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Issue Contributors Anna-Maria Darmanin, Thanos Skouras, Luigi Guiso, Simon Lewis, Ndubuisi Ekekwe, Alfredo Behrens, Anthony E. Gortzis, Harris Vourkas, Per Wirtén, Edoardo Campanella, Leire Ariz, Harry Briggs, Florian Pantazi, György Suranyi, Daniel Isenberg, Grace Segran, William C. Taylor, Lisa Petrilli, Herminia Ibarra, Erik Sherman, Steven Horwitz

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Too few good women: Why are boards still male domains?

Issue: Jan/Feb - Mar/Apr 2012


08 A BRUSSEL’S VIEW

Editorial, by N. Peter Kramer, editor in chief

10 OPINIONS

Greece: Why Not Go Back to the Drachma? EU moving towards a European Energy Community Is this the end of populism in Europe?

18 BANKING

How to rebuild trust in the banks

20 THE WORLD

President of Taiwan Ma Ying-jeou re-elected!

22

Africa Is Open for Business

24 ENERGY

DEPA’s Strategic Role in Europe’s Energy Policy

Africa Is Open for Business

26 Emerging Markets

What Multinationals Miss in Emerging Markets

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28 CORPORATE RESPONSIBILITY

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World in Turmoil due to lack of Business Ethics

30 european affairs The Fullness of Time?

34 special report Europe in Crisis?

54 Entrepreneurship

How to rebuild trust in the banks

Greece: Why Not Go Back to the Drachma?

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30

Still Lost in the Davos Dialog

56 management

Why are boards still male domains?

65

Are You Learning as Fast as the World Is Changing?

60 TRENDS

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A BRUSSEL’S VIEW

EU and Putin, Putin and EU N. Peter Kramer Editor-in-chief

N

o, I am not a supporter of Putin. Let me start with that. But what surprises these days is the return of the Cold War approach of Russia by journalists, think-tank people and... politicians. The most exaggerated example is, without any doubt, Guy Verhofstadt, a former Belgian PrimeMinister, now leader of the third biggest group in the European Parliament, the Liberals. His prompter is a former Estonian Minister of Foreign Affairs, Kristiina Ojuland, outspoken anti-Russian, who even for most Estonian politicians is too fanatical on it. The day after the elections, easily –as expected- won by Vladimir Putin, Verhofstadt was already present in Moscow for talks with

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some of the Putin opposing movements (probably not with the “old” communists, Putin’s biggest opposition) and the next day he organised a kind of hearing in the EP. Ms Ojuland stated that “the EU does not need to provide the scene for any further photo opportunities for Mr. Putin”. Hearing that, the Russian President-elect must have been shocked... Ironically, many Russians, including both those on government and those in the protest movement, see the EU as an unprincipled power in decline. Russia likes to think that the EU is not at all the democratic and “clean” paradise it is pretending to be. Member states Bulgaria, Romania and Greece (at least in the past) are not showing a kind of public governance that could be a great example for other countries. It is not that long ago that Berlusconi was a respected member of the EPP, the biggest political group in the EP. Look at the Eurozone in complete disarray. What to think of “Brussels” pressure on governments to keep citizens out of the loop by not to hold a referendum, to postpone elections or to accept a technocrat as prime-minister? The EU should put its own house in better order, for example by resisting the “Putinisation of Hungary”. Konstantin Sonin, a Russian opposition leader, said: “doing something with Hungary is the best way of helping Russia. In Hungary they are doing what Putin did in the last two years”. By the way: the Hungarian prime-minister Orban is also a respected member of the EPP! Now experts advise the EU to refrain

from counter-productive loud support for the Russian opposition movement and not to intervene too obviously. Russia is not Egypt or Libya! Comparing the Arab spring with what is going on in Russia is a mistake, certainly in the eyes of the Russian demonstrators. They hope on a better result than in Libya where the revolutionaries are killing each other or Egypt where the army is still holding the reigns, showing that Mubarak was not more than their marionette. The only similarity is the use of social networks and modern electronics. After the March 4 elections, Putin is certainly weaker than the Putin from before. But he is still not weak! Don’t forget that the enormous Russian middle-class is not poor. They didn’t forget that it was the young President Putin who cleared up the mess made by his predecessors Gorbatsjov and Jeltsin, and brought them finally prosperity. The economic situation in Russia is not (yet) bad for most of the Russians; the grow perspective is higher than in most of the EU memberstates and there are still natural resources, oil and gas, the EU need to survive and not to go down in the cold. On the other hand, the end of Putin’s reign is closer than the start of it. The question is what after him. Neo-communists? Still an important and growing political factor! The young protesters? Whatever they are standing for in six years. On verra! For now, I am looking forward to a great picture of Kristiina Ojuland and Vladimir Putin (with his jacket on).


Special Report: The Opening of Southern Corridor: The Key Players

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opinion

Greece: Why Not Go Back to the Drachma? In the international debate about Greece’s future options, it is often argued that the only way out for Greece is to abandon the euro and return to its national currency. As Thanos Skouras points out, the strategy would likely be a great deal for Greece’s highly indebted political parties - and a terrible deal for Greek democracy. By Thanos Skouras*

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opinion

T

here are three problems with Greece abandoning the euro and returning to the drachma. The first two pertain to the sphere of macroeconomics. Most immediately, there would be turmoil and difficulties involved in the transition from the euro to the drachma. This will likely include a run on the banks, strict control of capital movements, inconveniences in payments and settlement of debts, and shortages of essential imports such as oil, spare machinery parts and medical supplies. During this phase, Greece’s GDP will most likely continue to fall rather than recover. The second problem is more crucial. It is doubtful whether a devaluation of the drachma will strengthen the economy and lead to sustained growth. It will certainly increase Greece’s debt-to-GDP ratio, as most of its debt is contracted in euros, and will make borrowing from the international capital markets practically impossible for a long time. It will also quite certainly rekindle inflationary tendencies, as the prices of imported goods will rise. The increase in the prices of raw materials and intermediate goods will increase domestic costs and cancel out the competitive edge provided by devaluation. More devaluation will then be needed to restore competitiveness - and the end result risks being a devaluation-inflation spiral, with inflation tending to accelerate. Such an outcome is not dissimilar to the historical experience of the Greece’s economy in the two decades prior to its adoption of the euro. This experience is, to a large extent, the result of the political elite’s handling of the economy in their boundless quest for political power. The politicians’ appetite for power and for fighting each other in their quest for control seems hardly to have abated. This is the third problem and it bodes ill for the future. It is indicative of the mentality characterizing the political class, that the major political parties are far more indebted than the Greek state. Despite allotting themselves subsidies, which exceed more than 10 times (on the basis of votes received in the most recent election) the corresponding ones for Germany, they have borrowed from the banking system the equivalent of four to five times their current revenue from the state. And yet, even today, they are trying to borrow more. Though it may sound incredible, borrowing from the banking system is still feasible, given that the state still controls a sizable part of it. Moreover, the declared intention of the majority party in parliament, PASOK, is to effectively nationalize the main private banks, which hold a considerable amount of government debt and will need recapitalization following the impending haircut. It is true that the state subsidies to the political parties were reduced, under the pressure of the debt crisis, in

2010. Nevertheless, the subsidy level was nearly restored in 2011 - and it is planned to be increased in 2012. It should be added that the parties’ finances are scandalously opaque. Not only they are not properly audited or controlled, but one of them (the Communist Party, which holds the third most seats in parliament) has emphatically declared that it will never accept any inspection of its finances. All of this should suffice to explain not only the generalized distrust towards the politicians, but also the fear that a return to the drachma will inevitably result in a devaluationinflation spiral. In this respect, it is instructive to consider the beneficiaries of devaluation and inflation. Clearly, borrowers who have to repay their debt in the devalued currency stand to gain. This includes not only the political parties, but also most of the press and the media, as well as a host of firms that depend on state orders and political favoritism. This is a formidable nexus of influence and power, which has a common interest in returning to the drachma. Its rallying cry is invariably nationalist-populist and, of course, hides this interest behind appeals for resistance against the loss of national sovereignty and the “humiliating colonization” of the country by Europe and the Germans. In short, the true beneficiary of a reversion to the drachma is the whole system of power cultivated by the political class since the fall of the dictatorship in 1974. It is this informal, implicit power setup, which until recently was often invisible to the general public, that is presently under threat. It would be given a fresh lease on life by a return to the drachma and the nearly certain devaluation-inflation spiral that will follow. That is the last thing the Greek people should want. And it should gravely concern the international community as to the forthrightness of the intentions of the Greek political class in its negotiations with the EU, the IMF, the banks and so on. The political parties’ self-interest, or so it seems, does not lie with the outcome of staying in the euro. They may be paying mere lip service to it.

* Since 1986, Dr. Thanos Skouras has been a professor at the Athens University of Economics and Business, and vice rector and chairman of the University Research Centre (1989-92). He has served on the governing board of the Centre of Planning and Economic Research and was a member of the first Council of Economic Experts, in which capacity he represented the Ministry of National Economy at meetings with the OECD, the IMF and the European Commission.

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opinion

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opinon

EU moving towards a European Energy Community The European energy community is Jacques Delors’ visionary response to challenges that, if not addressed, have the potential of putting the European countries and the EU at risk. And so far, the main energy challenges have not been adequately addressed.

Î’y Anna-Maria Darmanin*

T

he European Economic and Social Committee, as the EU institution representing civil society at EU level, has always contributed to EU energy legislation in the most consensual manner by putting the different viewpoints of civil society in a pragmatic perspective. But, in recent years, we also had to deplore the slow progress on certain energy policy issues deserving much more quick and radical realisations. Today, the time has come to put forward what I would qualify as daring proposals –others may say provocative - as, with Notre Europe and also with a very large group of civil society representatives, we feel that decisive action on the political governance of energy policy cannot wait any longer. This is not only a matter of conviction. It is matter of necessity. Energy is no longer a purely industrial issue for member states to solve independently. Energy policy is no longer about deciding centrally how many power plants need to be built. Energy is now a central policy that has many social, economic, financial, environmental and cultural ramifications that no single member state or operator can address separately or on its own. The new directions that define energy policy are well-known: the security of supply, the transition towards a low-carbon society by 2050, the provision of affordable energy to end-users, without which European competitiveness and social model would be severely jeopardised. EUROPEANBUSINESSREVIEW

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opinion

Europe may have grasped the urgent made more costly by a lack of coorneed to act, or so it seems. But it has so dination between Member States? far failed to make decisions and take action. It is true that these issues are being • Does it make sense that citizens’ views discussed – perhaps not to the extent are not appropriately taken into acthey deserve, though. Concrete solutions count in the key decisions influencing are still in limbo. Our fellow citizens energy use and consumers’ behaviour? seem to have understood the urgency ahead of us. In a recent Eurobarometer, This is not my understanding of Eurothey asked the EU for concrete actions: pean solidarity and an efficient political cooperate to protect us better, act jointly system. This is why the European Ecobecause it is the first, indispensable step nomic and Social Committee, together to facing up the challenges. with Notre Europe, will leave no stone If the EU, its member states and all unturned in the effort to move towards involved in energy policy, do not do a better governance of energy issues at it, then we would terribly fail our fel- EU level and ultimately establish a Eulow citizens and eventually ourselves. ropean energy community. This challenge is Political needs and colossal but it is discourse now have our responsibility to match reality. The cost of a lack of to take it up. The A lot can be done joint action is simply credibility of policynow. Notre Europe too high for the EU, making at national has made a number industry, and consumers and European level of sensible proposto accept. is at stake. A lot has als that the EESC been done so far by supports. It is now the European Commission to complete up to flesh out this proposal and make the internal market for energy, one of it a clear objective for the EU to meet in the prerequisites to success. And a clear the years to come. Joint gas purchasing direction has been given by Jacques groups at EU level or increased cooperaDelors. He has come with a compre- tion on the energy mix between Memhensive plan to establish in the EU the ber States at regional level feature high right conditions for joint governance amongst the policy measures that would of energy issues, which is the only way contribute to both securing energy supforward. ply within the EU and limiting excesThe European energy community is not sive price hikes and differences between at all abstract. On the contrary. I will not Member States. pre-empt the discussion but there are a The cost of a lack of joint action is simfew considerations that should be made ply too high for the EU, industry, and right from the outset to think over. consumers to accept. I am not naive though, and I hear the sceptical voices • Does it make sense that, within the around. They think that there is enough EU, national borders, inadequate cooperation, that the EU should not inlegislation and a lack of grid inter- tervene in every single area of national connections drastically limit the free sovereignty and that the energy mix production, exchange and provi- should definitely remain a national resion of energy when and where it is needed? • Does it make sense that third countries can play Members States and the EU against each other and offer them different, less favourable terms and conditions? • Does it make sense that the development of renewable energy sources is

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sponsibility. I think that the sceptics should explain to the consumers and industry that they will be deprived of more sustainable and efficient policy options because decision-makers continue to live as if the EU construction would not exist. In this regard let me refer to the European Monetary Union and the turmoil it is currently going through. Many will share my view that the euro is not the problem. For almost ten years the financial markets had been more than happy with the euro. The common currency had indeed grown stronger compared to the American dollar. So where is the problem? Invisible during times of economic expansion, the problem is that of the absence of governance mechanisms. We are all suffering from the dramatic consequences of the absence of economic integration within the EU. Eurozone countries and the EU at large have been fighting for several years with the markets and this allows speculators to make use of this weakness to put EU governments under pressure for their own profit. My conviction is that due to the extreme interdependence between the EU Member States in energy, the same cause could produce the same effect. At this stage of interwoven grids, markets and objectives, there is no alternative to deeper integration and common governance. Be assured of the EESC’s commitment to the European energy community. I am convinced that civil society at large will acknowledge that, in spite of the many obstacles, this is the best option for all. The EESC will not fail in making the point to the EU institutions and civil society. It will work on making citizens’ expectations a reality and will contribute to a project that, in times of doubt and mistrust of politics, can remobilise Europeans around a forward-looking project.

*Anna-Maria Darmanin is VicePresident of the European Economic and Social Committee. The article is an edited version of Ms Darmanin’ s speech during the conference ‘The EU moving towards a European Energy Community’, 31 January 2012 in the Jacque Delors Building in Brussels.


Special Report: The Opening of Southern Corridor: The Key Players

EUROPEANBUSINESSREVIEW

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opinion

Is this the end of populism in Europe? What good might come from Europe’s crisis? Profligate governments in Italy and Greece, while pandering to the masses, have left their countries with crippling debt. This column draws parallels with Latin America and argues that the current hardship may sound a death knell for populism in southern Europe, as it has elsewhere. By Luigi Guiso*

T

he collapse of Silvio Berlusconi’s government in November 2011 leaves us relieved, even if it was after a protracted ‘death scene’ that brought Italy and the Eurozone to the very edge. Now questions arise: • How did such a populist government succeed in a western European democracy like Italy? • What are the economic costs of populism and how do they manifest themselves? To answer these questions, a comparative look at Latin America can be illuminating, since populism has been more pervasive in that part of the world than anywhere else.

Latin American populism

Populism can be defined by two key features. • Consensus gathering based on promises of redistribution to the masses. • Concealment of government budget constraints from the voters. These flourished in Latin America, mostly during boom times. Populist governments that succeed in good economic times can easily implement public expenditure policies which are, in fact, procyclical, as a number of research contributions show (Akitoby et al. 2004, Kaminsky et al. 2004, Talvi and Vegh 2005). Indeed, in Latin America populism is widely understood as excessive public spending during booms. Obviously, fiscal policies should, instead, be countercyclical

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opinion

in order to fulfill the basic principle of consumption smoothing at the aggregate level and the idea of accumulating public sector precautionary savings as insurance against future recessions. Finding a procyclical pattern of government spending is even more shocking because, in developing countries, the business cycle is much more pronounced and volatile than in developed countries.

The Italian difference

Berlusconi, by contrast, first came to power during a period of protracted stagnation and dimi­ nished expectations – known as ‘Il declino Italiano’, or ‘the Italian regress’ – in the 1990s. Promises of redistribution, of protection from competitive pressure from global markets, and of lower taxes were granted precisely when they were most in demand. Italians were sold on Berlusconi’s populist message when they were hungry, while the government budget constraint was being hidden from them. Excessive public spending followed. The primary surplus was 5.5% in the year 2000, and is currently virtually zero. So why the difference? Why doesn’t Latin American populism fly in bad times, as it did in Italy? Let’s consider the first question. A country like Italy, which always had easy access to capital markets and could place half of its huge public debt abroad, never encountered significant obstacles to financing its public spending through credit. Indeed, public spending increased constantly, despite the high stock of public debt. As long as financial markets remain friendly, populist excesses can be (or promise to be) the country’s public policy. Moreover, populist governments in rich countries can divert resources away from existing large public goods programmes – such as education and basic research programmes – which reap their benefits only in the long run, to finance short-term consumption and transfers – the types of expenditures that make voters happier today but make them cry in the future. In other words, populist governments in developed countries can fund their transfer policies by cutting back on investment. This could even be easier to hide from the general public than the government budget constraint. In Latin America, excessive spending during recessions was followed by spectacular financial collapses. In the 1980s and 1990s, Argentina, Brazil, Bolivia, Colombia, Ecuador, Mexico, and Peru saw record hyperinflations due to excessive seigniorage or, in the absence of that, sovereign defaults due to excessive and non-payable foreign debt. Argentina in 2001, Uruguay in 2003, Paraguay in 2003, and Ecuador in 2008

are more recent examples, still fresh in our memory. These experiences seriously compromised the access of these countries to capital markets (Gavin and Perotti 1997). Perhaps surprisingly, public debt in Latin America stands on average at around 50% of GDP, much smaller than in Europe. Populist excessive spending happens in Latin America at the only time it can happen – under a government surplus, when the government enjoys windfall profits from the sale of oil (as in Venezuela) or soy (as in Argentina), or some other commodity whose price and revenues are procyclical. But these windfalls are not saved and invested in long-term enduring projects to overcome some of the structural weaknesses of these economies. Instead, they are redistributed for current consumption. From this perspective – and answering the second question – populism is essentially the same in Italy and in Latin America. Both divert resources from long-term public good projects to short-term consumption, weakening the long-term growth prospects of their economies. Populism gives the illusion of short-term relief at no cost; the cost is just hidden or simply procrastinated. The main difference is that in developing countries, the demand for populism is active both in bad and good times but has more chance of being satisfied – and, thus, its supply gains credibility – in good times. In developed countries, most people are well off most of the time, and can sustain their consumption needs easily. But when protracted bad times hit and their consumption habit is threatened, the siren of populism may becharm, as Italy’s story teaches us. The key question we are left with today is whether the mindset of southern Europeans has changed after the experiences of these past few months. After their countries were brought to the brink of a financial collapse by populist policies, will Italians and Greeks again vote a politician into power who makes lavish promises in the presence of a recession? Among the many challenges facing Mario Monti and Lucas Papademos is that of teaching Italian and Greek citizens to be realistic again and not to trust illusory promises.

*Professor of economics, European University Institute in Florence and Scientific Coordinator of Ente ‘Luigi Einaudi’ for Monetary, Banking and Financial Studies in Rome. CEPR Research Fellow

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banking

How to rebuild trust in the banks Restoring trust in banking depends on policymakers to establish a stable and sustainable new regulatory framework and by bankers themselves to address flawed past governance and management practices, writes Simon Lewis, CEO of the London-based association for financial markets in Europe (AFME).

“F

By Simon Lewis*

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or some prominent politicians, finance is the enemy that needs to be conquered. From Brussels and other capitals, there are waves of new regulations which leave the industry struggling to stay afloat. In Berlin and in Paris the campaign continues to launch a Financial Transaction Tax. All are symptoms of the basic problem facing Europe’s wholesale financial services industry and capital market participants: a large and enduring loss of public trust. The crisis which began in 2008 exposed the limitations of government, regulators and market players – including investment banks, retail banks, the rating agencies and others. All have seen their reputation suffer, but none more so

than the banking industry. The worrying signs are that this issue continues to grow. The Edelman Trust Barometer, a respected annual poll published in January, showed trust in business declining and banks and financial services again as the least trusted of all business sectors. More worrying still for bankers, trust in banks suffered another sharp fall last year. Only 40 per cent of those asked trusted banks compared to 56 per cent in 2008. This matters a great deal, and not just to the banking sector itself. Liquid capital markets and a well-functioning banking system are the beating heart of any modern economy. Without trust in the financial system, it will be hard to restore broader economic confidence and with it a durable economic recovery. A new book of essays on financial reform written by leading regulators, policy-makers and academics and being published this week by the Association for Financial Markets in Europe (AFME) explores the scale of the problem and the elements of a solution. Restoring trust, it concludes, depends on action by policy-makers to establish a stable and sustainable new regulatory framework and by bankers themselves


banking

to address flawed past governance and management practices. The process will be long and arduous, and although significant change has already happened since 2008, there is much more to come. Take regulation. In the past three years the global regulatory machinery has been in overdrive and has produced significant reform – especially of the framework for banks’ capital and liquidity requirements. Paul Tucker, Deputy Governor of the Bank of England and a leading member of the global Financial Stability Board, comments in our book that this is just the beginning. Regulators, he writes, are now determined to address the problem of “too big to fail” – the systemic risks that led banks in several countries to be rescued by taxpayers. Regulators are focused on excessive opacity and complexity in capital markets and financial exposures, and on the need for a new “macro-prudential” approach to supervision of the system which will be much more intrusive and interventionist in the face of risks to financial stability. For the banks themselves, this means a period of wrenching change that will leave the industry of 2017 bearing little resemblance to that of 2007. Bank balance-sheets are already shrink-

ing under the influence of the costly new capital requirements and will continue to do so for several years. Simultaneously, many product lines will no longer prove profitable under the new Basle III capital rules and so will be axed. Economic conditions are playing a part; competition will become more severe as sluggish growth exerts a downward pressure on margins and banks compete for market share. Many of the more esoteric and complex products that appeared at the height of the boom (such as the infamous “CDOs-squared”) have already disappeared; others will follow. Remuneration is the issue by which the industry will be ultimately judged by the public and politicians. This year’s figures show a significant reduction of compensation levels in investment banking. More significant is the increased proportion of compensation delivered in the form of deferred stock, some of which can be clawed back in the event of poor performance in later years. Unless the industry does a better job of communicating how remuneration structures have been reformed banks will always appear dramatically out of touch with the society in which they are operating.

Another development that is less visible in public but is no less real for that is a new dialogue between bank executives and shareholders about strategy, returns and the division of rewards between investors and employees. We can’t know precisely how the industry will look after these changes have worked their way through. But the direction is clear, including to the leaders of the banks themselves. After a period in which investment banking played an unusually prominent role in booming economies and in the public consciousness, the industry knows it needs to return to a position in which bankers are seen not as masters of the universe but as servants of the real economy. We have not reached that point yet, not by some distance. But when we do, the conditions will have been created in which the political attacks will subside and a measure of trust in finance can be regained.” * Simon Lewis is the Chief executive officer of the London-based association for financial markets in Europe (AFME).

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the world

President of Taiwan Ma Ying-jeou re-elected! Saturday January 14, President Ma Ying-jeou was re-elected by a comfortable margin, fending off a challenge from his main rival, Ms. Tsai Ing-wen. Recent polls had suggested the race would be very close, raising anxiety among those who prefer the status quo. That group included some American officials, who expressed unease in private that a win by Ms. Tsai could complicate the already difficult relations between Mainland China and the United States, a longtime ally of Taiwan (Republic of China). By N. Peter Kramer

P

ursuing closer ties with the Mainland helped solidify Dr. Ma’s support despite withering attacks from Ms. Tsai. More than 200,000 of Taiwan’s citizens who live and work across the Taiwan Strait in China flew home to vote, most of them taking the direct flights that Dr. Ma helped establish. Not surprisingly, many returnees were Ma supporters spurred by the polls that had showed him in a close race. “The people gave their approval of our efforts to put aside dis­ agreements and focus on peace on both sides of the straits, turning crisis into economic opportunity,” Re-elected President Ma told his supporters. His party also retained a majority in the Parliament, but with a reduced margin. Dr. Ma, of the Nationalist Party (Kuomintang), won with 51.6 of the vote. Ms. Tsai, of the Democratic Progressive Party (DPP), drew 45.6 percent. A third independent candidate, James Soong of the People First Party, who had been expected to siphon off as much a tenth of the electorate from Mr. Ma, received 2.8 percent, according to the Taiwanese Central Election Commission. Turnout was more than 74 percent.

Mainland China, Obama and EU comment

The People Republic’s agency that handles Taiwan affairs lauded Mr. Ma’s victory, according to China’s state-run Xinhua news service, saying it showed that improved cross-strait ties were the “correct path and have the support of the Taiwanese compatriots.” In a statement the White House in Washington DC congra­tulated President Ma on his reelection and the people of Taiwan on the successful conduct of the presidential and legislative elections. “Taiwan has proven to be one of the great success stories in Asia and has again demonstrated the strength and vitality of tits democratic system”. Also saying, “Cross-Strait peace, stability and improved relations, in an environment free from intimidation, are of profound importance to the United States.” The European Union sent a message without even mentioning

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the name of the re-elected President, clearly showing the strange relation the European Commission has with the country. The High Representative of the EU for Foreign Affairs and Security Policy and VP of the Commission, Catherine Ashton wrote: “I welcome the elections held in Taiwan on 14 January and reiterate the EU’s support for democratic values. The EU welcomes the improvements in cross-strait relations over the past four years, and I hope that this trend will continue, to the benefit of the people on both sides of the strait.”

Ma’s second term more challenging

The economic benefits from Dr. Ma’s first term have been pronounced. They include a landmark trade agreement between the two sides, which slashed tariffs on 800 items, helping to increase Taiwan’s exports to China last year by 35 percent over 2009. Spending by mainland tourists has pumped $3 billion into the local economy. But despite such figures, many working class and middle-class Taiwanese say they have yet to feel any trickle-down effect. But a plurality of voters appeared to side with President Ma’s contention that improved relations with Mainland China were the island’s best hope for prosperity. But the margin of Dr Ma’s victory this time - down from the 17 point spread from his first election in 2008 - highlights deep divisions among an electorate still wary of Mainland China’s intentions. “The true message of this election is that people in Taiwan are anxious about the future, and Beijing would be wise to note this division,” said an analyst of the Center for Northeast Asian Policy Studies at the Brookings Institution in Washington DC. Dr. Ma may find dealing with China far more challenging in his second term, analysts say: “with low-hanging fruit on trade and transportation matters already picked, both sides could be forced to tackle thornier concerns, including a peace treaty, measures to protect Taiwanese investment in China and the future of the roughly 1,500 Chinese missiles still aimed at the island.”


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the world

Africa Is Open for Business Angola is offering financial aid to debt-ridden Portugal. The Economist recently declared Africa a “hopeful continent” after years of writing it off as “hopeless.” More than a million Chinese are in Africa exploring opportunities in villages and cities. The continent is attracting top global brands and has a growing middle class. There’s a sense of upbeat optimism with possibilities that seem endless. By Ndubuisi Ekekwe*

A

s the lions roar from Kenya to Ghana, and cheetahs from South Africa to Mali, young Africans are unleashing their entrepreneurial energy and most governments are offering stronger leadership, a more businessfriendly economy, and less corruption. But, Africa is not an isolated island in the world, and ongoing uncertainty with some of its trading partners could imperil any sustainable progress. A trade shock is just around the corner, as the continent remains reliant on a mineral-based

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economy. And new, rosy economic statistics have not managed to stop strikes, riots, and other protests, which are the result of the continued reality of economic inequality. What’s more, Africa is complex, fragmented and multicultural. What works in Nigeria is not guaranteed to work in Kenya. But, none of this should keep businesses from expanding into African markets. The international community should not ignore a growing market of roughly a billion people. Africa needs about $50 billion to meet its development goals over


the world

the next few years, and it needs the help of the international community to tackle the vicious cycle of poverty, disease and hunger in Africa today. African economies are growing, and millions have moved into the middle class category within the last decade. And Africans are buying things, from iPads to Porsches. Africans are also becoming global players, with some of their banks - such as United Bank for Africa and Guaranty Trust Bank - opening offices in the U.S., France and the U.K. Investments in the continent will grow, and the following areas remain the most promising: • Energy: Despite the abundance of resources like solar, oil, water and gas, most Africans still have no reliable energy supply. The challenge has been the cost-intensive, longterm reward nature of these projects in unpredictable political systems. It’s simply too risky for businesses to invest in this sector. • Minerals: As the world economy recovers, African minerals such as crude oil and gold will remain important to the global economy, as demand increases. Investing in extracting and processing these minerals will remain a lucrative venture. • Agriculture: Africa is unfed in a continent with good, arable land. Africa imports its food, despite the fact that it produces enough to feed its citizens. The problem is that harvests are poorly managed due to a lack of preservation techniques, which means that much of the food goes to waste and Africa goes hungry even after bumper harvests. Food production, processing, and preservation will remain a profitable growth area. • Technology: Africa has not attracted capacity-building investments, such as R&D centers and hi-tech manufacturing. In the coming years, as global buyers become more sophisticated, companies that differentiate their products within local markets will have a strong competitive advantage. Africa is no exception. For example, telecoms can be profitable in Africa not for selling airtime, but for powering value-added services such as mobile banking and mobile business, among others, that address the needs of this unique population.

able African development. As the global economy recovers from recession, their impact will continue to expand. • Education: Education is a weak link in the development of the continent. Major foreign investment has not come to the sector owing to low return, but some African governments are working hard to change that. For instance, Rwanda and Carnegie Mellon University have teamed up to offer a graduate-level program in East Africa. The new campus will train talent for companies who want to make products closer to Africans. Better education will also serve to advance the entrepreneurial ecosystem on the continent. • Intra-trade: The trade route to colonial links will become weaker as these nations become richer and make choices purely based on market factors. For instance, Cameroon could choose South Africa, rather than France, to process some of its food. • Infrastructure: Though the regional economic communities (RECs) have not lead to monetary unions, Africa is poised to benefit from the integration of its various economies, and can learn from the euro zone crisis when strategizing about its own single currency program (PDF). The RECs will form free trade areas, which will help modernize infrastructure, among other things. Africa’s biggest risk is its political system. New governments have cancelled mine contracts and leases executed by predecessors. The continent faces challenges if it cannot prepare for its post-mineral era. As I drive by dead mines that generated billions of dollars of wealth around the world, but left no sustainable community development behind, I have to wonder: What will the domino effect be if the continent cannot transmute effectively into a post-mineral era? Africa needs a redesign of its economy towards a knowledge-driven one. New industries remain underfunded and quality startups are scarce. Africa is open for business, and tomorrow’s global leaders should understand both the risks and the opportunities that are available here. There is the potential for corporations to make billions of dollars in profits in Africa. But, much more importantly, contributing to a strong and sustainable Africa could just be the next generation of global leaders’ greatest legacy.

Four things will drive the African economy in this decade: • African diasporas: The diasporas who have acquired worldclass skills with international networks will drive sustain-

* Ndubuisi Ekekwe is a founder of the non-profit African Institution of Technology.

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23


ENERGY

DEPA’s strategic role in the Southeastern European region DEPA, the Public Gas Corporation of Greece is the firm that completed the construction of the natural gas transport infrastructure and elevated that fuel to a pillar of Greece’s energy balance. This year, 15 years after its first entrance into the Greek pipelines, natural gas consumption will reach 4.7 bcm versus 4.5 bcm in 2011 and 160 mcm in 1996.

T

hus, today, the “green fuel” participates in the local power production by more than 25%, whereas more than 1 million domestic, professional, and big industrial consumers enjoy its benefits. During the next 2 years, the segment of the population and businesses that will have access to natural gas will rise more due to the operation of 3 additional Gas Supply Companies, which will cover regions with total population over 1 million inhabitants, plus several thousands of small and large service, trade and manufacturing companies. Except for the establishment of natural gas as the fuel for power generation and the cover of domestic and professional requirements, DEPA has been developing further activities in order to attract investment and turn Greece into a natural gas transmission hub. The Greek company, together with the Italian Edison, is involved in the promotion of international interconnection investment projects, such as the Greece-Italy (IGI) and Greece-Bulgaria (IGB) pipelines. In addition, it has been examining the possibility of transferring the natural gas that was recently discovered in the sea area around the Eastern Mediterranean through a pipeline system that will cross the Greek state. For this purpose, it has already undergone respective studies that confirm the both the feasibility and the financial advantages of these plans. The extensive recognition of DEPA’s potential became evident during the first phase of its privatization tender, since 17 companies and company consortiums expressed their interest - an unprecedented number for such tenders.

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Who is DEPA The Public Gas Corporation of Greece is an S.A. company; the Greek State participates in its share capital by 65%, and the Hellenic Petroleum S.A. Group by 35%. The company controls 100% of its subsidiary DESFA S.A., the “Hellenic Gas Transmission System Operator”. When it will be privatized, the Greek State will transfer to the strategic investor 100% of DEPA, maintaining 34% of its subsidiary, DESFA. As dictated by the European Community legislation, DESFA is administratively independent from DEPA; it controls and manages the transport networks (high pressure networks), the LNG terminal on Revithoussa Island in the Gulf of Megara, the compressor station in Nea Mesimvria, Thessaloniki, the metering stations at the system’s inlets and outlets, as well as the Natural Gas Control & Dispatch Center in Patima, Elefsina. In addition, the 3 Gas Supply Companies (GSC) that distribute natural gas to the residential areas of Athens, Thessaloniki, Volos and Larissa, Trikala and Karditsa, through urban pipeline networks, are all subsidiaries of DEPA, which controls 51% of their shares. DEPA also participates in the investment projects of the ITGI pipeline system, which includes the Greek-Italian pipeline (IGI) and the Greek-Bulgarian pipeline (IGB), through the Greek-Italian joint venture “Poseidon” (50% DEPA, 50% Italy’s Edison). Profitability In 2011, DEPA had the highest turnover and highest prof-


ENERGY

its since its foundation. Earnings before taxes rose to 244.73 million euros versus 152.3 million in 2010, and net earnings after taxes rose to 190.9 million versus 90.8 million in 2010. Its EBITDA reached 275.03 million euros versus 204.31 million in 2010 and total revenues to 1.76 billion euros versus 1.22 billion in 2010. The high profitability is a result of the large increase of gas quantities delivered by DEPA (commercial activity), and of the quantities transported through DESFA’s network. Specifically, out of a total demand of 4.5 bcm approximately, DEPA supplied 4.22 bcm versus 3.85 bcm in 2010. New activities In 2011, DEPA invited an international tender for the participation of investors in 3 new GSC that will cover the regions of East Macedonia and Thrace, Central Macedonia, plus Central Greece and Evia. In those 3 regions, DEPA has invested up to 160 million euros in necessary infrastructures, such as steel pipe networks, natural gas valve stations etc. and city networks, so that the new GSC will be able to operate as soon as possible after their foundation. The new networks will provide gas to large urban centers in the regions of Central and Northern Greece, very soon after the completion of the tenders, since the new companies will be able to begin immediately the distribution of natural gas to commercial, industrial, and domestic clients, due to the investments already made by DEPA. The deadline for the reception of invitation to prequalify by private investors interested in participating in these firms, and assuming their management, expires on the 23/4/2012. As far as the use of natural gas for vehicles is concerned, DEPA is a pioneer in Greece; as in the beginning of the decade 20002010, it created the first bus fuel supply station. Today, it operates two such units that supply gas to more than 800 public transportation vehicles and to vehicles of local government organizations. In fact, one of these stations also supplies gas to privately owned vehicles. DEPA firmly promotes vehicle motion by natural gas, and soon a gas station network will begin to operate in Greece, covering the urban centers through a distribution network, as well as the AthensThessaloniki highway, thus opening up the market and creating the circumstances required in order to further promote natural gas vehicle motion, given the fact that the number of vehicles powered by natural gas is increasing. International activity Since the completion of the basic infrastructure for the introduction of natural gas in Greece, DEPA traced out an expansion strategy based on the exploitation of the country’s geographical advantages. The first step in this direction was the connection of the Greek network to the Turkish one in order

to supply not only Greece but the broader region too, with natural gas from the Caspian Sea that Turkey already uses. Thus, since 2007, the Greek system receives approximately 0.7 bcm of natural gas from Azerbaijan through BOTAS. At the same time, DEPA concluded a strategic alliance with the Italian energy company Edison for joint participation in big interfrontier pipeline projects. Edison is the second largest power generation company in Italy, very active in the management of infrastructures for transport, storage and distribution of natural gas. As a result of this association, the “Poseidon” joint venture was set up, which is responsible for promoting the construction of the Greece – Italy (IGI) underwater pipeline, 200 km long, with an annual capacity of 8.8 bcm, as well as the new interconnection to the Bulgarian network, the IGB pipeline, 180 km long with an annual capacity of 5 bcm. The two pipelines are designed for double flow in order to exploit the possibilities of gas reception from every available source, i.e. according to current data, from the Caspian Sea through Greece to Italy and Bulgaria, from North Africa through Italy to Greece and Bulgaria, and Liquefied Natural Gas through the Revithoussa Terminal to Italy and Bulgaria. Regarding the permits and studies required, the two projects are in a quite advanced stage. The IGI has received the environmental permits from the Greek and the Italian authorities, whereas the IGB has received the relevant permits from the Greek authorities and in the very near future it is expected to receive the corresponding permits from the Bulgarian Ministry of Environment. Thus, the construction of the IGB can even begin at the end of 2012, so that the pipeline will be commercially operational in 2014. The European Commission has recognized the importance of the IGB for the supply of natural gas to Southeast Europe; the project has been characterized as a common interest project, and the EU will support its construction with 45 million euros. New discoveries and DEPA The discovery of important natural gas quantities in Cyprus’ Exclusive Economic Zone (EEZ) offers new perspectives to the entire East Mediterranean area. DEPA closely follows the developments in the region, aiming to play an important role in the gas transport, using existing or new infrastructures. Initially, it prepared a preliminary study regarding the possibility of natural gas transport from the new fields to Europe through pipelines. The study concluded that the construction of a 1,100 km long underwater pipeline, which will connect the new fields to the Greek pipeline system and from there will transport the natural gas to Europe through a series of interconnectors, is technically feasible. The discoveries in Cyprus’ and Israel’s EEZ indicate that the 3 new fields (Tamar, Leviathan, Block 12) contain approximately 1 tcm of natural gas, a quantity large enough to justify the construction and operation of such a big underwater pipeline. In addition to this prospect, DEPA examines the possibility of transportation of the East Mediterranean gas to the European networks through LNG terminals on Greek soil, and from there, the utilization of international interconnections. EUROPEANBUSINESSREVIEW

25


Emerging Markets

What Multinationals Miss in Emerging Markets

Are multinationals getting the best leadership and professional talent when they recruit in Brazil and other emerging markets? In one sense, yes: These companies can generally hire the most-expensive, best-educated graduates in these countries. But their high standards may actually be keeping multinationals from taking full advantage of the talent on offer. By Alfredo Behrens*

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Emerging Markets

I

n Brazil, many multinationals outsource the preliminary screening of trainees, with the requirement that candidates must speak English. This is how 70% of a million candidates for 4,500 trainee positions are filtered out every year by the recruiting company Cia de Talentos. And when multinationals hire for more senior positions, they are mostly just poaching from each other - and thus restricting themselves to the same limited talent pool. In a relatively poor country where the spoken language is Portuguese, fluency in foreign languages is the privilege of the upper middle classes. By limiting hiring to those that show proficiency in English, multinationals are severely restricting career opportunities for the poor and thus ratifying a history of exclusion. This seems in line with the view that it is not up to the corporations to educate the workforce. But it also means that multinationals are shooting themselves in the foot. Because Brazil urbanized rapidly and recently, fertility among women has dropped quickly. Families of four or five children are now rare. Each child is worth much more to a family than used to be the case. In addition, rapid urbanization has brought urban violence. Upper-class and middle-class families do not want to expose their precious children to the streets. These children thus grow up sheltered and clawless in closed playgrounds and private schools. And it is they who, once they graduate from university or business school, form the recruiting pool for multinationals. To guide business schools teaching strategy to undergraduates, I recently organized a roundtable of headhunters, business magazine editors, and representatives of Cia de Talentos to figure out what was lacking among young management professionals in Brazil. Two missing traits that came up repeatedly were “perseverance and resilience.” Those are precisely the qualities that are lost to overprotective upbringing. This loss is difficult to make up for at a business school. It calls instead for a change in recruiting strategy to look to less privileged environments where the families cannot overprotect their children. There the candidates are unlikely to be as educated, and are generally lacking in English proficiency. But these abilities can be learned.

Mixer, a prominent Brazilian producer of audiovisual content for network television and publicity agencies, has followed this approach in recruiting producers. Mixer partnered with the philanthropic initiative Instituto Criar, which puts about 100 hundred poor and disenfranchised youngsters through a TV training program for a year. Mixer has hired about 30 of them per year to complete their on-the-job training - and is now a successful, 400-employee company with private equity backing. Multinationals should also be considering such paternalistic approaches to recruiting - for their own good. A partnership between business schools, the recruiting companies and multinationals is likely to render a more effective workforce, improved social justice and greater diversity at the subsidiaries of multinationals in Brazil. Multinationals would absorb part of the cost of developing abilities by business schools, and recruiting companies would learn how to develop a new hunting ground. Cia de Talentos is aware of the shortcoming and is poised to change. Multinationals must be willing accommodate. This is also relevant for all emerging markets. Think of India and China, whose large populations are still strongly rural but urbanizing rapidly. The ensuing decay of the urban social fabric will take place and families are likely to follow the Brazilian route: overprotecting their offspring. It makes sense for multinationals in Brazil to correct their recruiting practices and for those in India and China to avoid Brazilian shortcomings. A more paternalistic, long-term approach to developing talent may be the only way forward in emerging markets, where workers vie for protection because they are vulnerable and talent needs to be nurtured by business because there is not enough of it to go around. * Alfredo Behrens is professor of Global Leadership at Faculdade FIA de Administraçαo e Negοcios in Sαo Paulo. His most recent book is “Shooting Heroes and Rewarding Cowards: A Sure Path Towards Organizational Disaster”.

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27


CORPORATE RESPONSIBILITY

World in Turmoil due to lack of Business Ethics By Anthony E. Gortzis*

The international economic uncertainty has a direct impact on economic structure affecting everyone’s business life. At the time of writing this article, the European consumers and investors whether employees or pensioners are very anxious due to the significant increase in unemployment, continuous economic scandals, extreme -and sometimes illogicalfluctuations of oil, food prices, etc and the warning of imminent unprecedented economic deep recession.

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owever no matter the sudden burst of bad economic news, the decline was steady all the previous years due to the lack of business ethics in corporate routine operations and the loose or non-existent external audits & controls from the state / stock exchange / other international organizations. Yang Yuanging, Chairman of the Board of Levono, a private firm in Fortune 500 said that «If you want to be a global company, a company that is built to last, not only should you consider how to contribute to your shareholders but you have to consider how to contribute to society».

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The environmentally friendly production, the job security sentiment, fair rewards & equality at work, social security cover to all employees and their families and equal opportunities, pre-assume well-planned corporate structures and national self-protected and protective to citizens-employees-consumers policies from corruption, legal inadequacies or ill practices. Aristotle (380-324 BC) wrote: “For sustainability of leadership in excellence, pre-assumes the existence of three elements, uppermost being “Ethos & Ethics (business)”. The other is “Logos & Logic”, which only under the prism of


CORPORATE RESPONSIBILITY

tion of a universally acceptable standard code of business deontology, as well as the surge of knowledge and information on Business Ethics, Corporate Responsibility and Governance issues. The advantages of participating in EBEN activities are obvious as stated underneath. • Businesses are developed throughout all the range of procedures and activities, become more active members of so­ ciety and more environmental con­ scious supporters. • Businesses invest and form their business culture based upon exe­ cutives who combine know-how and human knowledge as the core of their activities. • Business also benefit by the de­ velopment of their know-how via sophisticated and modern internal systems aligned with the improvement and evolution of their executives. • Business culture is upgraded and becomes more familiar and under­ standing to its internal & external stakeholders, giving to the organization a unique and distinguished identity which is an excellent means of de­ veloping relations based upon con­ fidentiality and recognition by custo­ mers and third parties. • Businesses which, via the model, achieve positive results are presented as outstanding pan-European business and academic examples.

Business Ethics, and evolving management systems, product-service quality & total quality systems can achieve business excellence. The third element, “Passion” for business ethics excellence completes the perquisites for sustainable leadership in business excellence. The European Business Ethics Network EBEN, founded in 1987 as a European non-profit association, is a cross-national network dedicated to the promotion of business ethics, broadly defined, in

academia, business, public sector and civil society. EBEN mission is to promote ethics and excellence in businesses, to increase awareness about ethical challenges in the global marketplace and to enable dialogue on the role of business in society. We stimulate and facilitate meeting of minds by organizing fora, conferences and publications and we vision the diffusion and culture of a new way of management that it is based upon the values of Business Ethics, the crea-

EBEN network members include academics, practitioners and representatives from respective private corporations, NGO’s and the public sector. The diversity of membership of EBEN (from 43 countries in 2010) means that there are many varied views within the group about business ethics. Look for more information on www.eben-net.org *Athens based Anthony E. Gortzis is the European Chairman and President of EBEN Greece and Founder and Chairman of the communication group OneTeam.

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european affairs

The Fullness of Time? “How come we choose from just two people for President, and fifty for Miss America?” Alfred E. Neuman

By Harris Vourkas

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T

he recent Greek crisis contains its own synthesis of parameters: its internal and external dramas, its national and European aspects, its periods of stillness and of hastening speed, its layers of personal and collective involvement, its specific links to the local, the national, the European face of our society... In a dramatic manner, this crisis emphasizes the absence of a clear vision in order to inspire trust to people in agony, of a well-defined policy track in order to provide sense to active forces in the economy and to compose the heated spirits in the society, of a leadership advantage in order to create the difference, in Greece and in Europe alike... Therefore, this multitude of facets requires a radical shift in our approach: we must proceed to a deeper and more systematic analysis, we have to move further our focus, from the phenomena (the objects of experience) to the noumena (the things in themselves). We may then conclude that the so-called «Greek crisis» presents a combination of many unanswered questions with some ill-prepared answers with which we became simply familiar, because swimming against the current may be athletic, yet tiring... At first, let’s agree on the defining characteristics of the crisis. Seeger, Sellnow and Ulmer1 say that crises have four defining characteristics that are «specific, unexpected, and non-routine events or series of events that [create] high levels of uncertainty and threat or perceived threat to an organization’s high priority goals».

Venette2 argues that «crisis is a process of transformation where the old system can no longer be maintained». If change is not needed, the event could more accurately be described as a failure. However, for ancient Greeks the word is more anthropocentric and addresses the result of a balanced decision, the judgement, the preference/choice after careful consideration of options possible: in short, it is the human spirit which remains in command of all future actions of the human... At present, let’s unravel some bits of those issues hanging over our heads like the levitating placenta above this visionary «parabirth» (sic) painted by Salvador Dali in 1943...

A recent social paradox

We live today in a simple yet peculiar paradox: for the first time after WWII, the so-called «civil society» (or «citizens», for that matter) are in advance on their political, economical and social elites3. By the past, those latter used to provide a vision to the former, based on a knowledge gap, on their capacity to travel and propose best practices from abroad, or on their call for the development of a modern State, warrant of a stable welfare. This vision was their distinctive advantage, the instrument of their power, their reason of being... Today, this is no longer the case. And why is that? To start with one reason, more people are better educated nowadays than at the past or have access to seminars,


european affairs

symposiums, forums, etc. that enable them to keep up with the latest evolutions of their field. Another reason lies on the exponential amplification of information channels4 (in terms of both volume and content), which became progressively more accurate and widespread and which are read by the elites and the civil society alike. One other reason, is people’s growing experience with «cumulative comparisons»: gradually larger numbers of people travel and live abroad, work and interact in several workplaces, express themselves and exchange openly in public and in the web. These past unknown pleasures bear in them the hidden fruit of wisdom -aka the critical spirit- and lead inexorably to the definite defeat of the unquestioned authority, in every sense and conceptual load of the word. The last reason that can be brought out is that time and efficiency pressure to the elites forced them into «culture bunkers», where lack of exposure with the «real» issues and overprotection from risk5 gradually excluded them from everyday’s «smart» solutions. In short, during those last decades, we have witnessed a complete and profound modification of both fundamental and critical points allowing this «culture gap» to operate in the advantage of the elites in contrast with the civil society.

It seems that this alteration shall be a long lasting one, too...

An Unidentified Political Object

Commenting on the outcome of the EU summit of January 30, 2012, Greens/EFA co-president Dany Cohn-Bendit declared: «Another summit goes by and again Europe’s “leaders” have distinguished themselves by their lack of imagination and serious politics. The two month sideshow surrounding the new fiscal compact has lost us more precious time and we have not moved any closer to resolving the Euro crisis. It is time for the EP to take the lead and give Europe’s citizens some hope». As critic as this phrase may appear at first, it tackles several issues linked with the EU Institutions (more precisely, the people working in them). One may argue that their inability to put forward consistent solutions dates back in the ‘90s. Indeed, under the long administration of Jacques Delors6, the European integration and action found a new momentum: Single European Act (1986), The Cost of Non-Europe (1988), Delors Report on the Economic and Monetary Union (1989), establishment of the European Bank for Reconstruction and Development, Schengen Agreement (1990), Maastricht Treaty (1992), establishment of the European Monetary Institute, of the Committee of the Regions and of the European Investment Fund (1994), in addition to the introduction of the Qualified Majority Voting, for those who often take it for granted... In contrast, the years that followed this extraordinary legacy7, were more than

deceitful: failure to react to the beginning of the Kosovo War, inability to conduct the Agenda 2000 negotiations, ill-preparation and lack of projection on the consequences for the euro-based national economies, resignation of the European Commission en masse due to allegations of corruption, hasted enlargement of the European Union without prior due diligence and scenarios building, poor overall communication... Yes, the list is long and becomes longer as years are passing by... Today8, the «lack of imagination and serious politics» of the EU leaders and decision-makers is backed by a heavy institutional pandemonium, where even the best of intentions bear no future of success. We detect a patent deficiency of coherence, clear-cut indications, costbenefit analyses, rapid reaction especially to crucial issues, where decisions were -and remain- based on a «politicallycorrect» oriented culture. The Georgia crisis, the mass refusal of the Constitution for Europe (448 articles, have you read them all?), as well as the progressive introduction of party competition in the European Parliament, leading to the development of a Parliamentary system between the executive and the legislative branches: these examples demonstrate the difficulty to elaborate a common focal point within the European Institutions, where dissonance and inflexibility of decision-makers is ever-growing, instead of fading over time by getting to comprehend and assimilate better each other’s arguments. In a morning speech on November 16, 2010, EU President Herman Van

1

Seeger, M. W.; Sellnow, T. L.; Ulmer, R. R. (1998). Communication, organization and crisis, in Communication Yearbook No. 21, pp. 231-275.

2

Venette, S. J. (2003). Risk communication in a High Reliability Organization: APHIS PPQ’s inclusion of risk in decision making, Ann Arbor, MI, UMI Proquest Information

and Learning. 3

By political elites, we understand mainly the leaders and the administration of the political formations, including their executive arm (ministries, companies of the Public sector,

etc.). By economical elites, we consider the Boards of major companies (CEOs, CFOs, etc.), consultancies, etc. By social elites, we comprehend leaders of Trade Unions and other syndicates, pressure groups, etc. Naturally, one could always bring out an outstanding person or two and argue on the fallacies of this presentation. Unfortunately, though, exceptions do not make the rule, they are merely a reference... 4

One crucial event underlined the importance of live on-line information which has given equal opportunities to the elites and the citizens alike : the first Persian Gulf War and the

global retransmission by CNN (even with a security buffer zone) of daily operations, comments and analysis. 5

After several scandals that blew away this « urban myth » of risk-aversion choices (BCCI, Y2K, Xerox, Enron, Freddie Mac, Merrill Lynch, Arthur Andersen, AIG, Bernard L.

Madoff’s massive Ponzi scheme, Lehman Brothers, etc.), one may observe how overrated and ill-managed was this whole concept. 6

Delors I (1985-1988), Delors II (1989-1992), Delors III (1993-1994).

7

Namely the Santer Commission (1995-1999) and the Prodi Commission (1999-2004).

8

Barroso I (2004-2009), Barroso II (2010-2014).

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european affairs

Rompuy (poet and writer of Japanese haiku and Latin verse) warned that if Europe’s leaders mishandle the current crisis and allow the eurozone to break up, they will destroy the European Union itself: «We’re in a survival crisis. We all have to work together in order to survive with the euro zone, because if we don’t survive with the euro zone we will not survive with the European Union». From the above, it appears that the way towards an increased efficiency from the top of the European Institutions, as such, is still long. New options for the optimisation of the decision-making process within the EU and eventually for the timely response to (any sort of) crises shall be found, soon. But even a UPO does not come alone: there is a proliferation of other actors out there (not necessarily more defined for that matter) who seize their place as well, waiting for their time of glory, from their own fortified standpoint...

A long list of (unavoidable) guests in the party

At the same time, other actors from the periphery of the crisis that we are trying to deal with act with great focus, depending on the prospect of their specific interest. This element, as crucial for the maintenance of a balanced market economy it may be under normal circumstances, adds extra strain which generates more disequilibrium and make the decision-making process even more complex, as several parameters, manageable until then, go wild at the same time. These actors, are highly diversified: governments with different agendas and priorities; funds and financial players with calculations that measure return in shorter periods than the political period punctuated by elections; press and communication groups; global consul9

tancies and legal firms; investment and commercial institutions, you can grasp the big picture... They are numerous as well: more than 35,000 mutual funds operate in Europe, almost the half of the total world number, operating on a total assets value of more than US$ 8 billion, the third of the total world figure. The estimated size of the assets managed by hedge funds worldwide for the first quarter of 2011 amounted approximately US$ 2,550 billion9. In less than 10 years, they account for half of the assets managed by commercial banks, which face growing strict regulations and legal constraints10. Pressure groups, operate mainly on civic and producer issues. By their lobbying, decision-making and implementation functions, they can alter the end-result of general orientations, actions and legislation. On mid-2011, a new Transparency Register was created by the European Commission and the European Parliament showing that almost 4,000 entities existed on that purpose in the EU. The number of internationally operating NGOs is estimated at 40,000; separate national numbers are higher. Large NGOs may present annual budgets of several hundred million dollars and dispose for this reason a considerable capacity of communication, sometimes higher that the total communication budget of a company, a ministry or a government. One may easily realize here that both scope and size matter: the leaders of today can no longer afford to ignore the angle promoted by those actors, sometimes in conflict with their own priorities and issues developed in their agenda, neither all relevant economic and financial implications. Those parameters, in addition to the multitude of those actors, become increasingly complex to deal with, in particular throughout the given time

frame on office (for those leaders who are elected or assigned to their functions) or the fixation on quick results, higher revenue and premium returns (for CEOs, CFOs, COOs, etc.). The high rates of CEO turnover and the decrease of the average period on duty11 demonstrates that senior management in the private sector is merely a resting place. Once at the top, one should be able to prove his/ her abilities to over-perform at all times.

A learning curve, yes, but in which sense? Education is a fundamental factor for our society. Expectations, dreams, anxiety, frustration, pleasure, differences, networks, are based on it. It includes the transmission of society’s knowledge, skills, customs and values. Having stated that, how good does it correspond to the initial need to enlighten the human spirit, as well as the one of our society’s elites, the leaders of tomorrow? A series of question should be raised here: can we acknowledge that we have turn diplomas into job-oriented instruments? that we have witnessed the fall of the genuine capacity of free-thinking, based on knowledge? that critical mind is not rewarded in high schools and academia alike? that technological progress has entered the education sector only through its various gadgets and not by more creative approaches of the learning process? that basic reasoning skills decline and IT skills increase? that educational choices depend on lifestyle? that conformity of thought reflects on the way political parties, companies and pressure groups alike make their choices for the recruitment and management of their human capital? So, WHAT is coming next? WHO may lead those major, far-reaching, distinctive changes in order to support growth? WHICH are the main abilities that underline this wide-ranging talent?

HFN Industry Research figure.

10

Basel Capital Accords, Sarbanes-Oxley Act of 2002, current credit requirements, to name a few.

11

13% in 2011, a six-years high, for an average 7 years on the job, according to a study of S&P and Fortune 500 firms by Crist|Kolder Associates, as quoted by Thomas Black at

Bloomberg.com on September 1, 2011. 12

Henry P. Knowles; Borje O. Saxberg (1971). Personality and Leadership Behavior, Reading, Mass, Addison-Wesley, pp. 884-89. For the authors, instead of the authority of posi-

tion held by an appointed head or chief, the emergent leader wields influence or power. Influence is the ability of a person to gain co-operation from others by means of persuasion or control over rewards. Power is a stronger form of influence because it reflects a person’s ability to enforce action through the control of a means of punishment.

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european affairs

Back to the future: from «my-self» to «our-selves» The bureaucratic notion of «formal» organizations which dominated most of the 20th century is about to perish. Leaders can emerge from within the context of the «informal» organization, which expresses the personal objectives and goals of the individual membership. Their personal qualities, the demands of the situation, or a combination of these and other factors, attract followers who accept their leadership within one or several overlay structures12. For David Hakala13, leaders can be found and nurtured when certain character traits are present: Vision (from creation through completion), Integrity (outward actions correspond to inner values), Dedication (doing whatever it takes to accomplish the task), Magnanimity (giving credit where is due), Humility («follower-centric» leadership role), Openness (suspend judgment while listening to others’ new ideas), Creativity (think outside of the box, ask for «what if...?» scenarios), Fairness (dealing with others consistently and justly), Assertiveness (ability to propose crystal-clear statements), Sense of Humour (relieve tension and boredom, defuse hostility). Nevertheless, past and recent technological progress, associated to major cultural shifts under way in our societies, could put forward, or even include, other forms of leadership, in line with the growing complexity of current decisions. Nowadays, we are about to witness tribal urban behaviour of younger generations, world-wide campaigns of viral marketing based on the promotion of similar items which appeal to diverse segments of populations from different countries, expansion of cross-countries blogs and forums. The conversion of this mind-set to a new leadership model can be established in the Group Leaderships or Leadership Teams. As each member of a group or team has the opportunity to experience the elevated level of empowerment, it energizes the

other members and feeds the cycle of success14. However, these interesting approaches seem to overlook the leader’s willingness to act in that sense, whatever may be the personal cost. Our leaders have forgotten the «common sense», the «intelligence of the street», that almost every citizen disposes today... May we see in a not-so-distant future, our future elites coming from the «man in the street», a citizen with those characteristics that leaders seem to have lost for quite a while now? In the ancient Agora, once a statement was made, a point of view was formulated, an argument was developed, the other citizens were actively reacting to it. By doing so, they contributed to a greater idea, that of an ever-modern triptych: Thesis-Antithesis-Synthesis. Hopefully, the present article may open a debate, necessary for ourselves and our society, Greek and European. By doing

13

The Top 10 Leadership Qualities, in HR World, March 19, 2008.

14

Ingrid Bens (2006). Facilitating to Lead, Jossey-Bass.

15

Jacqueline de Romilly (1992). Pourquoi la Grèce ?, éditions de Fallois, 309 p.

so, we may have answered the question raised by a great Hellenist and member of the French Academy, «Pourquoi la Grèce?».15 If one may say, because the existence of this very question and its numerous implications for us implies that Greece still remains important, to all of us, even today...

Harris D. Vourkas is a strategy consultant for major European companies and policy advisor to Governments and local authorities. On November 11, 2011, he founded the non-for-profit «ATHROISISGrowth for Greece» in order to promote a new development model for his country. Born in Thessaloniki in 1966, he holds degrees from the ULB, SciencesPo Paris & the French ENA.

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Europe in Crisis? N. Peter Kramer Editor-in-chief

What crisis in Europe is everybody talking about? Is everybody talking about a same crisis? Is it a financial crisis, a Euro-crisis, an economic crisis, a political crisis, a democratic crisis, an EUinstitutional crisis? May be we have to conclude that we are facing a crisis with many components and many repercussions. Look at the unemployment rate among young Europeans, with Spain at the top. Look at the Greek workers and pensioners whose income is degraded till –or may be even under – an

acceptable minimum to have a human life (the same time many Greek parliamentarians bringing their big money out of their country!). Look at Italy where –following ‘Brussels’ instructionselections are postponed and a technocrat and former Eurocrat is in power. But what are the solutions? In this special report of European Business Review (EBR) you can read a selection of opinions and solutions given by Europeans taking the crises seriously. EUROPEANBUSINESSREVIEW

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Where were you when Europe fell apart? Too many Europeans have too long avoided the question of Europe, says Swedish writer Per Wirtén. To prevent the EU from turning into a “postdemocratic regime of bureaucrats”, intellectuals need to stop mumbling and take the fear of Europe seriously.

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By Per Wirtén*

he meeting of EU heads of government in Brussels on 9 December was the latest in the series of “critical events” shaping the future of the union. The same fateful aura has surrounded every summit during the past year. This time, though, it is possible that truly crucial decisions were taken that will start off an irreversible chain-reaction with no defined endpoint. In any case, there are bound to be consequences as groups form around the common currency – insiders, outsiders and prospective insiders – and become institutionalized and linked to political power in a entirely new way. For several days after the meeting, the media were overflowing with comment and opinion. Two issues domi-

nated: how will the markets respond, and which member countries emerged as winners and losers? Ever since the Greek debt crisis hit the headlines, the same questions have been hammered home, month after month, week after week. They have come to conceal not only the political processes leading to course-altering decisions, but also say something essential about a grave loss of meaning. What has happened to the citizens, to the democratic idea and the fundamental principles of popular rule in current discussions about Europe? Writing recently in Die Zeit, Thomas Assheuer asked, in an accusatory tone, where the all the intellectuals were when the European project collapsed. Eurozine has published an entire series of articles and conversations on the euro crisis that, more or less explicitly, ask the same question. Clearly, far too many Europeans have avoided the “the question of Europe”. They hide behind their comfortable mumbled exchanges. They have avoided investigating the real political conflicts. They have gone with the flow. They have dodged taking a stand in difficult political debates. The intellectual toolkit required for oriEUROPEANBUSINESSREVIEW

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entation seems to have got lost. When a sign that in a conceivable European things that matter are suddenly at risk emergency – perhaps when the consen– democracy, politics, security – waking sus about the euro cracks and the union up to that chilly world triggers a sense is shaken to pieces – stability would be of general incomprehension. also prioritized over democracy? When I read the novels of W.G. Se- Smuggled out from an Italian prison bald for the first time, some ten years island in the Mediterranean, Altiero ago, the pessimism then, in the wake Spinelli’s fabled manifesto for a federal of 9/11, was as deep as it is now. They Europe circulated among democrats exerted an hypnotic effect. It was like and veterans of the resistance during tumbling headlong into European mem- the final stages of WW2. Many had ories of human helplessness and political drawn the conclusion that only a united violence: the Holocaust, the insistence Europe could conquer nationalism and on borders, the streams of refugees, the offer protection against new tyrants, disorientation. Sebald transforms his- which at that time above all meant the tory from a time-line that allows us to rulers in Moscow. leave catastrophes A few years later, the behind into a buildCold War now uning where they still derway, the SwedEuropean politicians exist in different ish liberal Herbert seemed to have lost their spaces; where, in Tingsten wrote the democratic reflexes. some sense, they are following about still happening, so the experience of that the survivors and their descendants the disintegration during the inter-war are condemned to wander from one to years: “We may be of the Right, or Libanother. Sebald’s novels remind us of erals or Socialists: we will not tolerate the crucial element of every affirmation the chaos which a few decades ago was of the European idea: fear of Europe. As described as ‘economic freedom’. In a I read, the effect was like a depth charge democratic state, the people must not with delayed release. It contributed to live in misery and unemployment.” At my feeling that, for the first time, my the time, Tingsten was the towering figarguments for a federal Europe would ure in Sweden’s intellectual life. As the have to be formulated more precisely. editor-in-chief of Dagens Nyheter, the In the middle of the political upheav- most widely circulated broadsheet in als, I was by chance pulled back into the the country, he dominated the debate literary world of Sebald. Now, as I read with his cultural radicalism and uncomAusterlitz, his last novel, that feeling re- promising anti-communism. Pessimism turns. But this time it is because I also and failing political will during the innote how the ruling elites of the conti- ter-war years had, he argued, “rendered nent – the heads of governments, techno- the world de­solate for the people”. crats and commissioners – seem to have In Austerlitz, Sebald meditates over forgotten the constitutional fear of post- and over again on three kinds of buildwar Europe. They are no longer in touch ings: the railway station, the library and with what has been called “the European the fortress turned prison camp. They experience” – with Sebald’s world. come to represent the historical corner But the extent of their loss seems to stones of modern Europe, embodying be greater still. When the Arab Spring the dream of travel, the need to properly erupted, European leaders shied away order memory and the recurring desire for as long as possible from demand- to lock people up. ing that the old tyrants retire. It was These texts – by Spinelli, Tingsten and not hard to decode their message: Sebald – span the movement that sucrather undemocratic stability than in- cessively united Europe, a movement secure democracy. The intervention in driven by the ambition to control capiLibya was a relief. But the distrust had talism, nationalism and, above all, Geralready grown roots. European politi- many. What came to be seen as the Eucians seemed to have lost their demo- ropean experience is the negative pole: cratic reflexes. Might this not be seen as never to be forgotten, we must distance

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ourselves from it and invent another Europe. There is reason for us to remind ourselves of these things, once so self-evident. The conclusions of Spinelli, Tingsten and Sebald stand in stark contrast to the comments that have dominated media and politics in recent months. Reading them is like waking up after a long period of deep sleep. During the euro crisis, a small circle of government leaders together with technocrats from the European Central Bank (ECB) have grabbed for themselves the right to take far-reaching decisions. In memos from civil servants in the Commission they have even been collectively referred to as “the Frankfurt group”. The past six months have seen weekly declarations to the effect that the EU is ruled by the wealthy nations and that indebted states must accept tutelage. Shameless moves have been made to capture power from the Commission in Brussels and transfer it to the assertive Berlin-Paris axis. The summit meeting on 9 December reinforced this pattern and attempted to provide it with more formal legitimacy. EU heads of government are now to meet more often and will eventually form the political nexus of the Union. Power shifts inexorably towards a circle of people who will discuss all issues and finalize all decisions behind closed doors. In their hands, politics will change into diplomacy, public debate into cunning power games and the European idea into negotiations between states. In this situation, the polemical essay by Jürgen Habermas on constitutional Jürgen Habermas


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jurisprudence, Zur Verfassung Europas, ever, the pressure to calm “the market” has become a welcome “call to arms” is now so intense that departures from in defence of the EU’s progress in the democratic rules may well be accepted direction of civilization and democracy. in an acute crisis situation. Other heads Recent developments have arguably of government will look away, as will added edge to his warning that, in the that powerful grey eminence, the ECB, shadow cast by the crisis, the Union and perhaps the anxious, stressed public risks being transformed into a “post- as well. Successful actions by a governdemocratic regime of bureaucrats”. ment of experts might tempt postponeIn fact, the Commission (intended as ments of scheduled parliamentary electhe forum for small member nations) tions for the sake of stability. Failures and the Parliament (the forum for the could cause total political disasters, citizens) are crowded out from crucial driven by “the markets”, causing the decision-making. The movement initi- citizenry to lose trust both in appointed ated by the Lisbon treaty, which despite technocrats and in duly elected politiits many shortcomings provided an im- cians, warns José Ignacio Torreblanca. petus towards a uniquely transnational The continent, he continues, is in state demo­cracy, is now seriously threatened. of a democratic crisis that is damaging According to Habermas, the fact that in two respects: “While democracy (as an elite is closing ranks around the EU, the capacity to self-govern) evaporates seeing it as a private, on a national level, elitist project, is it does not reappear “insolent”. The outanywhere else, least During the debt crisis, come of this insoof all where it ought democracy has become lence is that the citito – in Europe. the forgotten factor on zenry is once more On the contrary: the national as well as attracted to the illuinstead of reinforcthe EU level. sion of nationhood, ing democracy in complete with the Europe, the crisis is historically only-too-familiar package bolstering technocracy on two levels: on of border patrols, anti-European rheto- the national level [...] and on the Euroric and xenophobia. If you perceive the pean level.” world as “rendered desolate for the peo- In his book, Ill Fares the Land, Tony ple”, all this will add up to a popular Judt predicted that neoliberal agitation step backwards, reassuring and rational. for a “minimal state” would cease after During the debt crisis, democracy has the crash in 2008 and be replaced by the become the forgotten factor on the return of the state and a battle about its national as well as the EU level. Both characteristics: should it be democratic Italy and Greece have acquired heads of or authoritarian, kindly or malevogovernment who are “apolitical” tech- lent, based on surveillance or trust? He nocrats. This fact may mark a transition turned out to be right. That battle is beto political systems that are less corrupt ing fought already. and “client-oriented”, but in difficult The longstanding, wishful call for political situations, technocracies must “more Europe” has been converted into be regarded with considerable scepti- a meaningless platitude. Sharper, more cism. Even though in both countries the focused opinions are now necessary: the governments are scrutinized by parlia- parliament must be the engine of poliments elected by popular vote, the ar- tics, the Commission must submit to rival of technocrats indicates (especially the will of the parliament, social responin Italy, where the entire cabinet is a col- sibility and a redistributive policy from lection of experts) that democracy has wealthy to poor regions must become a edged closer to the point where it might reality – otherwise there is no future eibe eliminated or seriously curtailed by ther for the euro or the European idea . an administrative emergency decision. For the first time, this can be said withActually, there should be no need even out risking being regarded as a stranded to worry. Similar transitional govern- dreamer. The Parliament has backed ments are, after all, not unusual. How- some form of fiscal rights and the Com-

mission favours a Tobin tax on financial transactions. Anyone who can bear reading through Barroso’s speeches and written utterances will discover that, post-2008, neoliberal keywords have been cautiously replaced by the vocabulary of social concern. The IMF states that growing inequality is a causative factor in the crisis. If the different party groupings decide, as some have actually discussed, to nominate their own candidates for the presidency of the Commission in the next European elections, the result will be a democratic landslide in favour of federation. The situation is contradictory, both ominous and hopeful. Europe once again finds itself at a critical junction: it can decide either on a “post-democratic regime of bureaucrats” or else on a transnational democracy, reinvented but in the federalist spirit. The EU has long been moving towards such a democratic solution; now, for the first time, it is within reach. However, as Jürgen Habermas has written, it requires that the heads of government in the European Council are willing to go for “something that is contrary to their own interest, i.e. holding on to power”. This is more or less the same conclusion as that drawn a few years ago by the political scientist Simon Hix, who in his book What’s Wrong with the European Union and How to Fix It argues the Lisbon treaty has greater potential than we believe. Joschka Fischer is of course right when he points out that it is unrealistic to look for a new and better treaty. His fears that Europe might become renationalized are confirmed when one observes the successful attempts by the heads of government to strengthen their positions of power in the European Council. But Fischer’s radical pessimism seems to overwhelm him to the point of inaction. Perhaps his desire for a political Big Bang, as well as a tailormade federal constitution, blinds him to the opportunities that might still be available. To identify these minor opportunities and expand them later: isn’t that how federalists have always worked? Continued democratization and politicization are possible if elected politicians demonstrate a will to act. EUROPEANBUSINESSREVIEW

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But this is not going to happen without a process of opinion-formation and with intellectuals and politicians taking a clear public stance. For a long time, political scientists and economists have argued that the euro will cause either fragmentation or federalism, since monetary union is impossible without fiscal coordination. A cautious interpretation based on the recent European summit meetings, and the latest one in particular, suggests that the profound crisis of the euro could, in the best case, deliver the push towards integration that many have predicted. The euro mechanism would then lead to Europe reversing into a stronger political union, albeit at an appallingly high social cost. The subdivision into A-, B- and C-teams currently being mooted could be the first step in a slowly unfolding logical progression, in which countries outside the eurozone are squeezed ever further onto the periphery, and finally out of the EU itself. But a stronger political union, with a common policy on control and stabilization and with the euro as the adhesive, would force the member states to choose whether to stay or go: no euro, no EU membership. If this is so, the decisions currently being made are leading not to division and fragmentation but are moves towards a much more complex integration process. However this cannot not take place unless the issues of popular rule, citizenship and democracy are brought centre stage. What, then, would be the character of this European super-state, in many ways such a strange concept? That question awaits our answers – our taking sides. Any investigation of Europe, wherever you start and whichever direction you take at first, ends up in Germany. So it is interesting that the “German question” is now returning to the political debate, albeit formulated in new ways. Joschka Fischer has said that Germany, conscious of its historical role, has until now driven the realization of the European idea, but he is concerned that Germany may now have lost interest. However, the new “German question” has surely begun to change shape. Germany, aware of the strength that Fischer fears, has insisted on the submission of

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other nations and on continued integration according to conditions set from Berlin. What is about to change is the unwritten contract between Germany and the rest of the continent on the subject of the European idea. In his Zürich lectures on Luftkrieg und Literatur [English title: On the Natural History of Destruction], W. G. Sebald drew attention to the British carpet bombing of Nazi Germany and the fire storms in Hamburg. An eye-witness describes how a woman trying to escape from the burning city carried the charred remains of her dead infant in her suitcase until, on a strange railway platform, the lock broke and the contents fell out. Sebald’s strong empathy with the Germans provokes emotions that expose the continued charge carried by European history. I am aware

of it as a gut feeling. Usually hidden, but when the lock suddenly bursts, the reactions are immediate. For many years now, the glass civil service tower in Brussels has been the target of vague European unease. In a sense, this unease has focused on a blank space, a faceless, impersonal symbol. However, as the protests begin to shift in the direction of where the decisions are actually being made, towards Berlin, other, more unpleasant ghosts have emerged from history. Does this demonstrate that the public interprets current developments in terms of the replacement of the European idea by another geopolitical power structure? Is Germany once again the European problem? I believe that, for once, Jürgen Habermas is misjudging the matter when he argues that the link between the European project and the concept of peaceful coexistence is no longer relevant. The national, chauvinistic and separatist passions sweeping through Hungary, northern Italy, Denmark and other countries indicate the opposite. The European experience has not been conquered. The demons that the European project succeeded in defeating still wait to take revenge. Fear of Europe has become no less valid. Recently, I saw a new production of Oresteia by Aeschylus, a trilogy of plays about how Athens progressed from blood vendettas and spiralling violence to social order based on law. In a strange way, it seemed to correspond directly to the European drama now unfolding in the streets of Athens and at the summit meetings in Brussels, and reflected in the morning papers arriving on my doorstep. At a transnational level, the process of the European Union’s astonishing advance has been similar. But this advance cannot reach its conclusion without the Union’s decision-making system becoming more democratic and more transparent. Procrastination is no longer an option.

*Swedish writer and former editorin-chief of the magazine Arena


Special Report: The Opening of Southern Corridor: The Key Players

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A social earthquake in the making In Europe, a deteriorating youth marginalization is creating the preconditions for a social earthquake capable of shaking the old continent and impairing the survival of the Euro, writes Edoardo Campanella, economic adviser at the Italian Senate.

“A By Edoardo Campanella*

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bout a year ago the Arab spring taught the world an important, predictable lesson. When young people cease to be the engine of the economy and are excluded from the decision-making process, long-run economic growth is endangered and political stability undermined. This lesson holds true for dictatorial regimes as well as for long-established democracies. In Europe, a deteriorating youth marginalization is creating the preconditions for a social earthquake capable of shaking the old continent and impairing the survival of the Euro. Until now, safety nets andintra-family transfers have prevented peaceful Indignadosstyle protests from turning into violent Arab-ones. However, the shortfall of resources due to a new imminent recession, along with fiscal austerity measures, will impair this channel, whereas frustration and social resentment will keep growing The figures are already alarming. Ac-

cording to a report recently released by the European Commission, one in five young people is at risk of falling into poverty or social exclusion, only one third of young people are employed, and one in three has been out of work for over one year. Moreover, 40 per cent of the unemployed are under 30, to the amount of 9 million people. On the other extreme of the age scale, the trend is reversed. The employment rate for people aged 60-64 increased from 23% in 2000 to 34% in 2010. In peripheral countries the situation is extremely acute. The Portuguese government urged its young unemployed to leave Europe for better opportunities elsewhere, in Italy almost 120.000 young talents left the country last year, and in Spain thousands of people are pouring into former colonies in South America. Across Europe, and even in Germany or Sweden, young workers are experiencing in-work poverty due to what economists call labour market dualism. Unlike their older colleagues, they just have access to temporary contracts, which pays on average 14% less than permanent contracts and are more vulnerable to sudden layoffs. The medium-term economic and social consequences of such youth marginalization are huge. First, an economy that is


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not nourished by fresh ideas loses competitiveness, becomes vulnerable to interest groups, suffocates material as well as intellectual progress, and is fated to stagnation or even prolonged recessions. Second, high income volatility and job insecurity discourage the creation of new family units that are essential to generate social cohesion as well as intergenerational solidarity. Finally, economic uncertainty tends to lower fertility rates with negative spillovers on the size of tomorrow’s workforce, population ageing, and the sustainability of public finances. The political implications could even be more disastrous. Therefore, what begs asking is whether these economic factors could contribute to the eruption of an Arab spring in Europe. There are, of course, huge economic and political differences between North Africa and Europe. The latter, unlike the former, is graying, prosperous, and democratic. But, paradoxically, the combination of these diverging

demographic trends and opposite institutional features, along with the same aspiration for a better future, could lead to an identical result. In North Africa young people represented the demographic majority of a despotic regimes, in Europe the political minority of a democratic system. The former fought for an economic progress they just started to savor but that was hampered by the elite in power. The latter would fight for a material wellbeing that is only benefiting their older fellow citizens at their expenses. Either way, young people can improve their situation and gain power only through violent rather than legal channels. What event, if any, will inflame the upheaval in Europe, which country will be the epicenter of this social earthquake, and what impact it could have on the institutional, democratic order remain uncertain. However, it is still possible to predict part of the effects. With people already

questioning a model of society prone to generate inequalities, civil unrest in one country would rapidly spark political turmoil and social dissatisfaction across Europe. Foreign investors would fly away from Euro-denominated assets, scared by a spiral of riots, selective defaults, and low GDP that would eventually lead the Euro to collapse. To avoid this catastrophe, European governments should start promoting the role of the youth in their societies through family friendly policies, career paths related to productivity rather than to seniority, cross-country mobility, and the eradication of dual labor markets. Spring is approaching. European leaders should act soon.� * Edoardo Campanella is an economic adviser at the Italian Senate ** The article appeared first at EurActiv.com

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From Eurosceptics to Disappointed Europeanists The new threat to European identity Four or five years ago, nearly every European Union official was looking to make national newspaper headlines. Today, the EU is a fixture on the front page but not in a way we expected.

F

By Leire Ariz*

our to five years ago too, the European Union was encouraging its citizens to pay attention to all the relevant EU issues, and to figure out a way to reduce the so-called democratic deficit. Today, people care – but not in the way we had hoped.

What has gone wrong?

In the past, the main threat to the development of European identity stemmed from the obstinacy of the socalled Eurosceptics. Europe, it seemed, was beloved by the so-called Europeanists - that is, everyone else. Those on the political right found that Europe’s newfound potential to have a consolidated market appealed to them; those on the left were moved by the idea of their fragmented continent evolving into some sort of internationalist dream. Perhaps most importantly, the EU was an idea that people on both the left and right could get behind because of the values it stood for: human rights, democracy, freedom, equality,

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and unity. While the institutions of the EU were still under construction, it was easy for all Europeanists from very different backgrounds and ideas to see the potential of Europe as their own potential. Now that the building process is in an advanced stage, the ideas have begun to be implemented, leaving many of the previous Europeanists disappointed. In this case, the once-expected definition and materialization of Europe have resulted in a decrease of the people supporting it. While some may argue that the EU is an unfinished project, that there is still potential for everyone’s ideas, there is an increasing feeling among many that the core values of the EU are being put aside. They are the disappointed Europeanists: the new threat to European identity. Examples of this crisis of confidence can be found all around the continent. Perhaps most obviously, consider Greece’s cancellation of the referendum on EU rescue aid for Greece. Had this referendum taken place, markets would have been shaken even before the world knew the outcome of the vote; if the Greeks had unequivocally rejected the referendum, the outcome may well have plunged Europe into economic chaos. Needless to say, it is understandable that the referendum was called off.


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But was this the correct course of action in the long run? Why do political leaders fear their people’s ability to take charge of their own future, instead of providing them the tools to do it? Is disrespecting the will of the people a healthy trend for democracy? Should the legitimacy of a people’s government and its decisions not be derived from the people themselves? If financial stability trumped democratic legitimacy in Greece, speed and efficiency are what beat out democracy in Italy. The fact that the new Prime Minister was not backed by the people and was simply appointed by President Napolitano is hardly reassuring, and indeed a frightening trend. While there is no doubt he is a legitimate leader, the sense of urgency and need for a new head of state in Italy became more important than its democratic traditions. In Spain, more disappointment abounds. One of the few EU member-state where a transition of power occurred completely democratically, the country had previously amended its Constitution to put a ceiling on public deficit. This measure was praised by experts,

but also criticized by those who noted that only a national sense of urgency had incited the first-ever change to the rigid Spanish constitution. Whereas a referendum is traditionally desired to corroborate serious political change, the dire situation Spain found itself in was enough to get the amendment pushed through in about ten minutes. The aforementioned examples indicate that the European Union may be slowly leaving behind the ideals that gave birth to the institution itself and increasing the democratic deficit. Ignoring the will of the citizenry is contrary to the core values of the EU; its tradition of pluralism is the main source of its strength. If the EU does not alter its trajectory, we may soon find that the EU has evolved into a kind of Illustrated Despotism, where “everything is done for the people, but without the people”. * Leire Ariz is the Media Officer at ThinkYoung, a Brussels based think tank working to promote the youth’s interests in the EU institutions.

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One size doesn’t fit all By Harry Briggs*

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“European policy can all too often be a blunt instrument with no consideration of the vast differences across member states. Perhaps it is time our leaders took a new perspective on Europe; taking a lesson from the private sector and running it as a single organisation with regional differences.”


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As

I write this article I’m sat in a hotel room. Not the Savoy, Ritz or Plaza but a fairly nondescript 3*. It’s not too bad (by which I mean it’s at least clean) but it’s not exactly glamorous either. Now I’m not on holiday or anything so enjoyable, in fact I’m here because my client has an office ten minutes down the road and therein lays my inspiration for this article. My client is a global business. If I could mention their name you would undoubtedly recognise them but I would be in breach of some reasonably hefty contracts (not to mention ethics) if I were to, so they will remain anonymous. It’s not the name that matters here but the way they do business. They trade through outlets across nearly every European country and beyond. Their model is a perfect example of an organisation that adapts to different regulations, economies, cultures and opportunities. So I started to wonder, if businesses are so capable at doing this why do our Governments struggle so? On the 9th of December 2011 the EU found itself divided. On one side stood a single member state, staunchly against what has become known as the ‘Tobin tax’, a tax on financial transactions. Their argument was that it would disproportionately impact London, presumably in the same way that Frankfurt and Paris would be hit more than Rome or Athens. Perhaps they were right but that will be debated at length elsewhere. The question I find myself dwelling on, in this meagre hotel, is how would my client react in this situation? Looking back at the events either side of this treaty faux pas there are some key events which stand out. In November the British chancellor, George Osborne, publicly compared France’s economy to that of Greece and Italy; a dangerous thing to do as the markets have a habit of making such prophecies self-fulfilling. The next month François Baroin, the French finance minister, retaliated by stating Britain was in a very difficult position and will be remembered as marginalised for backing out of the treaty proposal. This was followed up by the head of France’s central bank, Christian Noyer, stating Britain should have their credit rating downgraded before France. The war of words continued in the press, slowly disintegrating into something resembling a school playground and culminating in French President, Nicolas Sarkozy, reportedly referring to British Prime Minister, David Cameron, as a stubborn child and refusing to shake his hand at the summit. Thus what had been a straight forward disagreement on an individual tax manifested into the breakdown of AngloFrench relations, which were so recently at new heights over the joint action in Libya. Try as I might it is hard, nay impossible to imagine my client managing the situation this way. If they disagreed over which policies, practices or products to introduce across all the countries they operate in do you think the CFO of the UK would suddenly start to question the viability of their business in France or Italy? Can you see the CEO of their French business calling the UK CEO a stubborn child? Of course not, the very notion is untenable. This isn’t unique to my client. I suspect every reader of this article would agree that no business would devolve into such

a partisan system. This doesn’t happen for a simple reason, there is nothing to gain from driving rifts between partners. Business know how to work together, they understand the importance of team work and value the benefits it brings. Perhaps then it is time members of the European Union realised that they are in fact united and that they should be working together towards common goals like economic growth. In doing so they must drop this simplistic ‘one size fits all’ approach and become adaptable. This can only happen if our leaders have the strength to avoid the childish political rhetoric we’ve seen in recent months. With Europe facing a sovereign debt crisis and the World struggling to recover from Global recession it is exasperating to see such games being played out on the political stage. The European Union must learn from successful organisations like my client, otherwise it will simply tear itself apart. Member States must be mature enough to accept their differences and professional enough to accommodate them if we are to return to growth and prosperity.

*Harry Briggs is a 24 year old accountant at PricewaterhouseCoopers. The opinions expressed by the author are his alone, and do not necessarily represent those of PWC or ThinkYoung.

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Towards a two-union Europe? Forging ahead with excessive and unwise austerity measures could only aggravate the continent’s economic slowdown and the sovereign debt crisis. Instead, as the heads of the IMF, the World Bank and the WTO have demanded recently, EU politicians should concentrate on growth strategies and boosting employment. By Florian Pantazi*

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tandard & Poor’s decision early this year, to downgrade the country ratings of France, Italy, Spain and Portugal, not only aggravates the sovereign debt crisis, but it actually divides the EU in two. The most affected group is made up of the Latin countries bordering the Mediterranean. Their interest bills are going to rise to levels that, in some cases, will make it prohibitive to finance their budget deficits and therefore to continue to provide quality public goods and services to citizens. To make matters worse, this group of countries has to swallow the bitter German pill of budget austerity at a time when long-term economic recession and social anarchy look increasingly likely. The second group of countries, headed by Germany, has kept their AAA credit

rating. It includes Denmark, Sweden, the Netherlands and the UK, for example. Switzerland and Norway also belong to this group, although they are as yet unaffiliated to the EU. The main preoccupation of Germany and its likeminded northern European partners is fighting inflation, not unemployment. This is in sharp contrast with the eco­ nomic philosophy of the Latin group of countries, which are quite tolerant of higher levels of inflation and budget deficits, provided these are used to significantly bring down unemployment. Whilst a two-speed Europe might not be in the cards, in a not too distant future we might be faced with the prospect of two separate European unions, built out of the ashes of the current one. Thus, as Angela Merkel herself threatened in 2008, the Germans might

be more interested in building a Baltic union, which could conceivably attract Russia as an associate, whereas the Latin countries might wish to explore further a separate Union for the Mediterranean that could potentially integrate Tunisia, Morocco, Libya and Algeria. As far-fetched as this sounds, such an outcome might, however, prove to be the only solution to having a too-large and dysfunctional union, in which national interests prevail at the expense of the greater good of all existing members. In truth, the provisions of the Maastricht Treaty, the austerity packages and the German insistence on having an European Central Bank solely dedicated to fighting inflation do not work in practice for a majority of EU members, and especially for the first group of countries mentioned above. At this point in time, all good ideas aimed at solving the EU’s woes - such as fiscal union, the emission of eurobonds, a central bank dedicated to fostering employment, a common defence and security policy that works - have been discarded by Germany and some of its closest allies. In these conditions, no expert or responsible politician could be blamed if alternatives to the current union arrangements are actively being considered by them.

*Florian Pantazi is an historian and political analyst.

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Lessons from the crisis for the CEE region The financial and economic crisis shed light on the internal contradictions plaguing the functioning of the European Union and the European Monetary Union and taught serious lessons to countries heading into the eurozone, including Hungary. By György Suranyi*

Lesson #1: EMU entry should not be rushed, time should be left for real convergence.

For new accession states, the introduction of the common currency is not just a right but is also an obligation, as these countries do not have an opt-out option, like the United Kingdom and Denmark do. Until the onset of the global economic crisis, the dominant view among new EU members had been that the adoption of the common currency should occur as soon as possible. One of the main arguments for adoption was that the rules governing the monetary union would automatically result in fiscal discipline. Several studies aimed to prove the quantitative and qualitative benefits of euro adoption, having assumed that the satellite states around the EMU match Mundell’s OCA criteria, i.e. they form an optimal currency area with the eurozone. There were other authors (Frankel and Rose, 1998) who even declared that countries which are less OCA-compatible should also join, as membership could accelerate their integration and make them more apt for membership in the currency union. (Of course, it also has to be mentioned that there are studies, which argue that the EMU itself is not an optimal currency area either). Even well before the crisis, there were experts who had argued just the opposite: they had claimed that forced nominal convergence means great sacrifices, that ample time should be left for real convergence, and that the constraints of the common currency should only be accepted once the economy is fully prepared for them. Such opinions against the “rush for the euro”, however, clearly represented a minority view. It has become obvious based on the sovereign debt crisis of the periphery that the common currency could be not just a blessing but also a curse for economies that were not fully prepared for

it. The starting positions of Greece, Ireland, Spain and Portugal were very different, but it is still not a coincidence that it was these countries that had to face the most severe problems. The peripheral countries in question are less developed, have a higher potential growth rate and a more elevated equilibrium level of inflation. In order to join the currency union, these countries gave up their monetary independence, while other branches of economic policymaking remained under national jurisdiction. The interest rate that was appropriate for the most advanced countries, particularly Germany, proved to be too low for the fast-growing periphery and led to the overheating of the real estate market, lending markets and consumption, thereby resulting in severe external imbalances. Meanwhile, the euro concealed accumulating tensions within these economies, the forming imbalances were hidden from the public eye for a long time (or, perhaps, market players and European authorities chose to ignore them). When the crisis made it obvious that the process was unsustainable, it was already too late. Another great lesson from the crisis is that if a community of sovereign states creates a monetary union and uses a common currency, this common currency will not be a national and internal currency for any of its members. This practically means that if there is a “no bailout” clause, then, differently from the view that has prevailed before, any member of the monetary union can become insolvent. The EMU was completely un­ prepared for this almost evident eventuality. EUROPEANBUSINESSREVIEW

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Unified monetary policy (which is too loose for faster-growing economies) results in excessive credit demand in the nontradables sector, hence the sector’s labor-market demand picks up, wages rise, which also passes through into the tradables sector, thereby worsening productivity. This, in turn, manifests itself in the deterioration of external balances. If independent monetary (and economic) policy is not available to maintain a balanced economic path both on a micro and a macro level, then processes can sooner or later become uncontrollable. Consolidation efforts can be much more painful and, surely, more time-consuming in the absence of an independent exchange rate and monetary policy.

Lesson #2: Fiscal discipline is necessary but it is always external balances that represent the true constraint.

Under these circumstances, it is not surprising that a fund­ amental shift can be seen in accession strategies around the region (admittedly, the monetary union would also be less prone to welcome newcomers). The earlier minority view that real convergence should be a more emphatic element of the accession process has, by now, become dominant. A country should not seriously consider the introduction of the euro until its economy has reached a certain degree of real convergence. The ordeal of peripheral countries clearly shows that a “one-size-fits-all” monetary policy is not optimal for emerging economies and early accession can lead to grave conflicts. According to the Balassa-Samuelson effect, productivity im­ prove­­ments in various sectors of a converging economy differ in their extent. In sectors producing tradable goods, the growth in productivity is faster than in sectors producing non-tradable goods. The rise in productivity in the tradables sector drives wages higher, which, however, does not cause any deterioration in relative productivity. Higher wage growth in the tradables sector, however, trickles through into the non-tradables sector, where the growth in wages does exceed the growth in productivity, thereby leading to inflation. Studies prove that the traditional Balassa-Samuelson effect works within the EMU as well (Szapary, 2000) but in converging economies there is an additional effect. This effect has not been talked about before and we could name it “the reverse Balassa-Samuelson effect”.

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It has been signaled in the past by various economists and has also become evident even in practice that the rules governing the Union and the Monetary Union (the Stability and Growth Pact and the Maastricht Criteria) are overly simplistic, inconsistent and that even a formal adherence to the rules does not necessarily play a stabilizing role. In fact, the rules are especially inappropriate for economies located on the periphery of the Union, which have a higher potential growth rate, including the converging countries. Instead of having a stabilizing role, the rules have led to the formation of imbalances. The main deficiency of the system was that it equated financial stability with fiscal equilibrium, while almost fully ignoring the question of external balances. Unfortunately, the crisis has verified views, which had been minority views in the past, that the sustainability and financeability of external positions represents the real policy hurdle. In terms of the sustainability of an economic trajectory, the key question remains the position of the current account and the capital account (i.e. the net domestic savings and investment balance and the ratio of total debt to GDP). Therefore economic policy should not focus single-mindedly on fiscal equilibrium, as growth in privatesector debt represents risks that are similar to those posed by public-sector indebtedness. The SGP has been reformed as a result of the crisis: rules pertaining to fiscal budgets have been strengthened, the Pact now includes a rule on debt and a framework has been created for monitoring and sanctioning excessive imbalances. The changes point in the right direction, since they take into account the fact that a common currency and a shared monetary policy cannot be successful if other branches of policymaking (especially fiscal policies) are not tightly coordinated. The emphasis, however, is still mostly on the fiscal position. Policy-setters in EU states should learn from past lessons: economic policy should be set in a way that the sustainability of external balances is also maintained.

Lesson #3: Harmony between fiscal and monetary policy is key; monetary policy cannot focus exclusively on inflation The crisis has taught some serious lessons to monetary policymakers as well. Over the past decades, inflation targeting


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has become the single most dominant monetary-policy frame­ work. External factors have contributed greatly to the success of this system, which was mainly observed in large, closed economies. Inflation remained stable without practically any special effort made by central banks during the period of the “Great Moderation”. Thus the achievements related to inflation are not just attributable to central banks’ activity, but they also came about largely as a spillover of globalization. Paradoxically, it was global imbalances that contributed greatly to controlling inflation in the short term. It was, however, undoubtedly the responsibility of central banks that they focused single-mindedly and exclusively on inflation and shaped their monetary policies accordingly. As they celebrated short-term successes in the fight against inflation, they did nothing to tackle problems related to severe external imbalances, unsustainable debt accumulation, credit expansion and asset price bubbles, which arose in several countries. Therefore, the main lesson for central banks was that much more attention would have to be devoted to matters regarding financial stability. The rate of inflation should not be the only targeted indicator (especially not short-term CPI developments), as successes reached in one area can easily lead to severe damage in others. (In small open economies, which use their own currency, it is clear that excessive external imbalances could be nicknamed “inflation”.) The security and economic benefits of the currency union can result in severe external imbalances and consolidation can only occur through an internal devaluation, which, in turn, can lead to an equally risky phenomenon: deflation. Additionally, the feasibility of such consolidation measures is not entirely clear and these programs can also be rather time-consuming. Hungary’s painful case shows what can happen when coor­ dination between the two branches of economic policy­making breaks down. Differently from popular belief, it was not just fiscal policy that played a role in the formation of imbalances and the undermining of financial stability in Hungary, monetary policy also had its own responsibility in the process. The National Bank of Hungary ’overtightened’ in order to counteract loose fiscal policy and to reach its inflation target at all costs. The maintenance of overly strict monetary conditions is even harder to defend when we take into consideration the fact that the turn in fiscal policies had taken place earlier on and significant consolidation had begun to take place. The elevated domestic interest rate and the belief that the central bank will not allow for a depreciation of the forint (as that could jeopardize the achievement of its inflation target) was a strong incentive for growth in FX-based private-sector indebtedness. This process caused a drastic deterioration in the external position of the economy, thereby boosting the country’s vulnerability. Although the Hungarian crisis did not turn out to be fatal, we will still have to live with the consequences of FXbased private-sector indebtedness for a number of years.

Lesson #4: In the case of economies with libe­ ralized capital accounts, the ’regulation’ of capital flows is fundamental

regulation of capital flows not only in small, open economies similar to Hungary but also in larger economies. If capital flows cannot be constrained within the appropriate limits, control over inflation, credit growth and the external position becomes impossible and significant disequilibria come to life within the economy. Seeing the consequences of the rapid growth in FX-based indebtedness in Hungary, it is evident that allowing transactions between residents in foreign currencies is not advisable. A clear banning of FX-based transactions should be considered or, if this is not possible, such transactions should be limited to the anchoring currency.

Summary

Looking at the way in which the eurozone is entangled in the crisis, it is understandable that the drive for euro adoption has subsided and that new entrants would be less welcome at this point in time. It is still indubitable, however, that euro adoption in a small open CEE economy is desirable at an appropriate point in time. Economies in the CEE region have integrated so deeply into Europe that staying outside the monetary union for an extended period of time could cause more harm than good in the longer term and could conserve the relative lag in their development. One has to reject the illusionary notion that the monetary union represents some kind of special protective shield, one that provides unilateral benefits, resolves all problems of an economy, enforces fiscal discipline, prevents the overheating of the economy and, with time, makes risk premia disappear automatically. The crisis has proved just the opposite: severe imbalances can also take shape within the currency union, insolvency remains a real potential risk even for EMU members, and the correction of imbalances might take much longer and can be much more painful in the absence of an independent monetary and exchange rate policy. Constraints within the currency union also make the operation of “demand management” (meant in a traditional sense) more challenging. It is of utmost importance to countries heading towards the EMU that their accession take place at the right moment in time. During the preparations, much greater emphasis should be laid on real convergence than had been customary and required before. Taking on the limitations and benefits represented by the common currency only makes sense once an economy is competitive and economic policy tools are available to ensure not just fiscal, but also external stability.

*György Suranyi is CEO and Chairman of CIB Bank and former President of the Hungarian National Bank between 1990-1991 and 1995-2001.

The use of unconventional tools could come in handy in the EUROPEANBUSINESSREVIEW

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Entrepreneurship

Entrepreneurship:

Still Lost in the Davos Dialog As a Davos novice, I was fascinated to observe how entrepreneurship was reflected in the dialog among the world’s movers and shakers at the World Economic Forum. The term “entrepreneurship” has achieved cult status in policy speeches, yet I was disappointed at our leaders’ superficiality and wrongheadedness, as well as the topic’s de facto low priority here. I suppose I shouldn’t be surprised. By Daniel Isenberg*

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Entrepreneurship

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hough the Forum has been working diligently in recent years to address the issue with sessions such as “Education-Entrepreneurship-Employment,” “Innovation Ecosystems 2.0,” and “Fostering Entrepreneurship Ecosystems,” it will take time to elevate entrepreneurship to its rightful status - alongside, for example, the environment and corporate governance - as a crucial global policy issue. It will also require overcoming a few major misconceptions: Entrepreneurship is confused with self-employment. Whether it’s this decade’s declared 100 million MENA job deficit or the 400 million world job deficit, the implicit assumption in the Davos dialog was that the brute force of self-employment and small business will somehow turn the tide. Why? One reason is the deeply ingrained belief that “idleness is the root of mischief” and that self-employment will get the idle, incendiary youth off the streets. This obviously reflects the conflicting views of youth movements as agents of change versus youthful mobs as threats to the status quo. The second is what I call the “Large Numbers Fallacy”: the idea that millions of self-employed hair dressers and delivery wagon vendors and hawkers (not that there’s anything wrong with these) will naturally evolve into tens of thousands of high growth and high employment-creating ventures. No one I spoke with has a realistic plan for how entrepreneurship will breach this employment gap. At present there is scant rationale for either assumption, although the jury is still out. Every country indeed has its example of the cell phone kiosk owner who made it big. But in fact, experience and research show that the mindsets and skills, as well as social and economic implications, of high growth entrepreneurship and self-employment are cut from different cloth. In many cases attitudes of the self-employed are anti-entrepreneurial (“If only we had real jobs...”). But the jury has ruled that it is high growth entrepreneurship that creates the employment and most of the other social benefits. Entrepreneurship is conflated with innovation. Davos leaders who recognize that entrepreneurship is distinct from selfemployment and small business, often fall into the trap of equating entrepreneurship with innovation and, by default, technology. Although innovation and entrepreneurship often co-occur, and some of that is technology-based, neither is a prerequisite for the other, and again, they are conceptually and practically distinct. In fact, most entrepreneurship is based on what I have called “minnovation,” small tweaks and excellent execution. Many prospective entrepreneurs are deterred by intimidating messages that they need to have big innovations, otherwise forget it. Entrepreneurship ecosystems are not checklists. Several other misleading assumptions were embedded in the Davos dialog, such as that young people are better entrepreneurs, despite evidence to the contrary. However the most surprising to me was that despite the new popularity of the catch phrase “entrepreneurship ecosystems,” (for which I am partly to blame)

the term is broadly misunderstood as simply a collection of diverse entities: if there are universities, venture capitalists, an incubator or two, as well as some government funding, voila, there is an entrepreneurship ecosystem. Thus, designing one is an engineering task. The term ecosystem actually refers to a self-organizing and self-regulating interaction of independent organisms; it is not a checklist of the local flora and fauna. And in nature, biological ecosystems are usually not designed, they evolve naturally. But at the other extreme, some of the Davos delegates viewed entrepreneurship ecosystems as completely impervious to intentional influence, and when dysfunctional, actually are the entrepreneur’s “enemy”: i.e., entrepreneurs are responsible for all the good things that happen despite the hostile environment; the bad things are because of the government and its errors of commission or omission. Leaders can indeed impact ecosystem evolution, but this requires both a mindset and a methodology. The mindset reflects an understanding of how the visible and invisible hands of the market can work, interacting with a plan for leaders to become less interventionist, as the elements of the ecosystem take root. The methodology, which we have been developing at Babson, is a set of processes for meaningful engagement of all of the relevant stakeholders, and the facilitation and acceleration of the self-organizing process. The good news is that many changes in reality start with changes in terminology. The corporate giants and public leaders at Davos have indeed been paying sincere attention to entrepreneurship and its social and economic impacts. Hopefully, this is a harbinger of actions and new realities that are just around the corner. * Daniel Isenberg is Professor of Management Practice, Babson Global, and founding executive director of the Babson Entrepreneurship Ecosystem Project.

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management

Too few good women:

Why are boards still male domains? New corporate governance strictures are making way for women on corporate boards. But how to find suitable candidates? And what do women really add to the board room? By Grace Segran*

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NSEAD professor of Strategy Annet Aris sits on six corporate boards. She was first invited to a media company board in 2004 because of her reputation as a media specialist, particularly in digital media. “I was brought in not because I was a woman but because I had the knowledge that the companies didn’t have,” Aris says. “That helped to establish my credibility.” Other companies heard about her and she soon started receiving offers to sit on other boards as digitalisation began to take place in insurance and other industries. Aris’ story of being a woman in demand on company boards is not a common one. Scandinavian countries lead the way with the highest representation of women on boards - about 17 percent. France has 12 percent and Germany just 8.5 per-

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cent. “The further south you get, the less relevant it becomes. It has a lot to do with the culture and the role women play in that society,” Aris says. “The topic also gets more important in times of economic growth rather than economic decline, so you have to be very pragmatic about these kinds of things.” In the UK, nearly half of all FTSE 350 companies do not have a woman in the boardroom. In February this year, the former UK trade minister and chairman of the Women in the Boardroom Review, Lord Davies, urged FTSE 350 companies to boost the percentage of women at the boardroom table to 25 percent by 2015, declaring that “radical change is needed in the mindset of the business community if we are to implement the scale of change that is needed”.


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Part of that change is mandated by new laws supporting diversity, while globalisation has also opened the doors to inclusion for many who had been on the sidelines of big business. Cherie Blair, a UK lawyer and the founder of the Cherie Blair Foundation for Women, says companies that have “parity” about 30 percent participation from women on boards - have a better bottom line and return on investment. They are also generally better businesses.

The female factor

When women get to the mahogany table they tend to change the rules of the game, and that’s not always comfortable for everyone else. Some male board members grumble that such politically motivated changes lower quality. For Aris, the most compelling reasons for having women onboard is that you get better decisions because you have more points of view. “When women are on the board, they set a different tone. They tend to ask questions in a way a man might not (as he doesn’t want to appear uninformed). When something doesn’t sound right, women tend to ask for clarification and to understand why things are (the way they are). In critical situations like takeovers, women tend to get less carried away by the game aspect,” Aris told INSEAD Knowledge. Then there’s the adjustment process as women learn boardroom rules of conduct. Aris says that initially she underestimated everything that was discussed outside the board. “I would go in relatively naive and there would be important topics for the board (to decide on) and there would be no discussion. I would then say, ‘No I don’t agree’ or ‘Why don’t we talk about that’, and there would be this big silence. And I thought ‘what’s going on here?’ Then I found out that many things had been discussed beforehand so it’s knowing what things can be discussed in formal settings and what topics you need to talk about beforehand with who, and make sure you really understand what’s going on.”

Talent search

The Davies report suggests that one of the reasons why there are so few women on boards is that there are few transparent procedures for appointing people. “The vast majority of people appointed to boards are appointed because they know the chairmen - who are overwhelmingly male. There’s no interview process and firms that are asked to identify targets for people to sit on the board often come around and say there are no (qualified) women,” Blair told INSEAD Knowledge. “I don’t accept that and I’ve heard that people like Christine Lagarde (France’s Minister of Finance) now comes around to the board with a list of female names – because if you look, there are women who are qualified.” For the most part, companies approach headhunters. However, Aris claims that headhunters can be risk-averse, and that hampers the search process. Ideally, she says the chairman needs women who have worked in the industry, in senior management positions. However, the problem is that there are not that many of those women around, so the chairman has to be more creative and look beyond conventional bench-

marks for experience or expertise. Aris calls this predicament “double diversity”. The board needs to incorporate the gender issue as well as different backgrounds – and this is not always easy.

Quotas: a necessary evil?

One of the problems arising from the introduction of quotas is that companies suddenly feel they have to get women onto their boards now. In the rush to comply, and with demand outstripping the number of capable women, companies motivated by availability rather than appropriateness will of course lose out. There are also the ‘trophy directors’ – the women everyone wants – who have multiple requests for board positions and who can crowd out other eligible women candidates. Aris feels that older women tend to support quotas, but younger women don’t see representation problems “because they are young, bright and entrepreneurial – why should they bother?” However, when they reach their 30s, have children and are thrust into leadership positions, things tend to be more complicated, and it’s an uphill struggle to advance further. By the time they reach their mid-40s they say advancement isn’t moving fast enough; ‘we need quotas’. “The first couple of years (into quota requirements) are really painful,” says Aris. “But after a few years, you actually get the good ones. Capable women begin to see the opportunity and they go for it and it starts working really well. After about five years, you can do away with the quotas because by then you’d have obtained the critical mass. So it’s not a bad idea to jumpstart (the process) with quotas.” The talent pool really is upper management. And once you get enough women in top management, there is a natural flow of qualified women to the board and representational issues are solved, says Aris. This also inspires younger women to be more ambitious… And she adds you also get a more motivated workforce because female employees feel they are represented all the way up to board level.

* Grace Segran is an independent writer/editor. Grace has written/edited for INSEAD Knowledge, GlobeAsia, The Straits Times and others.

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management

Are You Learning as Fast as the World Is Changing? Tom Kelly, general manager of IDEO, the world-renowned design firm, likes to quote French novelist Marcel Proust, who famously said, “The real act of discovery consists not in finding new lands but in seeing with new eyes.� What goes for novelists goes for leaders searching to craft a novel strategy for their company, a new product for their customers, or a better way to organize their employees. In a world that never stops changing, great leaders never stop learning. By William C. Taylor*

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oday, the challenge for leaders at every level is no longer just to out-hustle, out-muscle, and out-maneuver the competition. It is to out-think the competition in ways big and small, to develop a unique point of view about the future and help your organization get there before anyone else does. Which is why a defining challenge of leadership is whether you can answer a question that is as simple as it is powerful: Are you learning as fast as the world is changing? Of course, learning new things is all about exposing yourself to new ideas. So if you want to learn faster, you’ve got to think differently about where new ideas come from. Here are a few ideas I’ve developed over the years about what turns leaders into learners — three “habits of mind” that will help you keep learning as fast as the world is changing.

First, the best leaders (and learners) have the widest field of vision.

After Steve Jobs died, I, like everyone else, read and watched as much as I could about his life and work. One of my favorite sources of insights was an old PBS documentary called “Triumph of the Nerds,” in which luminaries of Silicon Valley talked about what inspired their innovations. As Jobs talked about the original Macintosh computer, he talked less about semiconductors and software than he did about painting, music, and art. “Ultimately it [creativity] comes down to taste,” he explained. “It comes down to trying to expose yourself to the best things that humans have done and then trying to bring those things in to what you’re doing... I think part of what made the Macintosh great was that the people working on it were musicians and poets and artists and zoologists and historians who also happened to be the best computer scientists in the world.” Translation: You’re not going to learn faster (or deeper) than everyone else if you seek inspiration from the same sources as everyone else. Educators know that we learn the most when we encounter people, experiences, and ideas that are the least like us. And yet, we spend most of our time with people and in places that are the most like us — our old colleagues, our familiar offices, our reassuring neighborhoods. If you want to learn faster, look and live more broadly.

Second, and more tactically, the best source of new ideas in your field can be old ideas from unrelated fields.

A few months ago, after I gave a talk about innovation to a gathering of executives from the world of food retailing, one frustrated member of the audience asked for some advice about dealing with her boss. “My boss likes to say, ‘I want a totally new idea — and three examples of where that idea has worked before.’” The audience roared in recognition of the oxymoronic absurdity of the boss’s sentiment, as did I. But then I got to thinking... Often, it turns out, a powerful source of “totally new” ideas in one industry can be standard operating procedures from another industry — wellestablished practices that look downright revolutionary when you simply move them from one place to another.

For example, leaders at Lexus identified all sorts of new ideas to reshape the customer experience for luxury cars by searching for clues at brands such as Four Seasons and Apple — companies that were great at what they did, even though what they did had nothing to do with automobiles. Physicians and administrators from London’s Great Ormond Street Hospital for Children redesigned many of their surgical procedures by studying how Ferrari’s Formula One racing team handled pit stops. Sure, there’s always a place for R&D as research & development. But there’s also a place for R&D as rip-off and duplicate. Ideas that are routine in one industry can be revolutionary when they migrate to another industry, especially when they challenge the prevailing assumptions and conventional wisdom that have come to define so many industries.

Finally, and most personally, successful learners work hard not to be loners.

These days, the most powerful insights often come from the most unexpected places — the hidden genius locked inside your company, the collective genius of customers, suppliers, and other smart people who would be eager to teach you what they know if you simply asked for their insights. But tapping this learning resource requires a new leadership mindset — enough ambition to address tough problems, enough humility to be willing to learn from everyone you encounter. Nobody alone learns as quickly as everybody together. We all want to be better leaders. And the best leaders, it turns out, are the most insatiable learners. How are you learning as fast as the world is changing?

*William C. Taylor is cofounder of Fast Company magazine and author of Practically Radical: Not-So-Crazy Ways to Transform Your Company, Shake Up Your Industry, and Challenge Yourself, published January 4, 2011.

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Networking

An Introvert’s Guide to Networking

I learned the critical importance of networking, and discovered my natural aversion to it, early in my career. I was a new college graduate working in the strategic planning division of a $10 billion company, and our business unit had been invited to a retirement party for one of the top executives. The gentleman retiring was someone I’d looked up to during my brief tenure, and I wanted him to know he’d made an impact on me. By Lisa Petrilli*

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hile I wanted to attend the party, as an introvert I usually avoided these types of events because they made me uncomfortable. Knowing there would be a lot of senior executives at this party made me even more fearful. In the end, I tamped down my fears and went. When I arrived I found a relatively empty room save for the executive’s friends and close colleagues. That night, because of the small turnout, I had the pleasure and advantage of engaging in one-on-one conversations with some of the company’s top executives, an experience that would prove crucially important in advancing my career. That evening I learned the importance of networking and realized I had to figure out how to engage in business events in ways that were comfortable for me. I went on to discover an array of strategies introverts can use, ultimately writing “The Introvert’s Guide to Success in Business and Leadership”. Because I figured out how to embrace networking I found myself in the plum role of leading one of the highest visibility company teams as a new marketing manager at the age of 26, and representing the company at a United Nations conference in Geneva. I went on to run a $750 million business and negotiate pharmaceutical contracts with top global companies, all in a way that worked effectively with my introverted preferences. Here’s what worked for me:

I learned to appreciate my introversion rather than repudiate it.

I have met so many introverts in business who talk about introversion as if it’s a malady that one must get over in order to be successful. This is wrong. Introversion is simply a preference for the inner world of ideas because this is where we get our energy. By understanding and accepting this preference, introverts can optimize time spent with their ideas to refine them and recharge. This allows them to be as powerful and persuasive as possible when networking situations arise. I recognized that one-on-one conversations would be my lifeline during networking. Generally speaking, business events — and particularly networking events that require engaging with groups — are demanding for introverts. An antidote to this, I learned, is to seek out conversations with one individual at a time. When I approach events this way I have more productive conversations and form better business relationships — and I’m less drained by the experience.

This pre-introduction leads to a more relaxed and productive in-person connection. By reaching out, you open the door to potentially rewarding business collaborations, and you do so on your own terms.

I learned to prioritize time to re-energize.

While it can be tempting to go from a networking lunch right back to work, or from a networking cocktail event right to a dinner, if you’re an introvert and you do that you won’t be able to bring your best self to your next commitment. Take the time to recharge, whether by walking from the lunch back to work, or by finding 30 minutes alone between cocktails and dinner. Introverts who avoid networking are making a critical career mistake. Being an adroit networker is non-negotiable — and not as hard as it might seem. If you’re an introvert, what networking strategies have you found that work?

I stopped being afraid to be the one to reach out.

My inner introvert used to think that making the effort to introduce myself was risky. I worried that my target would not be interested in talking with me or that I would make them uncomfortable. I learned over time that when I extended my hand with a smile and an introduction my effort would be reciprocated, even when I approached executives above my rank. Social media makes this is easier than ever. Reach out via LinkedIn, Twitter and even Facebook to people who will be attending conferences or networking events you’re going to and let them know you’re looking forward to meeting them.

*Lisa Petrilli is CEO of C-Level Strategies, Inc. and author of The Visionary Leadership Blog.

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Networking Managers today juggle more responsibilities than ever and for many of them networking becomes an afterthought. Herminia Ibarra, INSEAD Professor of Organisational Behaviour says that’s a potentially fatal career mistake. By Herminia Ibarra*

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Networking is vital for successful managers “

What you know is who you know,” she says and warns that managers who neglect to build their networks risk failing or remaining stuck in middle management. Ibarra insists that networking is a requirement for business leaders in today’s competitive environment. “Other things being equal, what is going to give you an edge? It’s the relationships that you have that allow you to augment what you know and allow you to take the ‘what you know’ and actually to translate it into practice, into something the organization can use. It makes all the difference.”

Three types of networks

There are three types of networks important in business: operational, personal and strategic. While a lot of managers excel at building and using their operational network, they often overlook their personal and strategic networks. Operational networking involves cultivating the relationships with people you need to


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accomplish your job. This may mean working closely with your Human Resources manager to make sure you hire the right people or developing relationships within other departments to win support for your initiatives. “This is the network you need to have to basically get things done. It’s good relationships with the people in your critical path, your customers, your suppliers, your team members,” says Ibarra. Most people master this skill or they wouldn’t be in mana­ gement. But some managers don’t reach out widely enough to build all the relationships they need longer term or they miss key changes in overall company priorities because they get bogged down in the day-to-day functions of their jobs. Personal networking is an afterthought for many busy managers. When you work 60-80 hour weeks, the easiest thing to eliminate from your schedule is your alumni meeting, the annual golf fundraiser and your scuba diving course. But these networks allow you to meet a diverse group of like-minded professionals. They also are a way to develop important social skills for many professionals and may be the first place you turn when you start thinking about changing careers. “These are professional contacts that are discretionary, that are not as closely tied to the immediate job (so) that you can neglect or even abandon and still get your work done today. But these are the contacts that allow you to continue to develop professionally, to benchmark yourself with peers outside, to remain a bit on the cutting edge of your profession. These are the networks that people often use when they want to make a career move,” she says. Strategic networking is the toughest but most essential if managers want to become business leaders. Ibarra explains that contact with peers and with senior executives in your field is vital and she encourages managers to look beyond their industry as well. This allows managers to share ideas about best practices in management, learn new approaches and keep close tabs on developments in business and technology. It helps managers to see the bigger picture and create their own visionary approach. “How do you link your contacts outside the firm (and) your contacts inside in order to add value, to leverage the knowledge and the ideas that you get outside to make things happen inside?” Ibarra says “these are the networks that make a huge different in leadership. This is where strategic ideas come into play. This is what allows people to line up stakeholders and, frankly, this is the area where most people have serious gaps.”

Why managers fail at networking

Ibarra says many managers tell her they just don’t have the time to network or that they consider it unsavory. If you want to succeed you need to make the time. She says managers should delegate more in their day jobs and schedule networking into each week to make it a habit. “A lot of people who are not very good at this may feel, initially, that they are wasting time. They’ve gone to that conference, to those meetings, to this networking event, and what do they have to show for it? They have less time to do the bread-and-butter day job. However over the longer term or even over the mid-term, those are the contacts that really pay off.”

The second objection to networking is that ”it’s sleazy, it’s using people, it’s political,” says Ibarra. “As you move up within an organization or a career path, doing the actual work itself becomes less and less your role and getting work done through people becomes more and more your responsibility,” she says. “That’s where networks come in. Informal connections that give you information, ideas, resources support, political intelligence and frankly most people are not very good at building these networks and using them.” This isn’t easy for a lot of managers who have survived and succeeded using their raw talent. “In a leadership role you truly have to operate outside the box and if you haven’t been doing that previously in your career it is a fundamental paradigm shift.” In addition, it’s the quality not the quantity of contacts and how you use them that really counts. Managers need to remember that networking is two-way and they need to offer help and make connections for others in their network as well as expecting help. You can have the biggest contact list in your field, but if you only pick up the phone when you are in a crisis, you won’t get far. “That’s why you don’t want to leave yourself vulnerable to having no where to turn when you do have a crisis,” she says. “Relationships take time, they take effort, they have their own rhythm … Depending on what you put into it and what you give back to it, to the extent that you are investing for the future, your network will be there for you.”

Cultural or gender networking challenges

Ibarra says the benefits of networking apply across cultures, but there may be differences in style. “I haven’t seen any national culture (in which) things don’t get done through networks.” In some cultures, you may be able to directly approach contacts, in others you may need an intermediary. Different kinds of groups or organisations may be better suited to networking depending on the country. Karaoke might be a great networking plan in parts of Asia, but might not work in the US and Western Europe. Women aren’t either more or less capable of networking, but since it’s easier for people to make connections with people who are similar, the fact that there are fewer women in senior positions in business can be a barrier.

Networking and your career

But can networking really make or break a career? Ibarra says yes. “It’s that black and white: when you get to a level in the organisation where your peers are as good as you are in terms of intelligence, in terms of track record, in terms of credentials and in terms of raw smarts,” she says. “When you look at what top companies do as they try to grow their future leaders and as they try to assess the leaders they currently have, they will tell you very explicitly that the ability to manage relationships across boundaries and to sell ideas is a critical competency.”

*Herminia Ibarra, INSEAD Professor of Organisational Behaviour

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What Facebook Users Like: 6 Secrets The social network officially crunched the data. Here’s what Facebook users like - and how to make it work for your brand. By Erik Sherman*

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ou use Facebook as a way to connect to customers, but on average, only 7.5 percent of Facebook users subscribed to business fan pages see posts from those pages daily. To break out of the pack, you need to drive up the engagement and get people to respond. And Facebook has some information to help you do that. The company has been wooing journalists (probably an attempt to push Twitter out of the limelight). Part of those efforts have included studies to find out what makes posts work on Facebook. But journalists are not in some special world. If certain strategies work for their content, chances are they will work for yours. Here are some types of posts that can boost your results: • Commentary and analysis on breaking news - Readers like this. Three times as many Facebook users like opinion posts as the average post. These types of posts also get twice as many shares as average. • Controversy - No surprise here, given how conflict effectively drives so much of public attention. Drawing attention to “controversial stories on debatable subject matter” can double both likes and shares. • Reader shout-outs - Directly addressing readers can quadruple feedback. Asking for recommendations triples comment. • Strong photos - A strong photo can double likes, shares, and comments. • Humor - People on Facebook like

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funny. (Think of your own experiences looking at posts.) Get a laugh and your post gets 50 percent more likes than the average post and five times as many shares. • Calls to action - Spend any time in direct marketing and you learn how important a call to action is. So there should be little surprise that adding a question can increase feedback by 64 percent while a call to read or take a closer look increases engagement by 37 percent. Interestingly, although 13 percent of the posts from journalists had video from their reporting, it apparently didn’t offer enough of a draw to make much difference in engagement. But this is a case where using your own experience is important. Video clips that are funny or outrageous seem to get people watching, so maybe the journalists didn’t have the type of video that might work. *Erik Sherman’s work has appeared in such publications as the Wall Street Journal, New York Times Magazine, Newsweek, the Financial Times, Chief Executive, Inc., and Fortune. He is a blogger for CBS MoneyWatch and InsideInvestorRelations.com. Sherman also has extensive experience in corporate communications consulting and is the author or co-author of 10 books.


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E u rop ea n Bus i nes s Summi t, 2 6 A pril 2012, @ S q u a re (Bru s s e l s )

Skills for Growth Human capital is playing an increasingly central role in the global market. Thanks to the high level of skills and knowledge of the European workforce, Europe has remained competitive in the last decade. However, Europe faces several challenges at the same time. Βy EBS

‘S

kills for Growth’ will be the theme of the 10th edition of the European Business Summit (EBS) 2012. During various sessions, relevant decision makers and politicians will discuss the necessity to find solutions for an ageing workforce, the mismatch between the current educational system and youth unemployment and ways to improve education in STEM. Moreover, EBS introduces a new feature: the “open forum”. This enables participants to share their views and enlarge their network in a kind of speakers’ corner at the new EBS premises. The first challenge is demography. The combination of a low birthrate, a workforce that tends to shrink and rising life expectancy threatens the continuation of economic growth and the sustainability of most pension systems. European edu­ cation is known for its level and broad curriculum. However, it does not give attention to entrepreneurship, while this educational system suffers from many drop-outs. From an international perspective, Europe tends to under-perform in STEM and lacks behind in e-skills. Young people, women and minorities are often excluded from the labour market. We need creative ways to include untapped talent. Finally, Europe is faced with a lack of mobility. What could we do to hasten the introduction of a blue card? How to cut red tape that hampers cross-border labour inside the EU? How to convince a shrinking population to move to the areas where work is? In which ways new technologies

could be faster adapted? Bridging these gaps would contribute to more growth and jobs in Europe. During the 2012 edition of EBS we want to debate and find urgent solutions for these urgent problems. We have to plug the skills gap, because the growth agenda of Europe is at stake – the clock is ticking! We look forward to welcome you on the 26th of April at the 10th EBS @Square (Brussels). Some of our confirmed speakers: • Herman Van Rompuy, President, European Council • Jo Deblaere, COO, Accenture • Bernadette Ségol, General Secretary, European Trade Union Confederation (ETUC) • Natarajan Chandrasekaran, CEO and Managing Director, Tata Consultancy Services • Thorkil Sonne, Founder, Specialisterne, Chairman, Specialist People Foundation • Kristin Skogen Lund, President, Confederation of Norwegian Enterprise (NHO) • Maire Geoghegan-Quinn, Commissioner for Research, In­ novation and Science, European Commission • Sanjit Bunker Roy, Director and Founder, Barefoot College, India • Jürgen R. Thumann, President, BUSINESSEUROPE • Dipak C. Jain, Dean, INSEAD EUROPEANBUSINESSREVIEW

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The Problem with Privatisation Classical liberals commonly favor “privatisation” of many government activities. Their case, of course, is that the private sector would provide goods and services at lower cost and of higher quality than government can. Since classical liberals are right about this, why do I think there’s a problem with privatisation?

By Steven Horwitz*

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he answer is that the call for privatisation does not get at the real reason the private sector works better than the political sector. The great advantage of the private sector is not private ownership per se but that private owners compete with one another. Classical liberals would do better to contrast not the “private” and “public” sectors, but the “competitive” and “monopolistic” sectors. If the goal is efficiency in delivering the goods, private ownership is a necessary but not a sufficient condition. Instead of calling for the “privatization” of government services, classical liberals should be calling for “de-monopolization.”

Private Monopoly

Suppose a local government decides to privatize trash col­lection. This often means that rather than running the trash collection organization itself, the local government offers the monopoly right to collect trash to the highest bidding private firm. Although the interested firms compete in bidding for the contract, they nonetheless end up with a monopoly privilege in the locality. From the consumer’s perspective, a political-sector monopoly has been re-

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placed with a private-sector one. Private monopolies might be marginally more efficient than political ones, if only because they have a bottom line and pre­sumably have to do the job well enough to get the contract renewed. Those incentives may be stronger than those that flow from the public’s ability to complain or vote out local officials in the case of government provision. However, notice that the private monopoly ultimately has to please the politicians who dispense the monopoly privilege, not the consumers. How much the public really gains from swapping a government monopoly for a private one is not at all clear. Imagine instead that the local government simply opened up trash collection to any firm that wished to sell the service to consumers. This “de-monopolization” would lead to actual competition among (potential) providers, forcing trash collectors to serve consumers well, instead of just local politicians who hand out monopoly privileges. Competition drives firms to provide better quality, lower cost goods to consumers rather than political benefits to government agents. Yes, you can’t have competition without private ownership, but private ownership alone is not enough. You need de-monopolization to generate the competition that is at the core of the private sector’s effectiveness.

Several Property

In some of his later writing, F. A. Hayek recognized a similar point when he sug­ gested that it was problematic to talk of

“private property” and that we should talk instead of “several property.” The distinction is not merely semantic. His point is that the important thing about “private” property is not that it is private, but that it is divided among “several” owners who then compete to make the best use of it. The rhetoric of “privatisation” may turn people off who might otherwise be more sympathetic to classical-liberal ideas if we were to frame them as opposition to monopoly rather than as support for shifting resources from “public” to private hands. It’s also worth mentioning that the “public” sector is far more “private” than the private sector. Compare how little we know about what “public sector” organizations like the CIA or the Fed do versus how much we know about Apple, Google, or other public corporations, which regularly open their books and provide annual reports to the public. If we believe that the benefits of demonopolization will go to “the public” as consumers, then let’s drop the talk of “privatization.” Private ownership is not a goal but a means to an end. What really matters is what best serves the public in its role as consumers. Private ownership only does that if it’s within an institutional context that promotes competition. We classical liberals need to shift our rhetoric from promoting privatization to promoting competition by ending government monopolies wherever possible. That is the path to lower prices, higher quality, and more freedom.

*Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macro­ economics: An Austrian Pers­pective, now in paperback.


Special Report: The Opening of Southern Corridor: The Key Players

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European Business Review (EBR)  

Issue 1/2012 of "European Business Review (EBR)" magazine

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