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Special Report:

EU Affairs:

The World:




ISSUE 1 - 2013 / YEAR 17th • PRICE € 10,00 / $ 12,00

Europe means

fair compromises!

Konstantinos C. Trikoukis

Chairman Athanase Papandropoulos

Publisher Christos K. Trikoukis

Editor in Chief N. Peter Kramer

Editorial Consultant Anthi Louka Trikouki

Issue Contributors George Friedman, Mario Draghi, Jorg Asmussen, Nathalie Tocci, Dimitar Bechev, Antonis Zairis, George Stamatis, Justin Fox, Julia Harrison, Miklos Dietz, Jose Antonio Ocampo, Radu Magdin, Wytze Russchen, John A. Allison

Correspondents Brussels, London, New York, Paris, Berlin, Istanbul, Athens, Helsinki, Rome, Prague

Commercial Director Fanis Kasimatis

Advertising Director Nikos Parisis

Public Relations Margarita Mertiri

Financial Consultant Theodoros Vlassopoulos


EMG Strategic Communications Ltd. 38 Princes Court, 88 Brompton Road, Knightsbridge SW3 1ES, London United Kingdom T: +44 (0) 20 3582 7381 ISSUE 1 - 2013 / YEAR 17th Published bimonthly by EMG Strategic Communications Ltd. under the license of Christos K. Trikoukis. European Business Review trademark is a property of Christos K. Trikoukis. European Business Review is strictly copyrighted and all rights are reserved.



04 EDITORIAL Editorial, by N. Peter Kramer, editor in chief



Bringing Turkey back to the EU debate A New Philosophy of Development for Europe...

12 EU AFFAIRS Connecting Agendas - A global drive for women



An interview with Mr. John Karagiannis, Management Consultant of Panos Germanos Group of Companies

16 THE WORLD Minister David Lin: “Taiwan will not back down over Diaoyutai Islands� Europe in 2013: A year of decision



Belgium a golden opportunity for UK business

23 SPECIAL REPORT Banking and Finance



Investing in 2013 - Rediscovering Romania Representing e-commerce in Europe Trade Commissioner De Gucht on collision course with China

44 COMMUNICATION Secrets of Social Media Revealed 50 Years Ago

46 INTERVIEW An interview with Georges Ranunkel, Managing Director & Founder of ARTFLOOR


50 LAST PAGE The Financial Crisis and the Bank Deregulation Myth

Reproduction without official permission of the publisher is strictly forbidden. Every case is taken in compiling the contents of that magazine, but we assume no responsibility for the affects arising therefrom. The view expressed are not necessarily those of the publisher nor of the European Business Review magazine.

For previous editions archive and up-to-date information on major topics and events you may visit our website


“ We are prepared to talk about British wishes” by N. Peter Kramer, Editor-in-Chief

A week after British Prime Minister David Cameron delivered his EU speech, the first Pavlovian reactions (“We will roll out the red carpet for the UK to leave the EU” said a French cabinet minister!) made place for more considered ones. The most important was from German Chancellor Angela Merkel: “Europe always means that fair compromises have to be found… we are prepared to talk about British wishes. But you always have to keep in mind that other countries have different wishes too. Therefore we will talk intensively with the UK about their vision in detail”. Czech Prime Minister Petr Necas said, “We share the view with the United Kingdom that Europe should be more flexible, more open, should strive more for confidence among its citizens”. A week after he said that Cameron’s speech was a strong one with good reform ideas, it was interesting to see the Dutch Liberal Prime , Mark Rutte’s next move. In a joint letter to the Dutch parliament with the Socialist Finance Jeroen Dijsselbloem (successor of the Luxembourger Jean-Claude Juncker as President of the Eurozone!) he reiterated the Dutch coalition government’s agreement call for countries to be given the formal right to opt out of individual EU policy areas such as Schengen or the Eurozone, or from the EU altogether. The letter follows Rutte’s intervention at the World Economic Forum in Davos, where he said that in terms of rules and legislation the EU “is a bit like ‘“Hotel California”, you can check out but you can never leave” adding that “you can never repatriate tasks to the national level”.



A recent poll shows that 59% of the Germans believe that an UK exit would be damaging for the EU and also that 49% of the Germans believe that the EU is heading in the wrong direction with only 20% who see the EU on the right track. Leading German papers are cautious but receptive, the tone is moderate. The Frankfurter Algemeiner Zeitung (FAZ) started saying that the “emotional rejection to Cameron’s speech proves that he hit the bullseye with his warning on the development of the EU”. A few days later the FAZ correspondent in Brussels argues that “the British are the first people that will redefine their place in the EU. Others will follow”. Die Welt wrote that Cameron is only the first to voice the necessity of establishing a new relationship between the Euro Zone and

non-Euro Zone. Mrs Merkel now knows what to do and to say to win the elections in September! What about the UK itself? Polls show a rebound to the Conservatives following Cameron’s referendum pledge if reelected in 2015. The boost of 5% comes mostly at the expense of UKIP, the anti-European party that was gaining support during the last months. Also business leaders in the UK endorse Cameron’s EU policy. In a letter to The Times, 56 industry and London City leaders have welcomed the Prime ’s promises of a negotiation followed by an “in-out” referendum within 5 years. It is “good for business and good for jobs in Britain”, they say. “We need a new relationship with the EU, backed by a democratic mandate”, they argue. It looks like the FAZ is right: Cameron didn’t miss the bullseye!

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Bringing Turkey back to the EU debate by Nathalie Tocci and Dimitar Bechev*

Shunned by the EU with membership talks effectively blocked, Turkey feels empowered. It is no longer on the European periphery, but at the centre of its own world, argue Nathalie Tocci and Dimitar Bechev.


the face of it, the euro crisis has infused yet more alienation into the already detached relations between Turkey and the European Union. Many Turks look at the trouble-stricken and enfeebled Union with an overt sense of Schadenfreude. And they relish at their country’s robust growth. Shunned by the EU with membership talks effectively blocked, Turkey feels empowered. No longer on the European periphery, but at the centre of its own world spanning from North Africa and the Middle East all the



way to the Balkans, the Caucasus and Central Asia. The Arab Awakening seemingly vindicates this vision. But, as of late 2012, turmoil in Syria has exposed the limits of Ankara’s influence. Indeed now Turkey has turned to NATO allies for support. These twin crises present an opportunity too. It is precisely from the depths of the Union’s ongoing drama that a “post-hubris” Turkey could be brought organically into the conversation on the future of Europe. The current drive at deeper integration in the eurozone leads the Union towards a multi-tier arrange-


ment. Could such a development facilitate Turkey’s inclusion in the EUto-be and revive its Europeanisation and democratic consolidation? Much depends on EU’s own evolution. We see three scenarios: EU of concentric circles, a daisy-shaped EU and a spaghetti bowl Union. According to Scenario 1, the eurozone federalises huge chunks of economic and fiscal policy, the outer circle of members would continue to participate in the single market. Turkey may join the company of current members such as the UK, the Czech Republic, Poland and Sweden, as well as future entrants from the Western Balkans. The likes of France and Germany will soften their opposition to Turkey, safe in the newly built core. Such a scenario, however, is not unproblematic. Fellow outer-circle members, from Poland through Romania and Bulgaria all the way to the Western Balkans, may consider Turkey as deadweight, permanently relegating them to the EU’s periphery and curbing their aspirations to converge with the prosperous and well-governed the core. Poland would like to be in the firstclass carriage, together with France and Germany. Turkey, for its part, while happy with retaining sovereignty, may also resent not sitting at the top table. The day Turkey discovers that it is handed down decisions on economic issues by the eurozone, it may well regret the bargain. Europhiles in Turkey will perhaps be unhappy too as Brussels’ transformative pressure will be diluted on the outer reaches of the Union. A second option is a daisy-shaped EU: an integrated core with hub-andspoke relationships with the “outs”. European Parliament member Andrew Duff foresees the growingly

eurosceptic UK drifting away from the EU to settle for a deal echoing the partial integration of countries such as Norway and Switzerland. Unsurprisingly, Turkey is cast as a member of that cohort of “associate” or “virtual members” too. It would adopt only part of the acquis and be admitted as observer in most EU bodies. In external and internal security policies, cooperate via intergovernmental deals, not Brussels’ supranational institutions. But such an arrangement would differ little from the “privileged partnership” advocated for years by Europe’s centre-right critics of Turkish membership ambitions. Furthermore, as associate partners would pick and choose from EU laws, adherence with Europe’s underlying values would be partial. The end result: Turkey’s reforms risk remaining largely off-track. In the multiple-cluster, “spaghetti bowl” EU, there would be two cores. As argued by Timothy Garton Ash, a rare europhile amongst today’s British commentators, a federal eurozone focused on economic affairs would be twinned a foreignpolicy caucus where the UK could still play a leading part. Turkey would surely fit well in the second core as well: It would give it first-class status without having to sacrifice highly prized national sovereignty. Yet presently this model appears least likely to materialise. It is complex, opens tough institutional questions, and plants the seeds of daunting turf wars in Brussels. A more tightly-knit eurozone will have all the incentives in the world to federalise external relations too. Splitting economic policy from foreign affairs is utopian insofar as much of what the EU does in global politics is an extension of its market

power at home. One thing is obvious: the UK holds the key to how Turkey’s relations with the EU will shape. Membership in the outer rim that excludes Britain would most likely be snubbed by Ankara. All scenarios have their pros and cons, but what matters is whether Turkey’s status results from imposition or choice. To make relations work more smoothly and limit the negative fallout from Europe’s mid-term evolution, policymakers in Brussels and national capitals should factor Turkey into their discussion. For Turkish élites to take the initiative and in so doing being actively part of the European family is of the essence too. Realistically, the government in Ankara is unlikely to take up the initiative. They have other priorities, from Syria to the Kurdish issue at home, and would not easily take risks bearing the “privileged partnership” stamp. Rightly so. But it is up to think tanks, academics, civil society, and public intellectuals to pay closer attention to the EU’s internal transformation and work out the implications for Turkey. Bringing in Turkish voices into the debate would create a genuinely political process and contribute to a pan-European public space, which the accession process so badly lacks. Above all, engaging Turkey in the conversation on the future of Europe could provide a vision to reignite momentum in Turkish-European ties and re-anchor Turkey to the Union.”

* Nathalie Tocci is deputy director of Istituto Affari Internazionali (IAI) in Rome. Dimitar Bechev is senior policy fellow and head of the Sofia office at the European Council on Foreign Relations.




A New Philosophy of Development for Europe... by Α. Ζairis, PhD on Economic Sociology G. Stamatis, Business Development Consultant

A new philosophy of development In today’s rapidly evolving global environment characterized by the increasing participation of various actors in development and demanding reasonable and effective use of natural resources (food, energy), Europe is called out to apply a strict control policy of resources, changing its economic and productive model in a fair and sustainable manner. Even though European choices are oriented towards the right direction according to the Lisbon Treaty and the Council of Europe decisions for 2010, fiscal discipline should also be based on policies that lead to sustainable development and employment, in order to be fruitful. Development can occur only on the basis of investments that render European companies competitive and focus more on exports than on internal consumption, while reducing the cost of energy and raw materials, making full use of information technology, optimizing and spreading the society of knowledge, reinstating the purchasing power and fighting against phenomena of social, environmental and currency “exclusion”.

The opportunity that must not be lost... The gradual increase of the citizens’ per capita income in emerging economies creates tremendous possibilities for Europe to export products and quality services. The European advantages of technology, quality, advanced cervices and cultural goods will be



widely and decisively optimized only within the framework of a new common European strategic choice. But, without the clear and concise indication of the European Union’s intention to start this new and different phase of development, there is a high risk of missing out on the opportunity to successfully integrate European economy in the new cycle of world economy. It is necessary for Europe to be integrated in the new world economy without being restricted to closed national contexts and petty interests. If this is what will happen eventually, all Europeans will profit much more! A related example is research (especially in new energy sources), which, when limited to national level without being included in one European context, results in huge loss of resources but also in huge reductions of relevant national budgets on research, due to the current situation.

The new development plan! As a consequence, if is of vital importance to launch a clearly defined European Plan for the economy and the development of the European Union, along with the cooperation of all economic and social bodies of Europe. This Plan will balance the needs for development, competitiveness, environmental sustainability and social justice.


The investment framework of this Plan must be based on its own resources, since we know that the era of development based on loans, to the detriment of others, is gone for good. Knowing that the model of horizontal reduction of wages and of insurmountable taxation has actually failed, (thus not of rationalized reduction where demanded), the new European budget must be based on resources that do not dominate over society, healthy entrepreneurship and economic activity, such as: • Tax on financial exchanges • Tax on carbon dioxide • The new European Value Added Tax (VAT) • The European bond The tax on financial exchanges will shift, if only partially, the burden of socially unfair taxation on nonexperts and temporary work to financial revenue. The tax on carbon dioxide will push the economic system to choices of environmental sustainability and it will also be imposed on products imported by areas that have not adopted such environmental measures yet. But, given the fact that the main goal of the Plan is investment recovery, it is crucial to predict important financial interventions, even with deferred disbursement, by virtue of issuing bonds, with the participation of the European Central Bank (ECB). Those interventions deal with the creation of a “capital fund”, which is to keep ownership of investments made, aiming at disposing of resources to new generations, even with deferred efficiency. Two factors, though, that will lead to a healthy and general development will have to be taken into account: 1. The Plan must also contain regions that are directly connected to the EU, due to geographical proximity, especially to the Mediterranean countries that have known considerable development in terms of their political, economic and social level. 2. In order to secure as much transparency and effectiveness in use of resources as possible, it is indispensable to predict in all cases, wherever possible in research for energy resources as well, the activation of special programmes and, in specific cases, of various entities responsible for the use of funds.

The optimistic perspectives... During its previous enlargement cycles (Common Market, Unified Market), Europe created fifteen million new employment positions. With this new Plan, we believe that at least twenty more million employment positions will be created.

Indicative factors are encouraging: 1. T he investments predicted in this new Plan should reach 300-500 billion Euros, which will be granted in 3-5 years. 2. At the finishing stages of the Plan, the EU will possess a fund whose growth could equal at least the double cost of the investment, thus securing abundant support for the new generations. 3. By virtue of the financial exchanges tax, 30-40 billion Euros of added resources to the European budget will be reclaimed, in order to provide sufficient funding for research credit and for the “Fund” that was created by the Commission in 2006 to come up against difficulties which resulted from adaptation to the labour market within the context of globalisation. Thus, the EU budget is to come close to the limit of 1,27%, which was agreed between Member States. 4. In order to issue the Eurobond or warranties by the EU, the tax on carbon dioxide must be imposed, because it could bring revenue reaching at least 50 billion Euros per annum, so as to pay it back. This tax, in order to support the investment plan in its initial stages, is perfectly justified also by the fact that the tax itself will be gradually reduced, while the European economy, in accordance with the suggested Plan, will use energy resources that do not produce carbon dioxide.

A vision for future generations! More specifically, the “Capital Fund” could support the inclusion of Europe’s youth to the labour market, on the basis of training to eliminate professional insecurity, as well as the creation of institution of “professional practice through exchange” for young people who are part of the labour market after having completed their studies, building also on the experience from programmes including the likes of “Erasmus”... If insurmountable difficulties with the participation of all states occur, the possibility of including a group of states by applying the rules for enhanced cooperation should be predicted, especially as far as the Eurogroup and the states that want to participate in the Plan are concerned, as is already predicted in the recent “Euro Plus” proposals presented by the German government as regards competitiveness. As a consequence, apart from the obvious social and economic results of this new Plan, which is part of the European federalist philosophy, we, as Europeans, will start to revive the unity culture, thus creating Europe’s core again, which is in danger of being lost.




Connecting Agendas - A global drive for women European Commissioner Viviane Reding spearheaded the proposal to initiate quotas for the representation of women on company boards which was adopted on November 2012. The initiative has triggered intense reactions and debate has only just begun.

by Julia Harrison*

that counts and b) the recognition and rewards are limited. Look at this study on leadership from the Women’s Forum and how the attitudes of young women change after just 2 years in the workplace.


urope’s fragmented situation was the starting point of the proposal which sets out the introduction of a 40% quota on boards to be attained by 2020 by publicly listed companies. 11 countries have already taken legislative action for a broader female representation on boards, France, Italy and Belgium amongst them, but others have no measures in place. While the proposal has not yet been discussed by the European Parliament, which tables amendments and gives its consent, a list of 8,000 ‘board-ready women, completed in conjunction with some of Europe’s leading academic institutions, is already up and running on LinkedIn.1 Commission figures announced by Commissioner Reding 25 January show progress: the share of women on boards in publicly listed companies has increased to 15.8%, up from 13.7% in January 2012. Of course it is important to redress the imbalance and get more women in positions of power and decision-making. However, the board discussion, whilst important, risks narrowing a much wider issue. We mustn’t take too narrow a slant. Wider issues need to be addressed, starting with a different balancing act. In 2012, international women’s day was dedicated to the inequalities between the salaries of men and women. The principle of ‘equal pay for equal work’ has a long way to go and whilst MEPs urged the Commission to reconsider an existing regulation that should guarantee equal opportunities and equal treatment for both sexes, the latest figures show that women earn on an average 16.4% less than their male counterparts.2 In the current debate we are sending signals to our young women that a) it is all about boards and that is the career path



The current economic situation in Europe is making matters worse, especially for women given the higher temporary or part-time nature of many jobs. Currently there is an ongoing legislative procedure in the European Parliament regarding the impact of the economic crisis on gender equality since 2008 the employment rate of women has decreased significantly. The plenary session is scheduled to vote in March. Looking at the economy from a different angle In 2012 The Women’s Forum for the Economy and Society ran a session with speakers from think tanks, business and NGOs looking at what sorts of innovative government, business and civil society partnerships could be brought to bear to foster economic growth in Europe.

Julia Harrison, FTI Consulting and Dominic Reiniche, president Europe Coca Cola at the 2012 Women’s forum.


A wider more complex debate

Creating long-term solutions

But should our thinking only be limited to European women at work? The answer is ‘no, not only’, internationally other grave questions arise. These are often linked to the deplorable financial, political and societal circumstances in which women can find themselves but also to conflict, health and education. These topics are too wide ranging and complex to attempt to more than touch on them here but it is interesting in Europe how the women’s diversity agenda is often considered so separately from the wider issues that women face. One rare opportunity to mix the agendas and hear genuinely diverse perspectives and passions from women coming from many different backgrounds, geographies and life circumstance is at the Women’s Forum for the Economy and Society, Women from all continents are brought together to this common platform each year to explore issues ranging from business, through arts to science, each from a female perspective. Organised in Deauville, the Women’s Forum does not lose sight of what is happening across the world. Topics for the Forum over recent years have included Education; post conflict regeneration; and microfinance. For example: In the developed world, discussions focused on the available possibilities for experienced and highly-educated women, however in the developing world gender disparity prevails from primary school onwards. The achievement of universal primary education and the closing of the gender gap are two of the UN ‘Millennium Development Goals’ that were set for 2015. Education remains a key priority for developing countries as statistics show more girls stay out of schooling than boys this, partly due to poverty and to the rural area they live in.3 The UN recognised in 2000 that war impacts on women and children more severely than on men. Additionally, women are left out of the peace process that follows such a conflict situation. Recognising this gap, NATO appointed Mari Skare4 as the ‘Special Representative for Women, Peace and Security.’ In January 2013, they published the second annual report on its activities in the field of empowering women in conflict situations to the benefit not just of women but to the recovering society as a whole.5 In 2012, after sessions in prior years on post conflict growth, the Women’s Forum looked at linking these agendas in a lively discussion on building social cohesion in international businesses to create growth. Cisco, Sodexho and Renault and Chartis lead the debate and showed its relevance to sectors from ICT to Insurance, from catering to automotive.

Whether looking at board participation or issues in developing countries building long term solutions is essential. Take the experience around women’s businesses in African communities – often the only support system available. CARE International, one of the largest humanitarian and development-oriented NGOs, runs the Village Savings & Loan Associations program. The program concentrates on women because they are “the cornerstone of Africa’s economic development” as they produce the majority of food and their financial competency creates long lasting opportunities for entire families and communities. CARE offers financial know-how which is vital for people before they seek financial services from formal institutions.6 Business education is also part of the ‘10,000 Women’ initiative which provides its services to women in Africa, Asia and the Americas. The program, launched by Goldman Sachs in 2008, is based on the premise that investment in education can create GDP growth. Rather than offer money it provides courses, ending with local certificates and reinforcing with skill the entrepreneurial spirit amongst participating women.7 “Diversity” has to be more than a Western buzz word for business. Women’s issues and inequalities issue transcend our latest narrow obsession with board places and cross all spheres in society. Let’s hope that more connections between these agendas are made through the latest push to get women on boards. Women have to ensure that women on boards result not just in commercial benefits for companies brought by more diverse teams but that those newly empowered, help business play its role in addressing the wider injustices and inequalities for women around the globe. * Julia Harrison is Senior Managing Director FTI Consulting Brussels and was a member of the founding board of the Women’s Forum 1. 2. 3. 4. 5. 6. cares-releases-report-on-state-of-microfinance-in-africa.html 7. about-the-program/summary-doc.pdf




“ We believe in the underlying strength of Greek entrepreneurship and in the prospects of the Greek economy!” an interview with Mr. John Karagiannis, Management Consultant of Panos Germanos Group of Companies

Olympia Development is a holding company that operates as a hub for various investments, focusing mainly on telecoms and retail sector, with strong presence in emerging economies. How did you manage to develop such a flexible business model that allows you to grow continuously in the last 19 years of your international presence? Olympia Development is a 100% Greek business Group controlled by the businessman Panos Germanos, holding a leading place in the Greek market. From 1980 as its starting point the Group has steadily maintained an upward course of robust business growth, both locally and abroad. Under a technocratic management and a charismatic leadership the Olympia Development Group has to showcase a dynamic differentiated portfolio, successful strategic alliances, and 5.000 jobs in Greece and abroad. Key to the Group’s positive and profitable course has been the management’s ability for creating capital gains and spotting high-profit investment opportunities, via strategic partnerships, acquisitions and sell offs. Our management team is characterized by deep knowledge of the local and emerging markets, by speed in decision making and management, taking reasonable risks and seeing timely and exploiting market opportunities. In the end of 2012 you did a major capital increase, of 100 million euros, for further investments in Greece. At a critical period for Greece, where most of the local businesses are accused of transferring their capital abroad, what is the concept behind this decision? With an unwavering confidence to the Greek markets’ prospects the Olympia Development Group, despite the gloomy forecasts and the adverse financial environment, preceded in November 2012 with an investment of €100 million through a Share Capital Increase. On a financial perspective, we believe in the underlying strength of Greek entrepreneurship and in the prospects of the Greek economy. A pre-requisite for inward investment has to be investor confidence. In order for Greece to become more attractive for foreign investments, Greek businessmen




should be the first to invest and inspire confidence in others and create a positive financial climate. On a business perspective, this move will allow us to further strengthen our market position and to build strong foundations over the next five years. Through recapitalization, the Retail branch will now come as a whole – both operationally and institutionally – under the Group’s umbrella, gaining new momentum and a higher ability to benefit from the opportunities emerging from the crisis. This will help carry out investments in the store network and will also help to reduce unemployment in Greece since PUBLIC brand is growing rapidly in terms of retail outlets and is creating new jobs all over Greece. At the same time, the capital increase announced will reduce the financial leverage of the Retail branch.

What is the role of banks when taking such important decisions for further investment? Certainly banks are more satisfied when they confront businesses with solid growth and strong shareholder involvement and may be more positive in future company’s planning’s However, during this period the role of banks is not what it once was. We would like to see Greek banks closer to companies with a significant extrovert profile, like Sunlight which is exporting 98% of its products to 100 countries around the globe. According to “Informa Telecoms Report”, your telecoms operator in Poland “Play”, was ranked 1st for market growth in Europe. What are the challenges and the opportunities when dealing with the broader European business environment? We have been working in Eastern Europe almost through our foundation and through this experience we managed to single out Poland, as a large local market that combines two distinctively positive aspects: on the one hand it is a large populated market and thus has huge growth potential, but at the same time they have strong European thinking. It is also crucial to mention that during times of crisis, it is the only country that never went into recession. Generally in the EU there is the trend of consolidation around the major Operators. The challenge is that we purposely go against this. Large groups have the

expertise and the volume of products, while we bring the entrepreneur knowledge, offer expertise to the consumer, flexibility and speed in decision making. The outcome through our presence shows that our strategy is of great value to the end costumer, who is the one to make the choice at the end of the day. Recently -in the 1800 MHz tender, Play winning 60% of the tender among all operators that submitted in the bidding process. This proves Play’s key position on the market as the major engine of industry’s development and pro-consumer policy.

How are EU regulations and directives affecting your strategy? How do you monitor them? Do you think that your “voice” is heard when comes to EU institutions? As it is well known, the telecommunications market is regulated. Wherever we operate we work close with the local authorities, in order to develop our positions and present our own perspective around business activation and customize our strategy where and if needed. Also, on a European level, there is an organization established, that represents the emerging telecommunications companies and through it we have a significant voice and stable presence in the EU institutions in Brussels. We consider that we have a “strong” enough voice through appropriate channels, however as I mentioned before there is the tendency for large consolidations in the field of telecoms. Is Olympia Development also operating outside Europe? Besides Greece, the Group’s international presence extends to Poland and Cyprus, through two mobile telephony operators, PLAY and MTN Cyprus– two companies regarded as references for business growth in Europe, as, during the last five years, they have been posting the highest market growth in their local telecommunications markets. As we have recently announced, our strategy is to invest the profits from PLAY and MTN to the Greek market. Moreover we are operating outside Greece through SYSTEMS SUNLIGHT S.A., which is ranked among the world’s top manufacturers of industrial and defence batteries, the company is exporting 98% of its products to 100 countries around the globe, and is a key supplier of the naval forces of 25 foreign states.




Minister David Lin: “Taiwan will not back down over Diaoyutai Islands” by N. Peter Kramer

A major territorial dispute is brewing in the East China Sea. The Republic of China (Taiwan) is committed to a peaceful resolution because at the heart of the dispute are islands that belong to Taiwan according to Taiwan. These islands are known as the Diaoyutai Islands. Taiwan’s proposal: the East China Sea Peace Initiative. The resolution of the sovereignty issue will take time, but there are steps we can take immediately to reduce tension and foster peace. On August 5, 2012, Republic of China President Ma Ying-jeou proposed a two-stage East China Sea Peace Initiative based on the concept that while sovereignty is indivisible, resources can be shared. Therefore, the Peace Initiative calls upon the parties concerned, People’s Republic of China, Japan and Taiwan, to replace confrontation with dialogue, shelve territorial disputes through negotiations, formulate a Code of Conduct in the East China Sea and engage in joint development of resources. Peaceful resolution of disputes, according to President Ma, is generally achieved in one of the four ways: negotiation, mediation, arbitration, and litigation. These approaches are not necessarily mutually exclusive, but must all begin with negotiation. He mentioned two stages. The first one is to shelve territorial disputes through meaningful dialogue and the second one to share resources through joint development. President Ma said: ‘we can move from three parallel tracks of bilateral dialogue (between Taiwan and Japan, Taiwan and the Chinese mainland, and Japan and the mainland) to one track of trilateral negotiations.

Tensions rise in the East China Sea. While tensions are more and more rising in the region, Taiwan’s Foreign Minister David Lin reiterated recently that the Diaoyutai Islands are the inher-



ent territory of Taiwan and added that his government ‘will not back down on any sovereignty issue’. He made clear the fact that sovereignty is different from administrative control over the territory and added that the US also acknowledge the existence of the disputes over the island group and that it wishes for regional peace and stability. This is according to Minister Lin completely in line with the wishes of Taiwan. Minister Lin also said that Taiwan wishes to conduct negotiations with japan over fishing rights in the disputed area. He added that the Foreign Ministry is still working on having a second round of preparatory fishery talks with Japan.


Europe in 2013: A year of decision by George Friedman*

If the Europeans do not generate that sort of solution to the financial crisis in 2013, it is time to seriously doubt whether a solution is possible and therefore to think about the future of Europe without the European Union or with a very weakened one, argues George Friedman.


he end of the year always prompts questions about what the most important issue of the next year may be. It’s a simplistic question, since every year sees many things happen and for each of us a different one might be important. But it is still worth considering what single issue could cause the world to change course. In my view, the most important place to watch in



2013 is Europe. Taken as a single geographic entity, Europe has the largest economy in the world. Should it choose to do so, it could become a military rival to the United States. Europe is one of the pillars of the global system, and what happens to Europe is going to define how the world works. I would argue that in 2013 we will begin to get clarity on the future of Europe.

The question is whether the European Union will stabilise itself, stop its fragmentation and begin preparing for more integration and expansion. Alternatively, the tensions could intensify within the European Union, the institutions could further lose legitimacy and its component states could increase the pace with which they pursue their own policies, both domestic and foreign.


The embattled European project It has been more than four years since the crisis of 2008 and about two years since the problems spawned by 2008 generated a sovereign debt crisis and a banking crisis in Europe. Since that time, the crisis has turned from a financial to an economic crisis, with Europe moving into recession and unemployment across the Continent rising above 10%. More important, it has been a period in which the decision-making apparatus created at the founding of the European Union has been unable to create policy solutions that were both widely acceptable and able to be implemented. EU countries have faced each other less as members of a single political entity than as individual nation states pursuing their own national interests in what has become something of a zero-sum game, where the success of one has to come at the expense of another. This can be seen in two ways. The first dimension has centred on which countries should bear the financial burden of stabilising the eurozone. The financially healthier countries

wanted the weaker countries to bear the burden through austerity. The weaker countries wanted the stronger countries to bear the burden through continued lending despite the rising risk that the loans will not be fully repaid. The result has been constant attempts to compromise that have never quite worked out. The second dimension has been class. Should the burden be borne by the middle and lower classes by reducing government expenditures that benefit them? Or by the elites through increased taxation and regulation? When you speak with Europeans who support the idea that Europe is in the process of solving its problems, the question becomes: What problem are they solving? Is it the problem of the banks? The problem of unemployment? Or the problem of countries’ inability to find common solutions? More to the point, European officials have been working on this problem for years now, and they are among the best and brightest in the world. Their inability to craft a solution is not rooted in a lack of good ideas or the need to think about the problem more.

It is rooted in the fact that there is no political agreement on who will pay the price geographically and socially. The national tensions and the class tensions have prevented the crafting of a solution that can be both agreed upon and honoured. If the Europeans do not generate that sort of solution in 2013, it is time to seriously doubt whether a solution is possible and therefore to think about the future of Europe without the European Union or with a very weakened one. If, however, Europe does emerge with a plan that has general support and momentum behind it, then we might say that Europe is beginning to emerge from its crisis, and that, in turn, would be the single most important thing that happens in 2013. At this point, a reasonable person will argue that I am ignoring the United States, which has different but equally significant economic problems and is also unable to generate consensus on how to solve them, as we have seen during the recent “fiscal cliff� affair, which will have many more iterations.




But as valid as the comparison is on the financial level, it is not valid on the political level. The United States does not face the dissolution of the republic if it follows contradictory policies. The United States is more than two centuries old and has weathered far worse problems, including the Civil War and the Great Depression. The European Union is only about 20 years old in its current form, and this is its first significant crisis. The consequences of mismanaging the U.S. financial system are significant to say the least. But unlike Europe, the consequences are not an immediate existential threat.

The other costs of the crisis It is the political dimension that has become the most important, not the financial. It may well be that the



European Union is in the process of dealing with its banking problems and might avoid other sovereign debt issues, but the price it has paid is both a recession and, much more serious, unemployment at a higher rate than in the United States overall, and enormously higher in some countries. We can divide the European Union into three categories by measuring it against the U.S. unemployment rate, which stands at about 7.7%. There are five EU countries significantly below that rate (Austria, Luxembourg, Germany, Netherlands and Malta). There are seven countries with unemployment around the U.S. rate (Romania, Czech Republic, Belgium, Denmark, Finland, the United Kingdom and Sweden). The remaining 15 countries are

above U.S. unemployment levels; 11 have unemployment rates between 10 and 17%, including France at 10.7%, Italy at 11.1%, Ireland at 14.7% and Portugal at 16.3%. Two others are staggeringly higher - Greece at 25.4% and Spain at 26.2%. These levels are close to the unemployment rate in the United States at the height of the Great Depression. For advanced industrialised countries - some of the most powerful in Europe, for that matter - these are stunning numbers. It is important to consider what these numbers mean socially. Bear in mind that the unemployment rate goes up for younger workers. In Italy, Portugal, Spain and Greece, more than a third of the workforce under 25 is reportedly unemployed. It will take a gen-


eration to bring the rate down to an acceptable level in Spain and Greece. Even for countries that remain at about 10% for an extended period of time, the length of time will be substantial, and Europe is still in a recession. Consider someone unemployed in his 20s, perhaps with a university degree. The numbers mean that there is an excellent chance that he will never have the opportunity to pursue his chosen career and quite possibly will never get a job at the social level he anticipated. In Spain and Greece, the young -and the old as well- are facing personal catastrophe. In the others, the percentage facing personal catastrophe is lower, but still very real. Also remember that unemployment does not affect just one person. It affects the immediate family, parents and possibly other relatives. The effect is not only financial but also psychological. It creates a pall, a sense of failure and dread. It also creates unrooted young people full of energy and anger. Unemployment is a root of anti-state movements on the left and the right. The extended and hopelessly unemployed have little to lose and think they have something to gain by destabilising the state. It is hard to quantify what level of unemployment breeds that sort of unrest, but there is no doubt that Spain and Greece are in that zone and that others might be. It is interesting that while Greece has already developed a radical right movement of some size, Spain’s political system, while experiencing stress between the centre and its autonomous regions, remains relatively stable.

I would argue that that stability is based on a belief that there will be some solution to the unemployment situation. Its full enormity has not yet sunk in, nor the fact that this kind of unemployment problem is not fixed quickly. It is deeply structural. The U.S. unemployment rate during the Great Depression was mitigated to a limited degree by the New Deal, but required the restructuring of World War II to really address. This is why 2013 is a critical year for Europe. It has gone far to solve the banking crisis and put off a sovereign debt crisis. In order to do so, it has caused a serious weakening of the economy and created massive unemployment in some countries. The unequal distribution of the cost, both nationally and socially, is the threat facing the European Union. It isn’t merely a question of nations pulling in different directions, but of political movements emerging, particularly from the most economically affected sectors of society, that will be both nationalist and distrustful of its own elites. What else can happen in those countries that are undergoing social catastrophes? Even if the disaster is mitigated to some degree by the shadow economy and emigration reducing unemployment, the numbers range from the painful to the miserable in 14 of Europe’s economies.

Europe’s crossroads The European Union has been so focused on the financial crisis that it is not clear to me that the unemployment reality has reached Europe’s officials and bureaucrats, partly because of a growing split

in the worldview of the European elites and those whose experience of Europe has turned bitter. Partly, it has been caused by the fact of geography. The countries with low unemployment tend to be in Northern Europe, which is the heart of the European Union, while those with catastrophically high unemployment are on the periphery. It is easy to ignore things far away. But 2013 is the year in which the definition of the European problem must move beyond the financial crisis to the social consequences of that crisis. Progress, if not a solution, must become visible. It is difficult to see how continued stagnation and unemployment at these levels can last another year without starting to generate significant political opposition that will create governments, or force existing governments, to tear at the fabric of Europe. That fabric is not old enough, worn enough or tough enough to face the challenges. People are not being asked to die on a battlefield for the European Union but to live lives of misery and disappointment. In many ways that is harder than being brave. And since the core promise of the European Union was prosperity, the failure to deliver that prosperity - and the delivery of poverty instead, unevenly distributed - is not sustainable. If Europe is in crisis, the world’s largest economy is in crisis, political as well as financial. And that matters to the world perhaps more than anything else.” * George Friedman is founder and chief executive officer of Statfor, a Texas-based global intelligence company.




Belgium a golden opportunity for UK business by EBR

“Belgium may not be as well known in the UK as some other global markets, but it is an open and dynamic export market, and the most globalised country in the world according to the Swiss institute ETHZ. The country of 11 million people with three official languages is the UK’s 6th largest trading partner in the world, with UK exports worth £12.7bn in 2012 - more than India and China put together”,according to the British Chamber of Commerce in Belgium.


ompact, close and affluent, Belgium is a great starting point to build business across all of Europe. It’s just over two hours by Eurostar from London to Brussels or a short and hassle free hop from the wonderful London City Airport to Antwerp. “It is an ideal place for the first time exporter and a great stepping stone to the rest of Europe” says Jonathan Brenton, HM Ambassador to Belgium, “English is widely accepted, and there are quick and easy communications and connections with the UK and the rest of mainland Europe”. Belgium: a marketplace full of opportunities As a market place, Belgium is full of opportunities, especially for small and medium-sized business. Belgians value good life and place a premium on non-price factors such as design, quality, delivery, and after sales service. British exports to Belgium powered ahead by 9% over the past year, the highest increase for any EU market. Key sectors include chemicals, ICT, renewable energy and healthcare. With a turnover of € 37 406 million in 2010 employing some 72,000 people within over 5,000 companies, the Belgian food & drink industry is one of the pivot industries in Belgium. Belgium is also the second largest per capita producer of food & drink products. In spite of the crisis the Belgian food industry has grown by 6.2%. Because of its openness large international companies see Belgium often as a good



test market for their products. The Belgian life sciences sector includes over 250 companies and 24,000 people. All segments (fundamental research, manufacturing, clinical development, in vitro diagnostics, medical and diagnostic devices) are well represented. Most of these companies are active in pharmaceuticals and healthcare, but also in agro-biotech and industrial biotech there are companies with strong expertise. And it’s not just British goods that do well here but a whole range of high value business and financial services. British experts and companies are leading players in legal and accounting services, creative & media, and also the public affairs and public relations business in Brussels. A Cushman & Wakefield study on the leading European cities for business put Brussels in 4th position, behind only London, Paris and Frankfurt (“European Cities Monitor”, 2010). Belgium consistently ranks within the world’s top five nations in terms of imports and exports per capita, and thanks to its central European location and multi-lingual workforce, is Europe’s number one distribution location. As well as being an attractive and open market in its own right, it is a great starting place to develop business across the rest of Europe. Belgium has excellent connections across Europe, but particularly with its close neighbours Britain, France, Germany, the Netherlands, and Luxembourg. Antwerp is the second largest port in Europe, with a huge global reach, while the port of Oostende provides rapid access to inland Europe via well developed infrastructure. The port of Oostende also has specialist facilities for heavy duty bulk cargo, meaning they can meet all of your shipping needs. Chamber’s partnership with UK Government United Kingdom Trade and Investment (UKTI) and the British Embassy already provide expert assistance to British exporters and now the British Chamber of Commerce in Belgium (the fastest growing British Chamber in Europe!) is working with them to launch new trade initiatives for UK companies. “The Chamber’s partnership with UK Government is a great example of how business can work with the public sector to provide a better joined up service for UK businesses” says Glynis Whiting, President of the British Chamber in Belgium. More info: Contact: Ms Joanna De Keyser, Business Development Executive,


SPECIAL REPORT: Banking and Finance‌ by N. Peter Kramer, Editor-in-chief, European Business Review

In this EBR Special you can find optimistic opinions about the future of the Euro by Mr. Draghi and Mr. Asmussen, both high ranked European Central Bank officials. Mr Allison, President and CEO of the Cato Institute, writes that the financial crisis is caused by governments and not by bankers.

Interesting! The future of banks in Eastern Europe and of the role of the World Bank, two articles with an important view. We advise you to keep this EBR Special new style; and to read the articles once more, later!




A central banker’s perspective on European economic convergence Over a period of many years, the EU has provided an unprecedented framework for successful regional integration. The process of integration has involved not only the creation of a common market and the harmonisation or coordination of several economic policies, but also the conduct of some of these policies at a supranational level. by Mario Draghi, President of the ECB




central pillar of the EU’s institutional architecture has always been the principle of subsidiarity. This is the rule that action shall only be taken at the supranational level if the objectives to be pursued cannot be sufficiently achieved by EU members, either at the level of central government or at the regional and local level. While we should continue to preserve the principle of subsidiarity, the recent challenges for the euro area have provided us with a major institutional lesson: maximising the benefits of the single currency

requires not only a strong ECB; it also requires additional strong common institutions. We need strong institutions to guarantee competitiveness and to encourage sustainable growth; to guide fiscal policies and ensure fiscal sustainability; and to supervise and stabilise the single financial market. We also need strong institutions to engage citizens more closely in the European project. In other words, the future prosperity of Europe hinges on our ability to complement monetary union with economic union, fiscal union and financial union. This more ad-


vanced institutional architecture will in turn need to be embedded in some form of political union that engages citizens more deeply in European decision-making. As a result, joining the euro area in the future should imply greater sharing of sovereignty and a deeper European accountability than it did ten years ago. The institutional challenge is the first major challenge with which we are currently confronted. We have already made much progress in addressing the challenge. But a great deal of work remains to be done.

in parts of the euro area. Debt is being reduced in some countries, while others are devising strategies to make debt reduction sustainable over time. And financial sector weaknesses are being addressed along with their links to sovereign risk. As I have said, progress is being made but much still needs to be done. The recent experiences of some current euro area members also serve as a cautionary tale to EU members bound by the Treaty to adopt the euro in the future. I will now turn to the challenges facing these countries in the process of convergence.

The economic challenge The second and complementary challenge is economic. The benefits of adopting the euro are greater the more consistent the economic structures of existing and prospective members are. Convergence can be broadly defined as a process in which crosscountry differences in economic structures are reduced over time. The success of the convergence process ultimately depends on the sustainability of the underlying policies. Shortcomings in the process of convergence across euro area members have been at the root of the challenges we have faced since 2010. But I am pleased to report that progress in addressing those shortcomings is being made. External imbalances and fiscal imbalances are starting to be unwound. Efforts to regain price and non-price competitiveness are bearing early fruit. Deleveraging is generally proceeding in an orderly way, even though credit flows to the real economy seem to be negatively affected

The perspective of EU countries which have still to adopt the euro The framework for convergence With two exceptions, all EU members that are not yet in the euro area are expected to adopt the single currency on meeting certain convergence criteria. As you know, the Treaty defines these criteria along three dimensions. The first dimension is the degree of nominal convergence with the euro area. This implies achieving price stability; ensuring the sustainability of the government’s financial position; realising sustainable convergence of long-term nominal interest rates; and maintaining a stable exchange rate between the national currency and the euro. The Treaty also requires that nominal convergence is sustainable. This is not possible without it being underpinned by a high degree of real convergence. According to this second dimension, adopting

the euro makes sense only if the economic structure of a prospective member has converged sufficiently towards the prevailing structures in the euro area. The success of the real convergence process in turn depends on the sustainability of the relevant policies. The challenges that we have faced since 2010 highlight the dangers that large and persistent macroeconomic imbalances pose, not only for the stability of domestic economies, but also for the smooth functioning of the euro area as a whole. We all know the dire implications of prolonged losses of competitiveness, excessive indebtedness and housing market bubbles. Recognising this fact, EU members have moved towards stronger surveillance of domestic policies. Let me remind you of two examples. One is the new Macroeconomic Imbalance Procedure, which aims to prevent the build-up of new macroeconomic imbalances and enforce the correction of existing imbalances. The other is the ‘ fiscal compact’, which was signed by all EU members except the UK and the Czech Republic in March this year and which strengthens the sustainability and credibility of fiscal policies. The third dimension of convergence is institutional. The relevant national legislation, including the statute of the national central bank, needs to be compatible with the EU Treaties and the Statute of the European System of Central Banks (ESCB). More generally, a lesson we have learned the hard way is that the strength of the institutional environment is crucial for the sustain-




ability of economic integration and convergence. Improvements in the institutional environment entail, among other things, better regulations, better governance, better quality of statistics and a more business-friendly environment. Removing impediments to the efficient use of factors of production helps to enhance the growth potential of each country.

How to achieve a high degree of sustainable convergence? So how can countries best prepare their economies to reap the benefits of closer European integration? There are four building blocks: monetary policy, structural policy, fiscal policy and financial policy. Let me reflect briefly on each of these.

Monetary policy First, monetary policy, which, before the euro is adopted, remains a national responsibility. But a number of Treaty obligations already apply at this stage. In particular, the main objective of monetary policy should be price stability, and exchange rate policy should be treated as a matter of common interest.

Different monetary policy frameworks have been devised to deliver price stability. Some EU members outside the euro area have fixed the exchange rate of their domestic currencies to the euro, which has a very good track record of low inflation. A different approach – which has been adopted by Hungary – has combined exchange rate flexibility with a regime of inflation targeting. The ultimate success of a central bank in maintaining price stability depends on its credibility. Credibility anchors inflation expectations in line with the definition of price stability adopted by the central bank. Well-anchored inflation expectations in turn align the choices relevant for wage and price setting. A key prerequisite for a credible monetary policy is the independence of the central bank. This principle is enshrined in the Treaty and the Statute of the ESCB. Each central bank in the EU should have institutional, personal, functional, and financial independence.
Institutional and personal independence protect the central bank and members of its decision-making bodies from direct or indirect influences of

We need strong institutions to guarantee competitiveness and to encourage sustainable growth Monetary policy best contributes to growth through the delivery of price stability. Overall price stability creates a predictable environment that fosters the efficient adjustment of relative prices and bolsters investor and consumer confidence. It also protects the purchasing power of the most vulnerable members of the population.



third parties in the performance of their tasks. Functional independence requires that the central bank has the necessary means and instruments for achieving its objective independently of any other authority. And financial independence guarantees that the central bank has access to and control over sufficient finan-

cial and human resources to fulfil its mandate. Credible inflation targeting in small open economies also depends on central banks’ recognition of the impact of their monetary policy decisions on the exchange rate. For example, in the presence of heavily indebted private and public sectors with large open foreign exchange positions, central banks have little space for manoeuvre when faced with a flagging economy. This is especially true when inflation is already high and there is not yet a critical mass of structural and institutional reforms capable of reducing the country risk premium to sustainable levels. In these circumstances, lowering the policy rate to stimulate the economy may risk sparking depreciation pressures on the domestic currency at some point in time. Depreciation of the currency may in turn further fuel inflation and offset the impact of economic stimuli through negative balance sheet effects on consumption and investment.

Structural policies The second building block is structural policy. The sustainability of nominal convergence is to a large extent conditional on a sufficient degree of structural, or real, convergence. A broad indicator of the degree of real convergence with the euro area is the catching-up of per capita incomes and price levels of new members with those of the euro area. Convergence in real per capita GDP levels has to be fostered by far-reaching structural and institu-


tional changes aimed at enhancing the growth potential of the economy. Such reforms typically aim at strengthening the flexibility of adjustment mechanisms in the economy and improving the business environment. When goods and labour markets are rigid, inflation and inflation expectations may remain high even in the presence of monetary regimes committed to

Fiscal policy


It is also crucial that the achievement of price stability is supported by sound fiscal positions, the third building block of convergence. Irresponsible fiscal policies can jeopardise credibility, as higher inflation becomes desirable to reduce the real value of government debt. Fiscal policies should be sustainable and oriented to the

The experiences of the past few years have shown that participation in a monetary union places important demands on national economic policies. Euro area governments are hard at work responding to those demands. They are correcting macroeconomic imbalances. They are establishing a stronger framework of governance to keep countries on the path of sus-

EU members have moved towards stronger surveillance of domestic policies the achievement of price stability. Both governments and social partners share responsibility for ensuring that wage determination takes sufficient account of labour market conditions and does not jeopardise competitiveness and employment. Active labour market policies should tackle persistent bottlenecks, such as skill mismatches. Finally, protection of vested interests in the product markets and lack of mobility and adaptability in the labour markets undermine job creation, in particular for young and less qualified workers, as well as for all those who face problems entering the labour market. Lowering barriers to entry will increase competition, particularly in those domestic service sectors that are sheltered from international competition, and thus support price stability. Economic growth led by the private sector needs to be fostered by a stable and business-friendly policy environment. In this respect, governments should strive for transparency and predictability of the policy regime, a low compliance burden, and effective governance in applying the rule of law.

medium term. They should further aim at mitigating undesirable trend growth differentials through ‘high quality’ expenditure and tax policies. In particular, high and inefficient public expenditure can put a brake on economic activity by imposing a high tax burden on the economy and channelling resources into unproductive uses.

Financial policies The fourth building block is financial policy. A sound banking sector, liquid and well-functioning capital markets are important for the sustainability of nominal convergence. On the one hand, well-functioning banking sectors and capital markets ensure efficient financing of capital accumulation in the economy, thus supporting potential output growth. On the other hand, they sustain the smooth functioning of the monetary policy transmission channels, such as the interest rate and bank lending channels. In this regard, financial sector vulnerabilities pose great challenges for the conduct of monetary policy.

tainable convergence. And they are improving the institutional set-up underpinning monetary union. For those EU members that have not yet adopted the euro, the challenge is to achieve a high degree of sustainable convergence with the euro area. This requires credible commitment on the part of their central banks to achieve price stability and treatment of exchange rate policies as a matter of common interest. For the members of the euro area, the challenge is to achieve full compatibility of their economies with participation in monetary union. Product and labour markets must possess sufficient adjustment capacity to buffer shocks while maintaining high output and employment. It is in this area that progress is most needed. As I have indicated, much work remains to be done –in both the current and prospective members of the euro area, and both individually in each EU member, and jointly across Europe. But I have no doubt that this opportunity to continue progress will be seized and that together we will reap the benefits of sustainable economic convergence and lasting regional integration.




Agenda 2013: the next steps in completing EMU Today, we have grounds to be cautiously optimistic. The fear of catastrophic tail risks has lessened. This is in part due to actions taken by the ECB to ensure monetary policy transmission, notably through our OMT programme. But it is also due to very important changes that have taken place in euro area governance. Of these, the most significant is the recognition by the euro area Member States that EMU is an incomplete project -and that it urgently needs completing.


by Jörg Asmussen, Member of the Executive Board of the ECB



or this reason, the topic of my address will be that process of achieving a genuine EMU, focusing in particular the conclusions of the European Council last December. I will say upfront that this outcome is not the definitive vision for EMU. It necessarily balances the views of European policy makers, reflecting what is realistic in the current political circumstances, while –I hope– remaining sufficiently ambitious to give citizens and investors a sense

of direction of where the euro area is heading. Accordingly, we need to think about the process of completing EMU in two phases: those elements that can be implemented quickly and can make a real difference to the euro area already in 2013; and those elements where more progress needs to be made in the medium-term as the integration process evolves. Let me begin by focusing on the first phase: the key elements for the year ahead.


Key elements for 2013 Completing financial market union Perhaps the most important element of agreed by the European Council is the commitment to construct a real financial market union in the euro area. This will be critical in 2013 for three reasons. First, a stable and healthy banking system is necessary to restore normal monetary policy transmission across the euro area, and hence to ensure that the ECB’s low rates are duly passed on to all parts of the euro area. Second, restoring confidence in the financial sector –of which the banking system is the bedrock– is the only way to re-integrate the single financial market and therefore disentangle banks from their sovereigns. Third, putting in place a less risky banking system and fixing the credit channel are key contributions to restarting growth across the euro area during 2013. Towards a Single Resolution Mechanism The agreement on a Single Supervisory Mechanism (SSM) by the EU Finance Ministers is an important first step towards a real financial market union. But it is only one component. A financial market union has to involve a Single Supervisory Mechanism and a Single Resolution Mechanism (SRM). This is the only way to ensure that taxpayers do not end up paying for the mistakes of the private sector. Let me explain why. Banks that are “too big” or “too interconnected” to fail at the national level –making bailout the preferred strategy– would not ben-

efit from this status at the European level. The SRM would have the legal and financial capacity, as well as independence, to ensure that viable banks survive and non-viable banks are closed down. Moreover, banks that are “too complex” to resolve via cross-border cooperation –making early action impossible– could be dealt with more effectively at the European level. The SRM would create an authority that could concentrate decisions on resolution and act pre-emptively and quickly, helping to preserve the value of the banks and save money for taxpayers. Principles for European public support However, a strong resolution mechanism cannot remove risks for taxpayers entirely. Certainly, any costs incurred from resolution should first and foremost be covered by the private sector, through establishing a European Resolution Fund raised by levies on the banking sector. But a real financial market union must also contain a public sector dimension at the European level. In this context, the European Council called for the operational framework for direct bank recapitalisation by the ESM to be ready by the first semester of 2013. I am aware that the prospect of ESM direct bank recapitalisation raises serious concerns: that European taxpayers will end up paying for the bad assets accumulated over the past decade; that mutualisation will become standard practice for dealing with banking sector problems. But let me reassure you that these concerns can be contained with what I would see as the three key principles for European support.

First, European support has to be accompanied by European control, meaning public funds can only be used after the SSM has effectively assumed its duties and on the basis of strong conditionality. Second, European support should only be granted to banks that are systemically relevant, or pose a serious threat to European financial stability, and therefore affect the common good. Third, European support must come at the end of a sequential process, involving the following steps: •o ne, the beneficiary banks must undergo a thorough and independent economic evaluation of their assets to ascertain their real capital needs and reveal any legacy problems; • t wo, those banks must be assessed to have a viable business model and so be deserving of additional capital, otherwise they should wound down; • t hree, if the banks are to be kept going, private sector sources should be exhausted first –meaning bailing-in of shareholders and bondholders, and if needed, use of the bank-funded resolution financing; • f our, if there are still capital shortfalls, the financial resources of the beneficiary Member States should be drawn on; •o nly in the very last step, would European public funds be used. This pecking order underscores that, the stronger the European resolution framework, the lower the eventual costs for European taxpayers. The more the financial sector can be bailed-in, the less it has to be bailed-out. We see in the US how this can work: the FDIC closed down more than 400 banks during the crisis, without any cost




for taxpayers. This is the standard we should be aiming for in Europe –and a real financial market union is the only way to achieve it. Let me make a final point regarding the institutional set-up of the SRM and Resolution Fund, which is my own personal view: the ESM would be well-suited to perform the tasks of the SRM and to house the European Resolution Fund raised from the banking sector. Building economic union The second key outcome of the European Council is the aim to strengthen economic union –particularly by ensuring that national economies can remain competitive and hence prosper within a single currency area. The importance of this issue for 2013 cannot be overstated, as it is critical to ignite growth and lower unemployment. We can see before our eyes a series of cases where quick implementation of targeted reforms could have a strong impact, even in the near-term. For instance, despite the recession in Italy, unit labour costs have adjusted by only 0.1% relative to the euro area average since 2008. This is because many sectors of the economy are sheltered and wages do not respond to weak productivity. It needs product market reforms to increase competition and reinvigorate its external competitiveness. In Spain, employment is struggling to rebound, and the burden on unemployment falling disproportionately on the young, because its two-tier labour market protects



insiders. It needs labour market reforms to bring in outsiders and improve incentives to hire. The Conclusions propose to kick-start this much-needed process of reform through three avenues. First, a renewed effort to complete the Single Market, in particular by opening up services and increasing labour mobility. Second, a thorough assessment, carried out in all euro areas countries, of the compatibility of their labour and product markets with membership of EMU. And third, for the issues identified in this assessment to be addressed through the new concept of “Reform Contracts”. Let me elaborate some more on this last point. The idea behind the “Reform Contracts” is that countries would commit to specific structural reforms that have a direct positive impact on competitiveness, with those commitments formalised in a legally binding contract. The contract would be multi-annual and, to foster national ownership, initiated by the national government and approved by the national parliament. If the terms of the contract were met, financial support would be provided, targeted at the transitional costs arising from structural reforms –for instance, re-training programmes for displaced workers. What are the benefits of this approach compared to the status quo? In my view there are three, although they depend very much on how the concept is eventually implemented.

First, the contracts could be entered into as part of a concerted national reform effort, rather than being seen as an imposition from “Brussels” in the context of the EU procedures like the European Semester. Second, reform commitments could potentially be more precise, measurable and binding in the contracts than under those existing procedures. However, this effect would quickly be lost if it simply becomes another bureaucratic procedure. Third, and perhaps most importantly, because the contracts are multi-annual they could allow for deeper reforms than are possible under existing procedures. There have been a series of recent studies that suggest that competitiveness is not only about flexibility, but also strongly connected to governance. We see clear correlations between countries’ economic performance and their rankings in governance indices published by, among others, the World Economic Forum and Transparency International. The contracts provide an opportunity, if used properly, to “go deep” and address these more fundamental barriers to competitiveness. Building a stronger economic union along these lines is necessary to correct what might be called an “original sin” of EMU: the fact that the convergence criteria did not include any structural benchmarks for joining the euro, and hence structural policies remained mainly within the national remit.


Areas for further progress in the future What about those areas that were not outcomes of the European Council and where there is room for further progress in the future? The most important is greater sharing of sovereignty. The importance of credible governance has been starkly demonstrated during the crisis. Countries without credible policies have been forced by markets to consolidate more rapidly than others in the downturn. This is because markets have not trusted that they can run sufficient surpluses in good times, or achieve sufficient growth, to lower debt levels and ensure long-term sustainability. Paradoxically, the lack of strong external constraints on fiscal and economic policies has led to countries losing substantive sovereignty in these areas. By the same token, countries now need to share more sovereignty in order to regain their sovereignty. By sharing decisionmaking with the European level, they can restore their policy credibility with investors, while at the same time having a voice over where they are heading. This will mean going beyond the Maastricht logic of national responsibility for fiscal and structural policies, and committing to governance arrangements that are actually enforceable –for instance, allowing for intervention rights by the center to prevent unsound national budgets. Sharing sovereignty implies a

number of other changes to euro area governance. First, there have to be strong institutions in order to exercise that sovereignty effectively. This will require a stronger Eurogroup. Second, those European institutions have to be properly democratically legitimated. This requires changes in the way the citizens participate in the European political process, in particular via the European Parliament. Let me stress: while I would have liked the outcome of the European Council to be more ambitious, these ideas are not intended as criticism of it. They are orientations to advance further which will need to be properly fleshed out in the years ahead as the integration process evolves. This will require a Treaty change in the mediumterm in order to complete EMU in a comprehensive way. Conclusion One year ago, the euro area was facing an uncertain future. But those painted a dark picture at that time have been proven wrong. One year later, Europe has proven its ability to act and we have begun to set the euro area on a more convincing path. It is now critical that, over the next year, we continue down this path and provide EMU with institutions it needs to advance. Putting in place a genuine financial union and a stronger economic union must be our key priorities for 2013. It is essential that the appearance of calm on financial markets does not

distract from the urgent need to address the euro area’s fundamental challenges. Moreover, we should also not row back on what has already been achieved. Implementing the Fiscal Compact and adopting the “Two Pack” of legislation in 2013 are essential to strengthen the fiscal framework. We should not undermine this by re-opening discussions on what constitutes “good” or “bad” deficits by arguing for exemptions for public investment. All deficits have to be financed on financial markets and increase public debt stocks –and this is the opposite of what we need next year. However, this focus on 2013 does not mean we should lose sight of the big picture. It is instructive to notice how little markets are reacting to the “fiscal cliff” debate in the US, while they are jolted by the prospect of earlier than planned elections in Italy. Our long-term goal is a situation where the essential functioning of the euro area is unaffected by events in individual countries, because sovereignty is shared and exercised in strong common institutions –and those institutions have a longer time horizon than politics. This is what Jean Monnet understood when he said: “ Rien n’est possible sans les hommes, rien n’est durable sans les institutions”. “ Nothing is possible without men, but nothing is lasting without institutions”. These words have never been more true than today.




A World Bank for the twenty-first century by Jose Antonio Ocampo*

It’s time to re-think the role of the World Bank, says former Colombian finance minister JosÊ Antonio Ocampo, who was recently one of the three contenders for heading it. And a basic lesson the bank needs to re-learn is never to impose any particular development model





hen the World Bank’s new president, Jim Jong Kim, took over in July of this year, he did so after the firstever open competition for the job. This, along with significant longterm changes in the structure of the world economy and its unsettled state, makes it an opportune time to re-think the role of the bank as one of the great international institutions. Such re-thinking must start with the lessons learned from our experience of development co-operation as well as from a clear understanding of the changes now taking place in the world economy. It means adapting the World Bank to the changing needs of the international community but also, in some cases, taking the institution back to its roots. The World Bank was created in 1944, just as the United Nations system to which it belongs was in 1945, on the conviction shared by its founders that the world had to be reconstructed from the ashes of World War II on the basis of the balanced, inclusive and peaceful development of all countries. Most would agree that the world has achieved progress in this regard, and certainly the World Bank has made a central contribution to that effort. But over two billion people still live in poverty, countries have made very uneven economic and social progress, and the development gap between rich and poor countries remains unacceptably wide. This means that the World Banks’s core mandate must remain that of reducing poverty. This relates primarily to the poorest countries, of course, but also to middle-income countries, where most of the world’s poor are in fact to be found. This means that the bank should focus

on helping to counteract the trend towards greater inequality that has characterised many countries in recent decades. The strength of this trend implies that the development task should not be limited to adding social safety nets to compensate for the market and social tendencies that generate inequalities, but rather it should design mechanisms that mainstream equity objectives into economic policy-making. This could be done by putting the creation of quality jobs at the centre of the development agenda, favouring small producers, developing universal education, health and social protection systems and eradicating gender inequalities. The food and financial crises engulfing much of the world, and the visible effects of climate change, have been a painful reminder that the world also needs institutions that can in cooperative ways address the enormous long-term global challenges of our time. In this regard, the World Bank is an essential contributor to the supply of global public goods. It has to give its support to the actions that developing countries must make to mitigate climate change and preserve the world’s remaining natural forests and watersheds and our planet’s biological diversity. The most important challenge the World Bank should be contributing to relates to climate change as this will require a veritable revolution in the global energy system, as its main clients, the developing countries, are set to be the largest source of increased energy demand. A new area in which the World Bank should contribute to global co-operation stems from the weaknesses of developed economies and the growing importance of

the largest emerging economies as generators of global economic growth. We need an inclusive forum for policymakers, from both developed and developing countries, to discuss the issues this raises and to co-operate on ways to accelerate global growth. With its strong analytical resources, the World Bank can provide the best forum to discuss how changing trade and investment patterns, knowledge and migration flows and the restructuring of production sectors around the world can be made compatible with faster yet equitable growth around the world. To achieve the three objectives of reducing poverty and inequality, helping to manage our global commons and co-operating to accelerate global growth, the World Bank has four major instruments. But they all need to be improved if we are to face the challenges of the 21st century. The first is concessional and co-operative financing, an area in which the World Bank operates both as a multi-lateral channel for official development assistance (ODA) and as a successful, and indeed profitable, global financial co-operative that facilitates access to external financing at reasonable terms for countries that lack adequate access to private sector finance. But if the bank is to continue doing this, it is essential that there should be in due time a strong 17th replenishment of its International Development Association (IDA), the arm that is in charge of helping the world’s poorest countries. But more immediately, it will also be important to re-establish the long-term financial sustainability of its non-concessional arm, the International Bank for Reconstruc-




tion and Development (IBRD). Its shareholder governments and institutions should therefore engage in an honest discussion about the latter issue because with its current capital position, the Bank has been forced to reduce its lending programme. To be very clear about this, it now lacks the capacity to respond to the on-going global crisis in the productive manner it did back in 2008-9. It requires a new capital injection based on a clear and shared set of priorities. This will also mean changes in its lending practices compared to what was typical during the period of market reforms. Increased attention needs to be paid to quality physical infrastructure, an area to which the bank contributed significantly in its early decades but unfortunately left aside later on. Fortunately, it is now back on the agenda. Much the same can be said of agriculture, which of course plays a key role in lowincome as well as in many middleincome countries. A fresh focus on industrialisation and technological upgrading would be equally welcome. This would underline the way that economic development is above all a process of structural change towards production activities with more technological content, which was a central concept in the bank’s early days. And as this requires domestic development banks to play a role, more support for well-designed national development banks should also be on its updated agenda. This would not only recognise the role that these institutions have played in successful development, but also the fact that the World Bank is itself a public-sector development bank.



The second instrument is knowledge. This requires the cross-fertilisation of research and the lessons learned from country programmes, as well as a capacity to transfer knowledge from one region to another, and from middle-income to low-income countries. Remaining global is key to the most effective use of an instrument which has become critical when so many countries will need to reinvent their development and growth strategies. It also requires diversity, among World Bank staff particularly, on the very different approaches around the world to development issues. The third instrument is close cooperation with the private sector. Given the immense demands for financing, and the private sector’s leading role in investment, partnerships are essential. The World Bank Group therefore must play an even greater catalytic role, especially for non-natural resource investments in low-income countries. Middle-income countries also play a critical role, both as recipients and increasingly as sources of investment as we have already seen substantial rise in South-South investment flows. The fourth instrument is a clear recognition that the World Bank should operate at country level as a single institution and not as separate ones that are part of a loosely tied group. Equally important is recognizing that the bank is part of a global system of governance: a specialised agency of the United Nations system and the apex of the system of multi-lateral development banks. Building and maintaining its place as a strong, credible and trusted partner are essential to providing leadership at the global level.

But the bank can only fulfil this potential if it retains the support of all its members. This adds up to reform, not least in the selection process for future presidents, which should not only be a competitive process but, as a G-24 statement put it after the recent election, also “transparent and truly merit-based.” That also means continuing the reform process started in 2009, which should lead to an enhanced commitment of those members whose voices are still incompatible with their growing share of the world economy. And that needs to be buttressed with a clear recognition of the contribution to development being made by different members, recognizing for instance the role that Europe has played as the greatest provider of development co-operation. Finally, building trust also means a clear acceptance of the principle that development policies should always be subject to decisions adopted by representative national authorities. Indeed, only when there is strong ownership of development processes are they likely to succeed. What this means, of course, is that it is not the role of the World Bank, or, for that matter, any international institution to impose a particular development model on any country. This is a fundamental lesson that the bank seemed to have forgotten during the zeal of market reforms which must now be put back at the centre of its agenda.

* José Antonio Ocampo is a professor at Columbia University, a former finance minister of Colombia and was one of three candidates who competed for the World Bank presidency.


What’s ahead for banking in Eastern Europe W

hile this volatility will continue and the region will remain vulnerable to external factors, we expect further long-term growth opportunities for the banking industry in Eastern Europe once the current turmoil has subsided. A new McKinsey analysis -based on empirical data, proprietary benchmarking, and interviews with 20 leading bank executivesidentifies a number of segments and geographies that look promising over the next decade. It also highlights strategic actions that successful regional players must take to capture these opportunities. Projections and figures in this article assume a consensus base case built analytically from the midrange of external macroeconomic forecasts and a consensus view on regulatory and market trends. In general, these assump-

by Miklos Dietz, ΆdÉm Homonnay, and Irene Shvakman*

Banks in Eastern Europe have had a roller coaster ride over the past decade.1 After dizzying growth between 2000 and 2007, when shares in the region’s top financial institutions performed better than those of their counterparts around the world, asset values slumped by two-thirds as the credit crisis of 2008–09 took hold. More recently, a modest recovery in sentiment -pinned on hopes that the sector could reestablish itself as the engine of regional economic development- has snagged on wider global worries over sovereign debt. tions are sluggish global growth, a prolonged and painful deleveraging, and high volatility for the next five years. This is not a worst-case scenario, though, and it does not assume, for example, a disorderly breakup of the EU Economic and Monetary Union (EMU) or a fiscal crisis in the United States. Broadly speaking, the region’s banks must do two things. First, they must acknowledge the lessons of the past, notably by tackling the problems of insufficient scale, inefficient operating models, and relatively weak risk and governance processes that hobbled efforts to create value in the boom years. Second, they must position themselves to confront a number of fresh challenges, including new regulations, higher funding and risk costs, and changing customer behavior.

In the face of these obstacles, some international banks that owned subsidiaries or branch networks in the region have already exited. We expect this trend to continue or even accelerate when capital markets stabilize, as players reassess their long-term commitment. Banks willing to stay the course and able to adjust their operating models, however, can reap considerable benefits as the region’s economies continue to catch up with those of Western Europe.

The years of missed opportunity The opportunity to reach new banking customers, combined with the prospect of at last closing the historical gap between Eastern Europe’s economic performance and that of Western Europe, provided the impetus for




growth in the region’s banking sector over the past decade. In 2000, banking penetration in Eastern Europe (as measured by the ratio of lending volumes to GDP) was below that of other emerging markets, such as Latin America or China, in several product categories. Along with low funding and risk costs, this gap created the conditions for a substantial increase in demand for banking services. Our analysis shows that Eastern European banking revenues from loans and deposits (excluding Russia) grew by more than 14 percent a year on average between 2000 and 2007 -more than triple the global average of 4.1 percent and surpassing even China and India during this period. Some products performed particularly well: for example, revenues from mortgages rose between 50 and 100 percent annually, achieving revenue margins of 4 to 5 percent, as well as a return on equity of roughly 100 percent. Despite the favorable climate and investor optimism, only a few banking groups captured the tangible benefits of expansion. Our analysis shows that between 2004 and 2007, the average level of value creation (defined as returns on equity less cost of capital) at Eastern Europe’s top banks was just 0.2 percent, falling to –2.0 percent for the period from 2004 to 2009. These averages concealed considerable variations -the best performers from 2004 to 2009 created 3.5 percent a year of new value; the worst lost 11.2 percent annually. This performance paradox -phenomenal growth and juicy product margins coupled with low profitability- can be attributed largely



to the costly operating models that banks rolled out across the region. The delivery models were mostly the same as those in Western Europe, even though volumes per customer in Eastern Europe are roughly one-fourteenth of Western European levels, according to our estimates, and disposable incomes are one-fifth as big. Most banks pursued country-bycountry entry strategies, in many cases creating a patchwork of subscale, fragmented operations. Governance focused mainly on country-level performance, allowing banks to extract only limited synergies from their portfolios. And assumptions about currency and regional economic convergence were often too optimistic. The financial crisis of 2008 and 2009 laid bare the fragility of the banks’ business models, exacerbating these inherent performance issues.

pect those revenues (after loan losses) to increase by an average of 12 percent annually, probably the world’s highest level during these years. Unlike the last decade -when a rising tide lifted all boats -in the future, growth will probably be uneven, concentrated in certain geographic, demographic, and industry pockets. The banks’ biggest coming challenge, which will be considerably greater than it was in the last decade, is to deliver shareholder returns that exceed the cost of capital. Our market modeling points to a decline in returns on equity from an average of 17 percent (2000–07) to about 13 percent (2010–20). Higher capital requirements, funding costs, and risk costs, as well as new regulations and state interventions and a generally more competitive market, are all likely to weigh heavily on the leading players.

A challenging decade ahead Looking forward, Eastern Europe’s fortunes are tied closely to other parts of the world, and the fallout from the sovereign-debt crisis is likely to hit the region hard. That said, the fundamentals for strong economic growth -rising consumption, trade, and investments, as well as the planned accession of more countries to the European Union and monetary association, subject to the euro’s future- are in place. The growing concentration of consumption and wealth in a handful of cities and regions, the need for improved infrastructure, the rise of more affluent consumers, and other important trends will create an impressive economic tailwind to support the growth of banking revenues. Over the 2010–20 period, we ex-

What winning banks must do How can a banking group outperform in such a challenging competitive, regulatory, and funding environment? What will be the major differentiators between good and bad performance in the next decade? And what will be the best ways to capture the opportunities that will create new value? Our analysis and industry survey results suggest that banks in the region must pursue four strategies.

Reshape business portfolios Critical mass allows banks to capture scale advantages and create additional value. In Eastern Europe, where costs are high relative to customer volumes, this is especially important. Only a few top banks have been able to build a


consistent, sufficiently large portfolio across major markets. In practical terms, this means about a 10 percent share of all markets where such players operate, Russia apart. Recent experience shows that banks at or above this threshold tend to outperform others in value creation: an average return on capital that’s 5.2 percentage points higher than the rest, according to our survey. Our analysis suggests that further acquisitions or swaps of “stuck in the middle” assets could generate incremental returns on equity of two to four percentage points for a number of regional players. If mergers and acquisitions are not possible, another option would be partnerships in, say, product development or distribution.

Build stronger regionalgovernance models Successful players must perform a delicate balancing act: on the one hand, to pursue efficiencies by centralizing and standardizing; on the other, to generate value by allowing local units flexibility in managing their business. One legacy of the past decade has been how most regional groups permit local units to lead stand-alone operations. In the future, finding centralization opportunities and developing standard products or processes through regional operating hubs could drive value, as banks in emerging markets such as Africa have shown. Consolidation is easier in some operations than in others, however. It may be straightforward to centralize international payments, card processing, and custody, for example, but less so the credit processing and IT platforms for depos-

it and lending products (because of local regulatory requirements).

Develop a differentiated approach to priority segments The region’s banks must position themselves to take advantage of selected product and customer segments that can serve as growth engines for the next decade. This approach might involve developing a distinctive value proposition for a well-defined segment of sufficient size or pursuing a specialized opportunity such as infrastructure finance. For example, the “emerging affluent” segment -young, educated, and consumption-oriented urban professionals- could account for up to a third of all retail-banking revenues in the coming three to five years: Eastern Europe, with just 7 percent of the total population of emerging markets, already accounts for 41 percent of all middle-class households in such markets around the world. Emerging affluents exhibit similar behavior patterns across the region. They are tech savvy, preferring online-banking and smartphone applications; reluctant users of branches; and price conscious and service oriented. To capture this potential, banks must learn to better understand the needs of customer subsegments and put in place differentiated value propositions and service models rather than traditional one-size-fits-all approaches. Affluent customers expect a distinctive experience, yet we find they are frequently disappointed because instead they get the service that banks deliver to the mass market.

Focus on innovation In the past decade, most banks in Eastern Europe based their home market models largely on the traditional branch networks in Western Europe. In these years, we observed far more banking innovation elsewhere in the emerging world, where low income levels made traditional models unfeasible. Banks in Eastern Europe must now take their cue from other emerging markets and try to develop business models more compatible with their stage of development. This effort might include focusing on “frugal” innovation -reassessing costs from a zero base- and considering greater centralization and the outsourcing of distribution and support. Eastern European banks also have big technological opportunities, including the introduction of richer features for automated teller machines and point-of-sale devices, biometric identification, and mobile payments. Notwithstanding the industry’s gloomy global outlook, banks in Eastern Europe, including Russia, can prosper in the next decade if they learn the lessons of the past and prepare for new challenges ahead. Those that can reshape their portfolios, target priority segments, build stronger regional-governance models, and innovate successfully are the most likely to boost market share, efficiency, and profitability.

* Miklos Dietz is a principal in McKinsey’s Budapest office, where ΆdÉm Homonnay is a consultant; Irene Shvakman is a director in the Moscow office.




Investing in 2013 - Rediscovering Romania by Radu Magdin*

If you’re an investor in Europe, in 2013, have a look at Romania. It’s not a perfect country, but it is dynamic and it’s looking for investment. There’s much more to Romania than meets the eye: opportunities can be found in several fields, ranging from technology and energy to agriculture and tourism. These fields are on the private sector’s agenda, but also the governmental one.


here are some news, good ones. After a hot political summer, things are getting back to economic normal. The governing coalition has unprecedented support in Parliament for the past two decades (a constitutional majority), and seems determined to keep one of the secrets of growth: a flat tax of 16%, among the lowest in Europe. Beside the competitive advantage of low taxation, the macroeconomic situation is solid in this EU and NATO country, with low public debt (33,3% GDP), much under the EU average of 82,5%. The economy is expected to grow; the EBRD estimates growth at 1,4%, the World Bank at 1,6%.



Consequently, 2013 is not a year to be wasted, if you have money in your pockets. Attracting foreign investment is a stated priority for major stakeholders, but also for middle and small ones. The country has been affected by the financial crisis, so finance for projects is sometimes as useful as some cold drinking water in the dessert. Investments will be stimulated by an efficiency drive in EU funds absorption, but private investments are also most welcomed, particularly to maximize the opportunities in terms of tourism, agriculture and, last but not least, energy, especially renewable one. State aid for investment is available, under certain conditions (+5 million euros investment), for insuring sustainable economic development. A few more details on these particular opportunities. Agriculture and tourism are smiling and waving because of excellent soil, climate and geography conditions. As concerns energy opportunities, one can buy cash-stripped investments or go after the Green certificates available, still a generous support scheme. Solar energy is in poll position, after the wind “revolution” that pioneered the field.

Interesting fact, Romanians are among the best IT engineers, and among the best represented in Silicon Valley or other world hubs. Romania is a hub for IT&C projects, increasingly developing local clusters, with a mixture of local and foreign capital. Creativity and good IT skills are helped by investments in broadband - one of the fastest in the world. Contrary to the Dracula legend, if you come to Romania, you will not see your financial blood sucked, but refreshed and enhanced. We do not promise eternal youth, but we do offer a case for good business. Doing business in a European country in present times can be increasingly interesting for those with a drive to transform a general crisis into a local opportunity. The largest market in South East Europe, with access to the Black Sea region, awaits for you.

*Radu Magdin is CEO of SmartLink Communications, a Romanian communications and public affairs consultancy. “Invest in Romania - Do Mix Business with Pleasure”, available on Youtube, is among SmartLink’s projects.


Representing e-commerce in Europe by Wytze Russchen*

Ecommerce Europe, an initiative taken in February 2012, is the European umbrella association representing companies that sell products and/or services online to consumers in Europe. Founded by seven leading national e-commerce associations, it now represents the e-commerce business in already nine European countries: Belgium (Becommerce), Denmark (FDIH), Finland (Kauppa), France (Fevad), Italy (Netcomm), the Netherlands (, Norway (Dinstansehandel Norge), Sweden (Svensk Distanshandel) and Spain (adigital).


mission is to advance the interests and influence of e-commerce in Europe through advocacy, communication and networking. Ecommerce Europe has set five general goals: enhancing the success of the European B2C ecommerce industry, provide for a strong and effective representation of B2C e-commerce industry in Brussels, advance the interest of B2C e-commerce industry with relevant stakeholders and institutions, in an environment where e-commerce companies feel at home and with new brand recognition and membership engagement at all levels.

Public Affairs As a trade association, Ecommerce Europe focuses on public affairs. It analyses and follows up on political and regulatory developments that affect its



members, but more importantly it tries to liaise proactively with the European institutions (European Commission, European Parliament, etc.) to defend e-commerce’s interests. To be able to defend these interests, Ecommerce Europe is in a constant dialogue with the national associations and other various e-commerce stakeholders.

Hot topics Ecommerce Europe has identified three key topics that influence the e-commerce climate: e-regulation, e-payments and e-logistics. Therefore it has created three working committees on these issues. The main goals of these working committees are preparing policy statements, draft white and position papers, provide for networking opportunities and inform European institutions and (inter)national stakeholders.


As for e-regulation, Ecommerce Europe pursues a fair balance between consumer and citizens’ rights and a proper functioning of the digital internal market. Therefore Ecommerce Europe believes that consumer rights throughout Europe must be harmonized at a maximum level and (administrative) burdens and costs for web merchants must be lowered, particularly regarding mandatory consumer information and the right to withdrawal. Ecommerce Europe also believes greatly in the power and the chances of success of self-regulation. The dossiers followed particularly for e-regulation are privacy and data protection, consumer rights, common sales law, alternative & online dispute resolution, digital internal market and online trust marks. Connected with the evolution towards buying products and/or services online, there has been an obvious change in paying for these products and services as well. The e-payments working committee focuses on an effective and efficient pan-European e-payments landscape, which it thinks to be beneficial for both web merchants and consumers. The key message to the financial industry is to intensify innovation on ‘customer not present’ solutions for e-commerce transactions. This poses various usability and security challenges for both merchants and consumers. The dossiers dealt with regarding e-payments are card based payments and related fraud issues, making existing payment-integration initiatives such as SEPA available for e-commerce, cash-on-delivery services, mobile payments and online identity and authentication. Although the EU is working on a liberalised postal market since 2008, cross-border postal services remain expensive when compared to national postal fares.

Ecommerce Europe’s e-logistics working committee is convinced of the fact that in order to be competitive and raise the stretch zone of web merchants, costs must be diminished.

Future Ecommerce Europe is eager to increasingly continue defending the e-commerce industry’s interests. In the short period the umbrella organization exists, it has welcomed various new members, business and media partners. Ecommerce Europe was also able to put e-commerce even higher on the political (digital) agenda due to the continuing liaising with relevant stakeholders on an evidence-based way.

* Wytze Russchen is EU Representative of Ecommerce Europe For more information, please have a look at www. and follow us on Twitter @Ecommerce_EU




Trade Commissioner De Gucht on collision course with China by N. Peter Kramer

Since his start as European Commissioner for Trade in 2009, Karel de Gucht (a Belgian-Flemish Liberal) has been pushing to stamp out what he believes are illegal Chinese government export-subsidies for their high-tech telecom industry, especially Huawei and ZTE. De Gucht is dis-



playing considerably greater willingness than his predecessors to confront Beijing. Hosuk Lee-Makiyama of the European Centre for International Political Economy, think-tank in Brussels, fears that the EU approach of ‘fighting fire with fire’ could have unpredictable repercussions.


EU Commissioner Karel de Gucht


he Commission is shifting towards a confrontationist approach for lack of other effective means to counter what it sees as activist Chinese industry policy”, Hosuk Lee-Makiyama told the Financial Times. Top of the agenda in talks between China and the Commission is a trade dispute over telecommunications equipment that could boil over into a fully fledged trade war. De Gucht has threatened to launch an investigation on his own initiative and not at the behest of an industry complaint! One Commission official made clear to the FT that De Gucht will enter the negotiations with the Chinese “with a loaded gun on the table”. On the other hand, a Brussels trade lawyer said, shrugging his shoulders, “the Commission has no leverage with China apart from some trade cases, that is why they are trying to scare the Chinese to negotiate on these subsidies”. The subsidies for Chinese producers come in the form of cheap land, loans and raw materials. Huawei is one of the most critisised Chinese companies, which will surprise nobody knowing that it is the largest “private” technology company in China and one of the largest tele-

com companies in the world. “Both enough reason for the competition and wretched politicians to create a hostile environment and bad publicity telling stories about partnerships with the Peoples Liberation Army, stealing others technology and having a poor cashflow”, says Toine Klok, a former director of the business partner channel of KPN. “Which self-respecting ICT company doesn’t have their national military department as one of their best customers? Isn’t involved in a legal battle with the competition about patents? And how important is Huawei’s moderate cashflow position when you can count on creditworthy Chinese banks and government and having a revenue in 2011 of USD 32,4 billion and operating margin of 9,1%. But of course, Huawei isn’t a paper tiger; it is a competitor to fear”. Klok added that companies such as Huawei Ericsson, Sony-Ericsson, Nokia, NSN, Qualcomm, Alcatel-Lucent and Nortel for instance have, as competitors, entered into cross licenses. To succeed in his crusade, the Commissioner for Trade, needs the support of the EU’s 27 member states. Many governments, battling unemployment in times of crises, are more focused on winning

contracts and investments from China than a questionable united EU trade policy. During a meeting in September 2012 with British Prime David Cameron Huawei’s CEO Ren Zhengfei announced an investment of GBP 650 million (€750 million) and promised to spend the same amount in procurement in the UK over the next 5 years. Last December Huawei announced it will invest €70 million in an R&D center for new technologies for mobile devices in Helsinki. In January 2013 an investment in Ireland, where Huawei was first established in 2004, was announced. A new R&D center in Cork and Dublin started in the meantime, focussing on Huawei’s next generation Customer Experience Management Product, SmartCare®. The initiative, which will create jobs for over 50 highly-skilled research professionals, is supported by IDA Ireland, the government agency responsible for the development of foreign direct investment in Ireland. In the FT an EU official said De Gucht enjoys member states’ full backing. Others are less convinced. “It is a big gamble for the Commissioner. He started it and now he is against the wall”, according to the trade lawyer.




Secrets of Social Media Revealed 50 Years Ago by David Aaker*

Almost 50 years ago Ernest Dichter, the father of motivation research, did a large study of word of mouth persuasion that revealed secrets of how to use social media to build brands and businesses. The study was reported in a 1966 article in Harvard Business Review.




major Dichter finding, very relevant today, was the identification of four motivations for a person to communicate about brands. The first (about 33% of the cases) is because of product-involvement. The experience is so novel and pleasurable that it must be shared. The second (about 24%) is self-involvement. Sharing knowledge or opinions is a way to gain attention, show connoisseurship, feel like a pioneer, have inside information, seek confirmation of a person’s own judgment, or assert superiority. The third (around 20%) is other-involvement. The speaker wants to reach out and help to express neighborliness, caring, and friendship. The fourth (around 20%) is message-involvement. The message is so humorous or informative that it deserves sharing. Looking at the social media role in brand building, I suspect that these same four motivations explain why some brands have been successful in using social media. It suggests that, in the absence of exceptionally entertaining communication, in order to employ social media effectively a brand needs to deliver extraordinary functional, self-expressive, or social benefits. That is more likely to be the case when the brand is associated with an offering that is innovative and differentiated in a way that truly resonates with customers. It is unlikely to happen when the brand represents a me-too offering in an established category or subcategory. So it comes back to creating and leveraging innovation and differentiation. A second finding was that listeners are primarily concerned with two conditions. One is that the speaker be credible with experience and background that is convincing. A person does not need to be an expert although that can help, people that have an intense interest in a subject resulting in relevant experience and access to relevant people and information will qualify as well. Another is that listeners also are skeptical of the speaker’s motivation. They want the speaker to be interested in the listener and his or her well-being without a bias. Is the speaker’s intention to sell a product or help me? What is the speaker’s relationship to me? An implication is that a firm promoting its own


brand needs to be aware of its status and emphasize facts instead of opinion, represent the right culture and values, and have a balanced perspective. Another implication is that a firm should promote a dialogue because a listener will be more likely to accept judgments from someone with whom there is an interaction going on. With a dialogue, it is much easier to communicate expertise, interest in the subject matter, and the right motivation because there is a chance to build up a relationship and use reassuring cues. In contrast, a one time, one way communication will have a harder time demonstrating credibility and motivation. A third finding was that recommenders had on average a huge impact on purchase running to 80% for

some products. The classic and even earlier work of the sociologists Katz and Lazerfield reported in their book Personal Influence had already documented the impact of social influence has a two-step flow but this study brought the ideas to the level of purchase decisions. It is amazing that the nearly forgotten theory and practice of word-of-mouth communication and influence from five decades and more ago can be so relevant today. * David Aaker is the Vice-Chairman of Prophet and the author of Brand Relevance: Making Competitors Irrelevant and the blog on branding.




An interview with Georges Ranunkel, Managing Director & Founder of ARTFLOOR by Harris D. Vourkas

G. Ranunkel with Jean Denant work - Leonardo Agosti Gallery

How can you best describe 2012 in the arts? Your worst/best moment? One sentence from the very beginning of 2012 could best describe last year: Gerhard Richter -whose impressive retrospectives in Tate and Beaubourg were real hits- reacted to the sale of his work Kerze (Candle), which reached almost $15 m by saying Its beyond understanding. It’s as absurd as the banking crisis. In fact, the global market figures hide that 2012 was a tough year for most of the genuine world players in the art market. Even though Richter was going to post 6 sales over $15 m that year and Munch’s Scream was sold for $107 m at Sotheby’s in New York, most galleries and living artists experienced the drawbacks of the crisis. One may wonder for how long the high-end of the art market while everybody knows that this could not last indefinitely. Fortunately, Art is not only a market but also leisure and education. The exhibitions and the public have been spoiled last year with impressive shows and retrospectives such as Kusama in London, Raphael and Hopper in Paris, Serra in Doha and a beautiful dOCUMENTA (13) in Kassel. Not to mention the richest and biggest art fairs and the expanding ones: FIAC in Paris and expending Frieze Art Fair in London. The worst in 2012 was the confirmation of the existence of new trend: a crowd with superficial taste. This trend according to me is the “Koons effect”, very successful marketers with very poor concepts and



Georges Ranunkel has been promoting emerging artists for over a decade. He launched a new type of virtual gallery in 2000 with Geoffroy de Francony: www. They now advise private and corporate collectors worldwide to build their collections or offer Art brokerage services. ArtFloor designs projects including communications strategy based on Art for international companies. Georges Ranunkel has curated numerous exhibitions and prizes including the MasterCard Prize. He gave lectures at Sorbonne University and at IESA in Paris and is a regular contributor to the Huffington Post. - talents. They value names for names and prices for prices. Ignorant collectors are increasingly influential in the world of Art.

Your profession combines market and civilisation. Which are the frustrations and delights that procure to you this double identity? When you consider that a Warhol painting is valued at 3-4 times as much as a Rembrandt, then this fact tells you a lot about what the market has become. Things are not that dark, dealers are indeed driven by financial opportunities and the amount of sales is of course increased by money laundering; however most of the people you will meet in the art market from collectors to experts, from artists to auctioneers, are aesthetes and creative people often passionate about Art since childhood. The pleasure that comes with making a living combined with the freedom of owning your own gallery can make this an extremely gratifying profession. We spend most of our time with people who believe in our vision and choices, we promote the art we have selected and appreciate and collectors are always enthusiastic, otherwise they would have not followed us. By showing a consistent selection of artwork, we have established an identity for our gallery and have enhanced our viewers’ understanding of what our work is all about. The biggest frustrations could be to miss those talented artists we really have wished to promote or not to manage to collect in time some exceptional works from the very fine among them.


In the past, the creation of Art, design, lifestyle... works of art was intended only Which are the boundaries for the “happy few”, as we for each notion and where may have called them today. do you place the common Do you consider that the perimeter between these situation has changed today? notions today? Is art an individual occupation It is common sense to consider or a societal one? as artists the designers if they call themselves “artists”… Milton GlaWe are talking about two differser noted in a 1974 interview that ent worlds. Nowadays, the happy Structure de la Pensée #4 by Erick Derac whereas a design must convey few have the means and the net- - Courtesy The ArtFloor Gallery a given body of information, the work, they are able to collect, be“essential function” of Art is to “intensify one’s perception come consultants or curators of large institutions. They of reality.” Sometimes, he said, these functions coincide, make the trends and also dictate the policy of instituas in a medieval stained glass window, but in modern tions. Most of museums have board of directors from times they have diverged. I now do not subscribe to this the private sector (like in the US) or are sponsored (or point of view, contemporary artists have become muleven owned) by powerful collectors that will “kindly” tidisciplinary and their work has to be considered as a insist that their collections would be valued through whole which means that Art can be dealing with comexhibitions. The rest of art amateurs include the followfort, aesthetics and also concepts all together. ers that will enjoy buying a work produced by Murakami’s studio thinking that it is by the hand of the artist. Real art connoisseurs are also in this category, those Which is the role of the media in the “shape who visit museums for the pleasure of viewing works. of the things to come”? How do you evaluate their ability to influence other players in their Even if the market makers are still an elite, the situation investment strategies (private and institutional has really changed today while the numerous exhibicollectors, galleries, individuals, etc.)? tions, shows and fairs- not to mention the Web- have given access to Art to a very large public. Almost 7 The media has an incredible role in reshaping the marmillion art lovers visited The Met in New York City last ket, especially in troubled economic times while nonyear and 10 million went to The Louvre in Paris. aware investors will tend to follow those they consider in-the-know. The great press coverage of the exhibitions also encourages collectors to lend their works to Do you consider that art occupies an important value their collections. The media has brought people part in our lives? Can we live without it? to compete on figures more than any kind of aesthetic From design to advertising, Art is almost everywhere, approach. We read more about exhibitions attendancyou’d better live with it, even passively! Historically, it has es and auction sale prices than about the works themalways served as a mean to express personal views selves. Websites such as ArtPrice provide the clients on politics, war, social inequities, the human condition with the results of most of the largest auctions around and it is even more noticeable nowadays. the world. Any collector is aware of the quotation of an I have always considered that mainstream people artist. Make no mistake, despite the overflow of informashould be taught Contemporary Art because it really tion about prices, the art market is still opaque… helps thinking out of the box!




We definitely live in an era of over-exposition to multi-layered information. Do you consider that today’s artists need more specific communication coverage? In which form ? It is probably why galleries, agents and dealers still have a role to play. The artists need to be promoted and this implies to use the network of the gallery and intensive PR. It is actually why I launched in 2000. At that time we were pioneers on the Web in this field but the online gallery success confirmed that communicating broadly was a real booster to promote our artists internationally. Nevertheless, whatever the communication exposure level may be, or even the choice of the media, the traditional effort of selecting the artists remains a compulsory one: buyers ask for real expertise in Art, even when they operate on the Web. How do the younger generations deal with art? Does virtual reality affect their creativity? They tend to use it a little too much and not in a very efficient way. This process of creating is radically new. Imagination is often overwhelmed by the work produced by computer. Some artists explore this new path of creativity with talent as Japanese artist Rioji Ikeda who creates an incredible visual and sonic environment where visitors are submerged in an extreme illustration of projected and synchronized data. I had the opportunity to see his show The transfinite at The Armory in New York two years ago and it was really an impressive one. Which are the trends we may see in 2013? I believe in a huge burst of the art market on the Internet. Geographically, the marketplace is turning East with Russian and Chinese collectors and new museums. South-East will still become very attractive with noteworthy Art fairs (Art Basel will be in Hong Kong for the first time). Of course Brazil is the third area where Contemporary Art is booming. I think the Chinese Art bubble will explode but it might take another year. Meanwhile we can still expect some bids to rocket even higher in some auction houses for exceptional works this year. On the other side of the market, 2013 will be full of opportunities for collectors while dealers and artists have now experienced 2 to 3 difficult years in a row.



George Ranunkel’s answers to The Proust Questionnaire • Your favourite virtue. Humility • Your favourite qualities in a man. His default, it makes me a better man compared to him • Your favourite qualities in a woman. When too much is just enough • Your chief characteristic. Open-mindedness • What you appreciate the most in your friends. Ingratitude, it is time saving • Your main fault. Getting older and wiser • Your favourite occupation. Working on my laptop from dream places • Your idea of happiness. Happiness is what works • Your favourite prose authors and/or poets. Zweig, Eco, Faulkner • Your favourite painters and composers. Ribera, Titian, VelÉzquez, Richter, Manessier, Hantaï, Morandi, Cognée… • What is your present state of mind? Dreaming, dreams are (I hope) informing future • Your favourite motto. Nature gave us two ears and one tongue so that we listen more and talk less


The Financial Crisis and the Bank Deregulation Myth by John A. Allison*

Advocates of big government have built economic policy on a series of myths. One is that the “robber barons” took advantage of the common man to create their fortunes. In fact, great industrialists, like John D. Rockefeller, dramatically improved the quality of life for everyone. Another myth is that President Roosevelt’s New Deal ended the Great Depression, when in fact the Depression did not end until after WWII when his policies were abandoned.


he new myth is that the recent financial crisis and failed recovery were caused by banking deregulation and greed on Wall Street. In truth, the banking industry was never deregulated. There was a massive increase in regulation under President Bush, including the Privacy Act, the Patriot Act and Sarbanes-Oxley. The banking industry was misregulated, not deregulated. These new laws fundamentally misdirected banking risk



management. There has always been plenty of greed (and fear) on Wall Street. However, there is not one shred of evidence there was a greed plague that swept finance. The financial crisis was primarily caused by government policy. We do not live in a free market. We live in a mixed economy. The technology industry is largely unregulated and as a result has performed well through various economic cycles. Financial services is the most regulated industry in the world, and since it is, it’s not surprising that the industry has been so troubled. The real cause of the financial crisis was a combination of mistakes by the Federal Reserve, along with government housing policy, which was implemented by Freddie Mac and Fannie Mae. Neither would have ever existed in a free market. In the early 2000s Alan Greenspan was nearing the end of his career at the Fed while the U.S. was experiencing a minor economic correction. Greenspan wanted to go out a hero, so he ‘printed’ money to create negative real interest rates where one could borrow at less than the inflation rate. This led to a huge increase in borrowing. When the Fed is printing money we think we are wealthier than we are, which creates excessive consumption. The consumption largely migrated toward the residential real estate market thanks to affordable housing lending quotas imposed on Freddie and Fannie by Congress. When the government sponsored enterprises failed they owed $5 trillion and had $2 trillion in subprime mortgages on their books. With a 65% market share, they drove down the lending standards for the whole industry. By the way, housing is consump-

tion as opposed to investment. You consume a house, just like you consume an automobile. During the government-driven housing boom, housing experienced a capital surplus amid a capital deficit for commercial innovators. Ironically, instead of being caused by greed, the philosophical cause of the financial crisis was altruism. Altruism is not benevolence. It is otherism. Everyone is more important than you. As interpreted by statists, altruism means the collective is everything and the individual does not matter. Everyone has the right to a nice house. Provided by whom? Everyone has the right to free medical care. Provided by whom? My right to free medical care is my right to force a doctor to provide that care or to force someone else to pay for my doctor. All of this runs counter to the traditional American concept of rights. In the latter, each of us has the right to what we produce. We do not have a right to what someone else produces. The U.S. must radically change direction. The foundation for that change is philosophical. The cure for our problems are the principles that made America great in the first place: Life, Liberty and the Pursuit of Happiness. You have a moral right to your own life and the product of your labor, including the right to give away as much of what you produce to whomever you choose. The political concepts that follow from these philosophical ideas are individual rights, limited government, free markets-or, more plainly, capitalism.

* John Allison is the President and CEO of the Cato Institute.

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