenge of Democracy By Rodi Kratsa*

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t is extremely important and inspiring that the Athens Democracy Forum: Enhancing Society through Better Governance was organised in Athens, democracy’s birthplace. It is an excellent opportunity to reflect what the testament of values of ancient Greece means for today’s society through the framework of the historic development and the modern challenges. It has been more than two thousand five hundred years since the birth of the first democracy in Athens and the world is still talking about it. This is because democracy is not something static. It is intertwined with the advancement of the homo as a political being, according to Plato, and the advancement of the society that it forms. There is no ideal or uniform system of governance. Certainly though, democracy is the highest and

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noblest form of organizing the human community. Its advantage is universally recognized and it constitutes an honest or a pretext goal for all countries who want to be accepted into the international community who aspirate for progress. All universal values, freedom, peace, diversity, inclusivity and equity, are recognized in the name of democracy. This is why these very complex issues were in the heart of the Athens Forum. It is important that these subjects are discussed within the framework of an international forum because within our interconnected world, the respect of those values in the name of democracy needs the mutual understanding of countries and their citizens and their collective responsibility.


SPECIAL REPORT

Democracy is not only the institutions or the electoral procedures. The key and very important element is to identify the conditions that are mandatory for democracy to function. In a democracy, the people themselves decide their luck and destiny, but to be able to make the proper and informed decisions for their future, it is mandatory that there be a calm political and social climate. Fanaticism and intensity damage and hamper the solution even of the easier problems. It makes the citizen incapable of thinking and coexisting. Besides being serene, each citizen needs to be educated to understand the complicated circumstances and challenges of the governance of their country in the modern world so that he may be able to use his vote to choose the most suitable to rule and not become a victim of demagoguery. The crucial political and economic developments in Greece reflect these serious concerns for the democratic governance of our country. The responsibility and the trust of the citizens and their rulers is the basic meaning for democracy. Aristotle said this: “The virtue of a citizen is the ability to be a ruler as well as to be ruled over well.” The state can protect the lives of its citizens and their property, as well as secure the conditions for justice, equality, information and education. The citizen, on the other hand, with his actions, is responsible for his freedom, which is intertwined with the respect of the freedom of others. Democracy requires, of course, responsible leaders who, not only in power but in the entire political system, respect for the role of the institutions, respect the transparency and the public control as a basic weapon against the abuse of power, and have the courage to speak the truth to the people and to disregard the potential political cost for the benefit of the common interest. While democracy is a better system than any other options, its weaknesses should trouble us. Even

in the most advanced democratic countries the citizens are not always predominant. There are cases where decisions are influenced by powerful centers (economic or media) while phenomenon of corruption are, of course on different levels, meet everywhere. These pathogenesis dissociate the citizens from the common interest, the political participation and the trust of the democratic system. The low percentages from the political and electoral participation are a dangerous consequence. The power of democracy though is the civic intervention, the change and the development. This is also our power and responsibility. This discussion, which has taken place in Athens, is very important during this time of great challenge for both the “democratically mature” countries and those that require a successful transitional phase toward democracy. We should take under great consideration that the biggest fortification against religious and every other form of fundamentalism is the strength of democracy, which is what the extremes are hostile toward. There should not exist a delay in the process of democratization and the respect of human rights based on different “excuses”, cultural stereotypes or ideologies. New challenges exist as well for the democratic governance at an international level. In the European Union our countries live in this constant process, attempting to function as a democracy by assigning power to a supranational system. Certainly the discussions for democracy will continue, we will follow them and participate with great interest and motivation. The Institute for Democracy Konstantinos Karamanlis is dedicated to the research on these challenges in our country, in Europe and in the international level as well as the promotion of democracy as the unsurpassed eternal means for peace, justice and prosperity. *Rodi Kratsa is President of the Institute for Democracy Konstantinos Karamanlis. She was Member of the European Parliament (1999-2014) and Vice President of the European Parliament (2007-2012)

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MARKETS

Five keys to connecting with China’s wired consumers By Cindy Chiu, Todd Guild, and Gordon Orr*

C

hina is the world’s largest and most dynamic e-commerce market. But being successful requires understanding and embracing its unique digital landscape and consumers. China’s annual online-retail sales passed those of the United States in 2013. By 2018, they are estimated to reach about $610 billion—passing Europe and the United States combined. Yet though the market is vast, succeeding in China is far from easy. While select leading Western companies have captured some of the country’s explosive e-commerce growth, many make basic mistakes, from equating China’s e-commerce leaders with US companies (“Alibaba is China’s Amazon!”) to assuming selling and distribution practices from home markets are transferable. The reality is that China is simply different. As a point of comparison

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for consumer and retail companies, we regard the combination of the size of the prize and the degree of change needed to succeed as roughly analogous to what consumer-packaged-goods companies experienced in the late 1980s when Walmart changed the consumer game. Understanding China’s e-commerce market starts with knowing its online consumers and companies. First, there are more than a dozen multibilliondollar players shaping parts of China’s digital marketplaces, ranging from JD.com (a crosscategory e-tailer) to VIP.com (a fashion-focused discount e-tailer). Engaging with just one of these important platforms isn’t enough—they are interrelated, and you need to work with several. Second, no strategy can ignore the country’s three digital powerhouses: Baidu, the largest search


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engine; Alibaba, proprietor of the largest online shopping mall; and Tencent, the leader in gaming and social networking (see sidebar, “Understanding BAT”). While each may appear as though it plays in a different arena (search, e-commerce, and social, respectively), in reality, the companies compete more directly with one another. Through organic and acquisitive growth, each has a role throughout the online consumer’s decision journey: generating demand, finding and comparing local merchants, moving customers from consideration to making a purchase, paying, and then reviewing or telling a friend and building loyalty.

Five keys to digital commerce in China Perhaps it’s no wonder that creating a complete digital-commerce strategy in China can seem excessively complex when viewed through the lens of practices in other economies. Yet the effort is worth it. Each of China’s digital players is a crucial partner, capable of connecting brands with hundreds of millions of new customers. In our experience, mastering the country’s e-commerce landscape is a journey specific to an industry and a company. We recommend strategies that incorporate the following five priorities.

Adopt an integrated platform strategy Retailers know that e-commerce platforms can compensate for limited physical-store networks. This is especially applicable in China, where our research shows consistently that up to 70 percent of Internet users shop online regardless of the size the cities in which they live, despite significant differences in Internet penetration (which averages 86 percent in Tier 1 cities, compared with 52 percent in Tier 3 cities).1 Yet advanced consumer companies in China don’t just sell online through their own sites. They use a variety of digital platforms, typically managing a flagship store on Tmall and selling through cross-category players such as JD.com and category-specific sites such as VIP.com. It’s an approach international players have evolved to adopt. Even British luxury brand Burberry now has a flagship digital store on Tmall, giving it access to traffic beyond its usual customers by virtue of being on the broader platform.

Understand China’s vast network of distributors Managing distributors in the digital space in China is different than in the West. The country’s e-commerce

market is filled with small distributors who have opened online shops through Tmall or Taobao, Alibaba’s consumer-to-consumer platform embraced by millions of small businesses and entrepreneurs. While consumer to consumer is declining as a percentage of China’s total e-commerce market, it still accounts for about 50 percent of China’s e-commerce sales. That makes it a critical platform for companies, even if sites such as Taobao present challenges for global brands. That’s because brands have little control over how products are presented or priced: anyone with a Chinese identification number can set up shop on Taobao, and the site has become a haven for counterfeiters, as well as for parallel importers—who purchase genuine foreign products meant for sale in other countries but bring them back to China for resale (often without paying import duties). In addition, excess inventory from large retailers or their sales forces also serves as a major source of authentic products on Taobao, sold at significant discounts. While Alibaba has strengthened measures to purge pirates from Taobao, we’ve also seen multinational corporations evolve their approaches. At first, many battled rogue distributors with a variety of “get tough” measures, ranging from lodging official trade complaints to using computer chips and bar codes to track down inventory leaks. Yet practices involving “carrots” as well as “sticks” are more effective. Several large consumer companies, including Kimberly-Clark, have instead proactively identified and partnered with their largest local distributors on Taobao, providing them with store certificates, stable product supply, and select product prelaunch benefits. In return, Kimberly-Clark asked distributors to comply with its branding and pricing guidelines, for example.

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Harness the power of social media Brands have found social media especially important in China. Chinese consumers do not trust official sources, such as government and big corporations, and as a result, their purchasing decisions are influenced much more by word of mouth. In fact, two-thirds of China’s consumers cite recommendations from families and friends as the critical factor influencing their decision to buy, compared with only one-third of consumers in the United States. What’s more, we regard China’s social-media-platform leaders as more attuned to commerce and opportunities to work with brands and retailers than their US counterparts—none more so than China’s dominant social-media player, Tencent, which evolved its WeChat messaging service from a platform for social networking to one for customer relationship management, commerce, and payments. Xiaomi, for example, used WeChat to manage both product-launch buzz and sales. And since Hanting Hotel, a local midprice hotel chain, began providing virtual membership cards through WeChat, it has recruited more than 500,000 members and realized 62,000 room bookings. In parallel, WeChat is rapidly evolving its commerce services. Our recent iConsumer survey found that 15 percent of WeChat users have made a purchase through the WeChat platform, and 40 percent are interested in doing so in the near future. Many brands are adding WeChat commerce functionality into their official WeChat accounts.

Leverage China’s growth in location-based services China already has more mobile Internet users than PC Internet users. Our research shows that almost two-thirds of Chinese consumers have made mobile purchases, and mobile commerce is predicted to surpass PC commerce in 2016. Not surprisingly, as mobile grows exponentially, so will location-based services that make online-to-offline transactions evermore important. China is rapidly becoming a market where the consumer shopping experience integrates social media, location-specific information, and mobilepayment capabilities on smartphones. For example, mass chain player Pudding Hotels uses WeChat’s “people around me” function to proactively recommend its hotels to users based on their location—a service that generated more than 10,000 WeChat-enabled bookings within three months of launch.

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We are finding that winning brand-building and e-commerce strategies increasingly require leading-edge capabilities to partner with digital platforms in social media, location services, and mobile marketing (“SoLoMo”) and, ideally, mobile commerce and payments.

Work with platforms to understand China’s consumers Need to know more about your potential customers? Brand owners and retailers can uncover consumer insights by collaborating with digital-platform businesses in China. Consider P&G, China’s biggest digital advertiser, which has partnered with Baidu to develop multichannel advertising campaigns for its products. In reviewing search patterns for P&G’s Olay skin-care products, for example, Baidu analysts determined that many users were framing their queries in ways that suggested a strong connection between concerns about skin care and aging. P&G used those insights to devise an advertising campaign built on the idea that Olay products could help older women “hold on to age 25,” a message that resonated strongly with Chinese consumers. Similarly, a diaper player worked with business-toconsumer e-commerce player Dangdang to identify pregnant women entering their third trimester and issue relevant coupons. Working with China’s e-commerce providers to codevelop consumer insights can benefit brand owners, retailers, and platform companies—and help strengthen a company’s relationship with China’s e-commerce players beyond being purely transactional. Global brands will not maximize their digitalcommerce potential in China solely with practices and formulas that have worked for them at home. In fact, success may require unlearning what you know to understand how to operate across China’s multiplatform e-commerce environment. Finally, the country’s landscape is still evolving quickly. Aside from the principles above, being alert to new channels and new business models and being ready to adapt early is also essential to future success.

*Cindy Chiu is an alumnus of McKinsey’s Shanghai office, where Gordon Orr is a director; Todd Guild is a director in the Tokyo office.


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Huawei Unveils the Mate S: A Smartphone that Revolutionises Touch Technology The Huawei Consumer Business Group unveiled the Huawei Mate S smartphone, the new flagship product in Huawei’s Mate series of mobile devices.Its ergonomic, luxurious design and innovative technology deliver a premium Android experience that surpasses industry expectations once again. “Our goal in designing the Huawei Mate S was to develop a smartphone that offers a personalized experience, rather than a commoditized one,” said Richard Yu, CEO of Huawei Consumer BG. “The Huawei Mate S is based on insights we gathered about human interaction – most notably that touch is a natural action we take to understand our world. The Huawei Mate S redefines how we incorporate touch technology into our smartphones, breaking through the conventional way of touch screen control and ushering in new imagination for humanmachine interaction.”

The beauty of a curved surface: innovative design from inside out Building on the revolutionary Huawei Mate 7 smartphone, the Huawei Mate S features a 2.5D floating screen lens and a 5.5 inches screen. It is 7.2 millimeters thick, with side edges that are just 2.65 millimeters. The arched back fits perfectly into the palm of a hand, while its curved surface features solid pressure and weight, making the phone less likely to be dropped. With the AMOLED screen, Huawei Mate S presents a perfect curve.

Revolutionary controls redefining user experience The phone is equipped with Fingerprint 2.0, an upgraded version of the advanced chip level

security and one-key unlock technology in the Huawei Mate 7. Fingerprint 2.0 improves recognition speeds by 100 percent, with more accurate selflearning functions. It can also be used to control the notification bar, double-click to erase unread notifications, slide to preview pictures, and hold and take phone calls. All of these options improve the one hand operation of the phone.

A camera designed for beginners and professionals The professional camera mode allows manual adjustment for ISO, exposure compensation, exposure time, white balance and focusing, and functions such as the grid, and flash-assisted focusing. The real time black and white filter mode provides multiple levels of density and real-time intensity adjustment.

Technology that adapts to every environment The Huawei Mate S takes regular recording functions to the next level by creatively implanting three microphones that support Huawei’s smart direction algorithm. The Huawei Mate S’ beamforming algorithm allows all three mics to focus on the sounds coming from where the phone is facing, enabling a clear recording with minimal background noises.

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ENTREPRENEURSHIP

What Europe really needs is a single market for entrepreneurs By Albert Bravo Biosca*

We often ask ourselves where are Europe’s Google and Microsoft, or for that matter new European high-tech start-ups that dominate world markets. Very rarely do we ask ourselves “Where is Europe’s Starbucks?” Yet the one simple answer to all of these questions is that Europe does not provide a good environment for start-ups to grow and challenge incumbents. ‘Creative destruction’ is what ultimately drives economic growth, and Europe doesn’t have enough of it. We have a much larger share of ‘static’ companies that neither grow nor shrink compared to the U.S., and very few of our largest companies are young. In other words, Europe is a great place for doing business, but only if you are an oldestablished incumbent. Imagine an entrepreneur who would like to set up a coffee retail chain in all 28 EU member states. It has to face 28 different legal regimes, tax rules, business registration requirements, labour legislations, commercial laws, judicial traditions and bankruptcy regulations. No wonder European coffee retail chains are mostly national, and haven’t really tried very hard to cross borders. Yet coffee shops are an industry where, compared to the U.S., Europe arguably had a competitive advantage. 40

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It’s an example that highlights a common problem with European business regulation. It is excessive in some regions or areas, often very complex and it’s tilted in favour of incumbents. And of course it’s different from one EU country to another, even if harmonised. Dealing with 28 different jurisdictions may be no more than an annoyance for large multinationals, but it can be an insurmountable barrier for innovative smaller companies. Let’s instead consider an alternative: Creating a new, separate, optional and fully-fledged 29th regime for Europe’s new companies. In other words, a single market for entrepreneurs. The building of Europe’s single market has so far combined two different approaches: full harmonisation, in which countries agree on a common set of rules, even if implementation varies in practice, and the country of origin principle, in which a business


ENTREPRENEURSHIP that complies with its home country legislation can operate anywhere else in the EU. The 29th regime would therefore represent a third way between these two approaches, and would overcome some of the pitfalls that hamper both. It has already been used to create the single European patent, and it underlies current attempts to create an EU-wide corporate tax system (the common consolidated corporate tax base) and a single legal form for SMEs (the unsuccessful European Private Company – SPE). Yet rather than tackle each domain separately, it is now time to be more ambitious and build a comprehensive 29th regime that encompasses all forms of business regulation. A single market for entrepreneurs, sitting alongside the 28 national regimes without replacing them, would give new start-ups the option, but not the obligation, to operate under the same set of simplified rules and procedures across the EU. At the same time, it would preserve member states’ rights over issues like tax rates or employment rights. There would be 3 levels of regulation in this 29th regime. Domains like bankruptcy legislation would be fully harmonised. In others definitions and processes would be unified, but countries would be free to set their own parameters (e.g., a harmonised tax base but freedom to determine the tax rate). In other domains, countries would have absolute freedom to impose additional regulation, but on condition that entrepreneurs can access it and comply with it through a common EU-wide online platform. The principle would be simple; no entrepreneur operating under this 29th regime could be forced to comply with any regulation if they were unable to do so through this online platform. Fitting existing rules and regulations for businesses across Europe into an EU-wide online one-stop shop

may sound a nightmare, yet if business regulation has become so complex that even full-time bureaucrats can’t simplify it, then it must be far too complex for entrepreneurs to comply with. The solution is therefore a radical simplification. Freeing entrepreneurs from regulations not covered by this new platform creates a de facto sunset clause for all existing forms of regulation. It changes the default, forcing governments to rewrite and update current rules, provided they are still needed. Creating an EU-wide online platform would not only encourage simplification but also transparency. It would provide real-time data for all jurisdictions on all the rules and procedures in place, as well as the time it takes to comply with them. It would, in short, be a much more fine-grained and up-to-date version of the “Doing Business” ranking published by the World Bank, which by raising awareness and creating a degree of competition has been very effective in encouraging behaviour change among governments. The launch of a single market for entrepreneurs would not be a small undertaking. There are, though, three powerful reasons that make it crucial. First, it will reduce the fragmentation of Europe’s internal market, which is hampering long-term economic growth. Not only is it still very difficult for European entrepreneurs to take full advantage of the EU’s potential market of 500m customers, it is also difficult for companies from different countries to work together, because regulation and its enforcement are fragmented along national lines. For instance, enforcing a contract if a cross-border collaboration fails may mean recourse to another country’s courts, with all the complexities and costs this involves. A 29th regime that incorporates regulation and enforcement would make it easier for companies to work with international partners, and to undertake the relationship-specific investments that underpin innovation. The 29th regime would also create a much less fragmented market for business services providers, from IT to accountants to lawyers, leading to more services innovation and improved solutions. The new EU-wide regime would also facilitate the development of pan-European financial intermediaries, and so boost cross-border investment, since at present business angels, venture capital and specialised mezzanine finance providers need to make substantial efforts to understand how the local regulatory environment, from taxation to bankruptcy procedures, might impact their returns. EUROPEANBUSINESSREVIEW

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The second reason for the 29th regime is the urgent need to address the competitiveness differences that have been at the core of the Eurozone crisis. Europe’s banking union is a crucial step, but the currency union will not be sustainable if southern and northern economies still diverge in the long term. The high barriers to growth that southern European companies face keep them small and hamper productivity growth. One of the commonalities that Spain, Italy, Portugal and Greece share is the comparatively small size of their companies. Some of the reasons for this are cultural, but their regulatory framework is an important one as well. The strains imposed as part of the Eurozone crisis are instructive. While some of the structural reforms imposed on bail-out countries by the EUIMF-ECB Troika could be implemented relatively quickly, institutional inertia risks hampering growth-enhancing reforms in many other areas, particularly once the spotlight shifts away. After all, asking these countries’ elites to reform is like asking Sir Humphrey, the devout permanent secretary in Yes, Minister, to reform the civil service. Once the minister leaves the room nothing happens. The Troika’s missions to Greece have often ended with a similar frustration. This is why starting from scratch with a parallel regulatory regime may be easier than trying to fix existing ones. Therefore, rather than putting all our hopes on the willingness and ability to reform of governments 42

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in southern Europe, it would be better to offer entrepreneurs an opt-out option: a 29th regime that frees them from the burden of their countries’ inefficient regulatory framework, allowing them to thrive while also putting additional pressure on governments to reform, since with choice comes competition. The prize would be the sustained improvement in the competitiveness of southern European economies that would in turn contribute to the long-term sustainability of the euro. The 29th regime could be part of a grand bargain, trading increased support for southern economies now in exchange for accepting a 29th regime, a more credible commitment than vague promises of reform. There is a third reason why creating a 29th regime could be highly beneficial: the opportunity to rethink how business activity is regulated as well as how this regulation is implemented and enforced. It would open the door to the creation of a new system adapted to the 21st century, not one inherited from the 19th century as we have today. The single market for entrepreneurs outlined here offers an ambitious vision whose spirit is to make it easier for start-ups to thrive, to help close Europe’s north-south divide, and to underpin longterm growth in Europe. The new EU Commission should put the creation of this single market for entrepreneurs at the core of its growth agenda. *Senior Economist at Nesta


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The Foolhardy Quest for a European Google By Sami Mahroum*

With the increasing globalisation of businesses and their supply chains European policy-makers should take a second look at where the real value lies.In a recent article in The Wall Street Journal, it was said that every time California-based Apple sells an iPhone, Japan-based Sony, the world’s largest supplier of image sensors, makes a profit. Sony is not the only Japanese company to benefit from the sales of Apple products; every time Apple sells an

iPad device, Toshiba, which makes the hard-drive for the iPads, generates revenues too. In fact, according to some calculations, Apple captures only 30 percent of the direct value generated from the sale of one iPad.2, and while this makes it the biggest beneficiary of the product’s sales, Korean companies LG and Samsung come second. While there are many ‘enabling technologies’, that EUROPEANBUSINESSREVIEW

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allow third parties to innovate and design solutions that benefit from the sales of an end product, not all beneficiaries are connected to the products’ design and manufacture. TomTom, the Dutch satellite navigation company providing Apple with its maps, also turns a profit every time an iPhone or iPad is sold. Similarly Skype, another Europebased company that is part of US-based Microsoft, now has its fortunes tied to the sales of Microsoft products. Gaming companies like Rovio, Supercells, create value indirectly through the sales of U.S., Korean and other mobile devices; Alcatel, Ericsson, Nokia and Siemens all continue to make money from the sales of mobile devices, even if they no longer manufacture the devices themselves; And UAEbased Mubadala, which owns GlobalFoundries, a semi-conductor company with 13,000 employees across three continents, makes money every time its chips are loaded onto computer devices, regardless of their country of manufacture. These examples are manifestations of two increasingly dominant and complementary developments. Firstly, as technology-driven competition intensifies, large high-tech companies ironically become more supplier-dominated. In these industries big dominant companies grow to benefit from economies of scale and, in due course, become more productionintensive. Secondly, while these companies continue to generate their own process and design innovations, they also grow bigger in their dependence on external sources of technology and innovation suppliers. The latter makes it necessary for companies to look outside to source new knowledge and technologies from around the world, subsequently globalising their supply chain. As these supply chains become more integrated, with supplier-producers beginning to codesign and co-develop the necessary components, they become value-adding chains. Today, such global value chains tie the economic fates of countries and regions together. A recent paper by Amador and Cabral notes that global value chains are a phenomenon that “cannot be perfectly understood under the classical concept of comparative advantages applied to countries and broad sectors�. From an industrial policy (or innovation policy) perspective the most relevant question then is, what should be done to maximise the integration and contribution of local economic agents to global value chains?

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Benefits of integrating into global value chains Some companies have grown so big that they now represent global value chains to a greater extent than mere domestic firms. Companies like Apple, Google, and Microsoft are like football clubs, affiliated with certain places, but composed of different nationalities. The smaller supplier companies that make up a significant part of their global value chains come from different countries and play an equally, if not more important, role in sustaining the competitive edge of the larger companies. Policymakers concerned with the economic competitiveness would do well to think of ways to increase the integration of their regions into global value chains, rather than aiming to create homegrown ones. This is particularly relevant outside the United States, especially in Europe, where the unrelenting desire of European policymakers to create European Googles and Apples has eclipsed the enormous success the continent has already had plugging into emerging global ICT value chains while preserving traditional home-grown global value chains in automotive, chemicals, pharmaceuticals, aviation, and luxury products. In fact, Europe has been doing rather very well in the division of labour along global value chains. According to the European Tech Exits Report, in 2014 alone, there were 385 European high-tech exits totaling 80


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billion euros, with US companies Google, Facebook, and Microsoft as the top acquirers (37 percent of total acquisitions). The biggest acquisition was made by Google, of UK-based tech company DeepMind. Germany and Britain represented the bulk of the exits, which comes as no surprise given that they are two of the three largest economies in the EU. Adopting a global approach to economic competitiveness should promote a different view of the performance of European high-tech start-ups which, through their acquisition by international players, are already successfully integrated in global value chains and operating as conduits for value capture for their home locations. As European businesses cannot compete internationally on the basis of cost or economies of scale, Europe’s best bet is on small to mediumsize, knowledge-intensive, specialised supplier companies. Policy thinking therefore needs to adapt to the new reality of economic performance. Locations are no longer home bases, but points of integration in global assembly lines.

New pillars of competitiveness From a locational perspective, a greater emphasis is therefore needed on identifying new pillars of competitiveness. In some places, these pillars will be the cost of doing things, in others they will be the convenience of living and working, or the caliber of institutions, workforce, and infrastructure,

or the prowess of the creative talent; or simply the presence of a particular legacy community of users or producers of some sort. These five pillars, which I refer to as the 5Cs in my forthcoming book: The Black Swan Start-Up: Understanding the Success of Technology Business in Less Likely Places (Palgrave MacMillian, March 2016), can individually, collectively, or configured in multiple formations, generate what some have called a place surplus. This surplus can be accrued in the form of a cost saving, the convenience of business operations, superb caliber, unique creativity, and/or community embeddedness. So why try to recreate new world-class football clubs when you can have many of your players play on some of the best teams in the world? Technology firms are more like football clubs than national football teams. If you want to beat the competition, send your players to play on top teams. As the last world cup showed, Brazilian football is more famous for its individual brilliance than for its collective team. In the technology business, the situation is increasingly the same. Top automotive, space and ICT companies depend on the brilliance of component suppliers from around the world.

*Sami Mahroum is Academic & Executive Director of INSEAD’s Innovation and Policy

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TRENDS

To Succeed at Crowdsourcing, Forget the Crowd By Henning Piezunka*

The vast majority of crowdsourcing efforts fall flat, because companies don’t do enough to cultivate individual contributors. When it comes to crowdsourcing and open innovation, we only ever seem to hear success stories. To be sure, the statistics can be impressive: Dell, for example, claims its IdeaStorm community website has fielded nearly 24,000 ideas since its 2007 launch, more than 550 of which were deemed good enough to act upon. Numbers like these would seem to indicate that there’s a world of innovative ideas out there for just about any company to tap into. But crowdsourcing has two dirty little secrets. The first is that a flood of ideas does not necessarily equate to greater innovation potential. That’s because companies tend to favour more easily actionable - i.e. less innovative - ideas as contributions pile up. As it turns out, however, that’s a problem available only to a lucky few. The second secret is that the

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majority - by which I mean 90 percent or more - will likely struggle to garner consistent feedback of any kind, let alone an overwhelming response. Looking at the performance of a broad cross-section of companies rather than just the successes, we can see how difficult it is to extract any value at all from crowdsourcing. To make it work, companies must concentrate not on the “crowd” but on developing reciprocal relationships with individuals.

The truth about crowdsourcing For a recent research paper we were able to lift the curtain on crowdsourcing thanks to an unusually rich dataset from a leading provider of online suggestion-capturing software. The data tracked a year’s worth of activity for 23,809 organisations that had installed the software, both suggestions received from external contributors and how


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organisations responded. The results were sobering. Only the top one percent managed to generate an average of approximately one suggestion per day. The rest performed much worse. Organisations in the 90th percentile received fewer than 30 suggestions over the entire year. The bottom half on the performance scale - a group almost 12,000 strong - barely elicited any participation at all.

Paying attention pays off It appears that companies’ baseline experience of crowdsourcing is not success but failure. Providing external contributors with the means to interact is far from a guarantee that they will. Perhaps blinded by the promise of innovation on the cheap, most organisations that build crowdsourcing initiatives lack a clear strategy for starting the flow of ideas. We found, on the whole, that the better performers in our sample were much more generous with their time and attention than the empty-inbox majority. And they didn’t wait until the campaign had gotten going to jump in but were visibly engaged during the crucial early stages. They took it upon themselves to start the conversation as well as to sustain it with a consistent flow of attention.

Proactive and reactive Specifically, we found that there are two kinds of attention that were important in this process: proactive and reactive. Proactive attention is when organisations become active contributors themselves and submit suggestions for community feedback. This shrinks the dividing line between organisational insiders and outsiders, acclimating external contributors to a back-and-forth that welcomes all pertinent ideas. It also gives the community a selective peek behind the scenes of the organisation’s decision-making, which may demystify it just enough that people feel their own contributions would be valued. This is most important in the early, most tentative stages of the campaign, when contributors are perhaps more comfortable responding to someone else’s ideas than posting their own. Reactive attention is the responses organisations give to suggestions from external contributors. This could be as extensive as actually implementing a suggestion and announcing it publicly, or as simple as saying “thank you” for the suggestion. More attention

paid is generally better for encouraging participation, but even a small response is better than none at all. Responding to suggestions proves the politeness of the organisation and makes contributors feel “heard”. It also may embolden lurkers to contribute by showing them what sorts of suggestions the organisation most values. Responding to first-time contributors makes more of a difference than responding to established ones. Having no prior experience to go on, newcomers are particularly receptive to their treatment by the organisation. Paying special attention to them helps stave off the insularity that characterises so many user forums on the internet. As with the proactive kind, reactive attention has the greatest impact early on in a crowdsourcing initiative. Unfortunately, most organisations do exactly the reverse: they are willing to invest only after the initiative reaches a more critical threshold.

Forget the crowd With all this in mind, we can perhaps conclude that crowdsourcing is misleadingly named. When it does add value, that value comes not from the agglomerated wisdom of the community but from real relationships formed with individual contributors. Cultivating these relationships takes serious time and effort. Organisations that decide to venture into open innovation should first make sure they have the necessary resources ready to devote to the process right from the outset. Remember, the early stages are the most decisive. However, our study suggests that even if everything is done right, many if not most attempts at crowdsourcing will wither and die, success stories notwithstanding.

*Henning Piezunka is Assistant Professor of Entrepreneurship and Family Enterprise at INSEAD

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MANAGEMENT

How to Stay in Business through a Disaster By Gilles Hilary and Steve Mintey*

Disaster can strike at any time. While crisis manuals are lengthy, they should have three key pillars. On 11th March 2011, the public announcement protocols gave Kazunobo (informally known as “Kaz”) and his investment banking team approximately one minute of advanced warning before the magnitude 9 earthquake whose epicenter was some 450km away began to shake his Tokyo office. For Kaz a swaying office was by no means unusual but he was now experiencing the largest earthquake to hit Japan since records began. One which shifted the country’s main land mass 8ft to the east and jolted the earth on its axis by as much as 25cm. The significant damage to the country caused by these violent tremors was soon eclipsed by the destruction brought by the ensuing tsunami. 48

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The wave, sometimes reaching 40m tall, washed more than 10km inland killing 16,000 people and displacing more than 200,000. 4.4 million households were left without electricity and 1.5 million without water. The Fukushima nuclear reactor melted down. When the severity of the Fukishima disaster became apparent Kaz’s thoughts turned to the safety of his colleagues. Tokyo’s 35 million residents were suddenly all at considerable risk and many wanted either to evacuate the city or stay at home with their families. Tokyo, however, is the centre of the 3rd largest economy on earth and home to the largest stock exchange in Asia. To pull the shutters down on the city’s banking industry would have been unacceptable to many firms doing business in or through Japan and would have been catastrophic for the nation’s recovery from this disaster. As difficult as it is to acknowledge amidst so much destruction; the show must go on. For many, having robust operations which can


MANAGEMENT

withstand disruption and continue to offer uninterrupted service is a significant business differentiator. For Kaz’s investment banking division, deploying robust Business Continuity Management (BCM) or not is the difference between maintaining a licence to trade or having it revoked.

Facing the unpredictable Kaz had realised long ago that the “it won’t happen to me” fallacy was a dangerous one. Sure, you may feel you understand the risks from within your business (although again that’s a dangerous assumption) but it’s the unpredictable which you should worry about. Of the ten most common causes of disruption to technology firms in 2014, five were natural ranging from hurricanes to floods to fires i.e. half of the risk to business outage was un-forecastable. Yet, studies indicate that 48 percent of business owners have no continuity plans and 75 percent of those companies fail within 3 years of having faced a disaster. As a business leader Kaz understood his responsibilities well. Critical functions had been identified and maximum allowable outages had been estimated. Thus, he knew where to focus his attention. By testing his firm’s BCM protocols every quarter he knew the drill well and, more importantly, he knew his staff knew the drill too. A good Business Continuity Plan (BCP) marries the priorities and requirements of all stakeholders. Staff are kept safe and well cared for and clients can trust in the ability of a firm to get back up and running in an acceptable time frame.

Continuity planning While subtly different from industry to industry and even business to business a BCP will center around a handful of key characteristics. Firstly, it should include staff. An efficient and swift communication broadcast is of paramount importance. The town is flooded, travel is impossible, how do you let your staff know whether the office will open and if so in what state? However, even the most robust communication systems will be strained in times of crisis. It is important that employees understand their responsibilities should the unexpected occur whether that’s a mouse gnawing through the mains power supply or the fourth largest earthquake of all time crippling an entire country. The second pillar is technology. Very few businesses operate free of a reliance on computing and connectivity. How do your service providers ensure that you won’t suffer lengthy outages? What happens when transcontinental undersea internet connections

are severed? Third is disaster recovery. Most firms will have an alternative site agreed from where they can operate a skeleton staff should the usual place of business be knocked out. Logistics, stock management, postal services are usually taken for granted, but if your BCP doesn’t provide for how these would work in an unusual situation they could be debilitating to your business. Luckily for Kaz’s business, he was able to calmly invoke the processes which had been so frequently practiced. Key processing staff were quickly relocated to the offices in Hong Kong and Singapore. Clientfacing staff chose either to work remotely from home or from the recovery site 60 miles outside of Tokyo. Telephony support, group email accounts, local systems access etc. were all opened up to colleagues in neighbouring countries. Clients knew that the Bank would be under pressure but didn’t experience any adverse impact.

Anticipate, prepare and weather the storm Expect the unexpected and be prepared. For the 7,900 businesses in the greater New Orleans region that went out of existence after Hurricane Katrina, the advice came too late. Plan for a rainy day, sometimes quite literally. The New York Stock Exchange shut down for two straight days in the aftermath of Hurricane Sandy when the contingency plan proved too complex to execute. Anticipate, build robustness and practice. Beware the coming storm. *Gilles Hilary is an INSEAD Professor of Accounting and Control and The Mubadala Chaired Professor in Corporate Governance and Strategy. He is also a contributing faculty member to the INSEAD Corporate Governance Initiative. Steve Mintey is the Director of Operations for Corporate Banking in Asia at Barclays Bank Plc and an INSEAD EMBA.

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6 Tips On How To Make Smart Business Decisions

It can be a little stressful when you have to make important decisions regarding your business and career. Making the right decisions is critical and this can create a lot of anxiety. As a result, here are 6 tips on how to make smart business decisions when you are on the job.

1. Get All The Facts: Gather all of the facts and necessary information that impacts your business. This is important, because you do not want to miss critical information that could make a difference in how you run your business.

2. Focus On The Results: Think about what you want and consider the possible outcomes of your decision. A person needs to focus on the shortterm and long-terms goals regarding every aspect of their company. Looking for ways on improving how your company does business will go a long way in accomplishing your business goals and mission statements. 3. Ask Around: It is important to consider other viewpoints other than your own, so get advice from your friends and business peers. For example, a good technique is to talk to your important business colleagues and managers to get their opinion on how to manage your business. Asking for advice can save you a lot of trouble down the road. 4. Learn To Relax: Do not try to do everything all at once and when things get hectic stop what you’re 50

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doing and take a 5 minute break. Take a few deep breaths and try to do something that will make you feel more relaxed such as taking a walk or listening to the radio. You will feel better and gain a fresh perspective on your current situation.

5. Learn From Your Mistakes: If you make an incorrect business then the next step is to learn from your mistakes and go from there. Learn what you did right and learn what you did wrong. For example, your company decides on a sales and marketing plan for a certain product, however you don’t get the expected results in terms of sales and customer satisfaction. When this happens, learn what went wrong and use this knowledge the next time you market your other products. 6. Stay The Course: Managing your own business involves a series of ongoing business decisions. Don’t put off important decisions, and don’t worry about your past mistakes — just keep focusing on what is best for your company. To determine the best outcome for your business, always listen to your customer needs. Making the right business decisions does not have to be stressful.


European Business Review (EBR)  

issue 03/2015

European Business Review (EBR)  

issue 03/2015

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