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TOWARDS DEVELOPING BETTER EU and US CAPITALISMS A BANKING UNION? CHANGE LEADERS COMPARED

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YOUNG PEOPLE LOOKING AT THE CRISIS!

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Chairman Athanase Papandropoulos

Publisher Christos K. Trikoukis

Editor in Chief N. Peter Kramer

Editorial Consultant Anthi Louka Trikouki

Issue Contributors

Guillermo Nielsen José M. Barrionuevo Emmanuel Hatzakis Nikolaos Georgikopoulos Stefan Lehne Antonis Zairis George Psathas Adair Turner Josef Joffe José Manuel Barroso Michel Barnier Hans-Werner Sinn Andrea Gerosa Sofia Trindade Alexandros Vigkos Andrea Pavon Alessandro Niccolo Tirapani Bénédicte Le Galliot Stephan Richter Michael Birshan Jayanti Kar Aaron De Smet Johanne Lavoie Elizabeth Schwartz Hioe Matthew Swyers Branko Milanovic Ron Ashkenas

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

Towards a European banking union?

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Don’t Leave it to the €conomists

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Taiwanese visa-free travel to the US

ISSUE 3 - 2012 / YEAR 16th

08 Nobel prize for the EU

Editorial, by N. Peter Kramer, editor in chief

10 OPINIONS

A European and Greek Tenable Choice A More Ambitious Europe? Time for a big European policy step

16 economic outlook

Don’t Leave it to the €conomists Eurozone II

22 FILE

Towards a European banking union?

34 economic outlook

Europe’s Failed ‘Austerity’

Young people looking at the crisis

34 special report

Young people looking at the crisis

48 the world

Taiwanese visa-free travel to the US The US and the EU: Capitalisms Compared

52 management

Three tips for any executive

56 leadership

Developing better change leaders

60 skills

Secrets of a Master Negotiator

Becoming more strategic: Three tips for any executive

Securitas Diplomatic Services in Brussels: discrete and all around!

62 trends

Securitas Diplomatic Services in Brussels

64 Books Who Was the Richest Person Ever?

66 last page Why Strategies Go off the Rails

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

Secrets of a Master Negotiator

7 Eurozone II:EUROPEANBUSINESSREVIEW A More Ambitious The case for Europe? muddling through

Editorial

Nobel prize for the EU: A political message! The Norwegian Nobel Committee has selected the EU for a peace prize when it is going through a major and potentially destructive crisis. The committee has chosen to send a political message, acknowledged as much by its Chairman, Thorbjorn Jagland, who said: ‘we want to remind us all what can happen if disintegration starts and if we let extremism and nationalism start growing in Europe again’.

By N. Peter Kramer

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f Jagland wants to remind the EU of the disintegration of Yugoslavia and the extremism and nationalism that grew after that in many Balkan states, it was quite a harsh warning. The EU of that time was, in fact, not able at all to play a role as a peacemaker in the Balkan wars; it needed the US to bring calm and a kind of peace in that part of Europe. A political message by the Norwegian Nobel Committee is not new; it awarded the Peace Prize for instance to the entire United Nations in 2001, not to forget the award to Barack Obama less than a year into his first term as US President, and before he kept up hawkish US practices such as using drones in Pakistan and Yemen. Is it really the job of a Norwegian committee to use the prestigious award to get involved in political affairs rather than single out real and great achievements and elevate them into models for the world as in the case of the awards to Mother Teresa and Albert Schweitzer? Nobel committee member Lundestad has already said that ‘some people will find awarding the EU con-

troversial’, not at least in Norway where ‘support for the EU is at an all-time low’. At any rate, the Presidents of the European institutions were incredibly happy with the Nobel Peace Prize for the EU. Martin Schulz, the EP President, won the race to contact the press corps about the prize, his press release came first. Commission President Barroso came second. After his message a joint press release from Barroso and Van Rompuy, the Council President, sent by the Commission was published; followed by the same joint press release of both Presidents, this time sent by the Council. After that a message of Herman van Rompuy himself and not to forget one from Baroness Ashton, Vice-President of the Commission and High Representative of the Union for Foreign Affairs and Security Policy. The top EU personalities quickly started to jostle for the limelight. Barroso posed for a photo opportunity getting flowers from the Norwegian ambassador to the EU and Schulz’s message ended with: ‘on behalf of the European Parliament we, together with the other EU institutions, look forward to receiving the prize in Oslo’. There is a lot of confusion as to who the prize is really for and who will go to Oslo on December 10 to pick it up. It is remarkable that the European Union is mentioned without any name of a leader. In the past the United Nations together with its Secretary-General Kofi Annan won the prize and the IAA with its then boss Mohamed Al Baradei. Maybe the Nobel Prize Committee considers none of the European leaders worthwhile mentioning…

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opinion

A European and Greek Tenable Choice Four fundamental flaws have compromised Greek policy efforts and need to be reconsidered to solve the financial crisis of Greece and more broadly of Europe

By Guillermo Nielsen, JosĂŠ M. Barrionuevo, Emmanuel Hatzakis, Nikolaos Georgikopoulos*

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hile the European crisis seemingly began as an event isolated to Greece, in less than two years it has extended in one way or another to most European countries. Just one month ago, renewed reassurances that Europe was finally containing Greeceâ&#x20AC;&#x2122;s impact were met with new credit and funding pressures throughout Europe. Financial markets thus unsettled at the prospects of yet another Greek financial program failure that signals that there is no real funding commitment to preserve the Euro. The failure of the Greek programs has been seen by many as a Greek failure. Until now, few have considered the possibility that the failure of the many Greek programs could be the programs themselves. Yet, the failure of the Greek financial programs is so stark that on the June 17 elections in Greece no candidate ran on a platform based on keeping the existing programs. Instead, they focused on bringing the necessary changes that could help Greece finally resolve its crisis. The Greek programs pursued until now

Guillermo Nielsen

have all failed because they are based on fairly isolated and dogmatic views of the world that abstract from how financial markets actually work. Instead they rely solely on cash flow, fiscal adjustments to restore creditworthiness. In the current strategy, cash flows are all that matter and stocks are irrelevant. Crises are thus resolved by providing liquidity, as if they were only a transitory shortfall of income problem, rather than by forcefully and in an orderly manner addressing solvency, or the permanent shortfall of income that makes debt payments unsustainable. Unfortunately, the European financial crisis is a solvency crisis, not just a liquidity crisis. Without ensuring that debt stocks and banksâ&#x20AC;&#x2122; balance sheets become sustainable today, the crisis will continue to worsen rapidly, as no one wants to take the pending losses.

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At the crux of the failure is the limited experience that Europe has in responding to severe financial crises. The Greek economic and financial programs have repeatedly failed because they have tried to make debt stocks sustainable, or stable as a share of the economy, after many years, instead of today as investors need. By not ensuring solvency and sustainability today, four fundamental

José M. Barrionuevo

flaws have compromised past policy efforts and thus need to be reconsidered to give Greece a chance to succeed. First, by not making the sovereign Greek debt sustainable from the beginning, past programs have failed to fully assign all the losses or writeoffs that would ensure that the debt be immediately supported by the Greek economy. In assessing debt writeoffs, all we need to recognize is that writeoffs are a consequence of irresponsible past fiscal actions, and not the dramatic present bravado of failed honor, as many mistakenly see it. It’s done, you can’t change it. The failure of not fully assigning all the losses, or assessing the full writeoffs, limited the capital inflows and any private investment that would’ve strengthened growth. Capital inflows and domestic credit would’ve filled the

vacuum created by the fiscal adjustment that is needed to signal commitment. Not surprisingly, the fiscal adjustment in isolation only exacerbated the economic contraction. Second, the financial support that is invariably needed to resolve a financial crisis was granted before, instead of after, all the losses were assigned and the debt was restructured. By doing so, the

Emmanuel Hatzakis

official debt became part of the problem. As such, the private debt restructuring that Greece pursued recently resulted in a private writeoff of about 74%, but only of about one third of all private and official debt. While a 74% writeoff would’ve been sufficient to restore sustainability two years ago, it isn’t now that Greece is a much smaller economy with a lot more official debt. This means that Greece needs now either official debt writeoffs, or a large amount of front-loaded official financing. Third, by not providing front-loaded financing, but rather pursuing a dropby-drop financing approach, Greece hasn’t had a fair chance of pursuing a successful crisis resolution strategy. Front-loaded financing would give Greece the time needed to signal credibly that its debt repayments are no longer compromised. The key is that

whatever financing is granted, it needs to be frontloaded. Fourth, Greece needs a new crisis resolution strategy and financial program that is European in reach and Greek in origin. Within it, Greece’s past failure in reaching its fiscal targets needs to be seen for what it is: a failure to pursue realistic targets that are also based on a broad range of critical goals, includ-

Nikolaos Georgikopoulos

ing domestic credit goals that support Greek growth. To succeed, Greece needs to be supported through a sound strategy. This is the choice Greece made on June 17, but to work it needs to be the choice that European leaders make soon.

Guillermo Nielsen, who is the former 2005 Chief Debt Negotiator of Argentina and former Ambassador of Argentina to Germany; José M. Barrionuevo, who led the Team of International Banks that restructure Argentina’s debt in 2005; Emmanuel Hatzakis, a ex-Consultant to the Government of Greece; and Nikolaos Georgikopoulos, who is a Research Fellow at the Centre of Planning and Economic Research (KEPE), Athens - Greece.

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opinion

A More Ambitious Europe? The eurozone crisis is not only having a devastating effect on Europe itself but has also severely damaged European foreign policy prospects for the next decade. By Stefan Lehne*

he crisis has reduced Europe’s standing in the world to a point where it is no longer seen as part of the solution to global problems, but as a big problem in its own right. Psychologically, it has undermined confidence and reduced ambition, while cutting the resources needed to pursue active international engagement. Most seriously, there is a creeping ‘renationalisation’ of foreign policy. Member states are less invested in common efforts than they were, and they tend to formulate national positions without co-ordinating with their partners. They are ever more tempted to impose their national agendas on EU policies. Unless the euro crisis can be overcome, the loss of both ambition and coherence will inevitably result in the continued marginalisation of EU foreign policy. The bigger countries, in particular the UK, France and Germany, will continue to play prominent roles, but tensions could cripple their ability to work together. Co-operation that does take place will most likely do so outside the EU framework. Coalitions of the willing might become the normal European manner of tackling international problems. The ability of the EU to shape developments in its neighbourhood, as well as global decisions, would diminish drastically. If the EU does succeed in overcoming the euro crisis, two scenarios seem possible. One assumes that the UK reaches

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some kind of durable accommodation with the EU and that, following the euro crisis, pressing external challenges will inevitably rise up the agenda again. This would not result in further far-reaching changes in the foreign-policy structures but it could mean that the reforms in the Lisbon treaty would be implemented in a more ambitious manner. This would include strengthening the political mandate of the EU’s high representative and reinforcing the European External Action Service. European defence policy could also be re-invigorated, possibly on the basis of a new division of labour between the EU and NATO. Following this trajectory, member states would maintain their identity and presence on the international scene, but foreign policy would increasingly be conducted within the framework of common EU institutions. The second scenario assumes that the euro crisis can only be resolved through a massive deepening of integration in

the eurozone. The transfer of fiscal- and economic-policy competences could be so far-reaching that it would eventually lead to the formation of a new ‘hard core’ of the EU, organised on federalist principles. Presumably, not all countries outside the eurozone would wish to join this group. The UK in particular would almost certainly stay outside. If it could not find a way to ensure that it retained influence on internal-market and external policies – or if the Eurosceptic tendencies of its public were to become unstoppable – it might leave the EU altogether. A deepening of integration within the ‘hard core’ could eventually prompt the development of a foreign and security dimension of a federal eurozone. As the entire structure would be based on federalist principles, it would be possible to develop a foreign and security policy with more efficient decision-making, a stronger strategic vision and upgraded instruments. However, the gain in punch would be paid with a loss of inclusiveness, as quite a number of EU member states would probably not participate. Foreign policy has never been a driver of European integration. Instead, the dynamics of integration have determined the scope and reach of the EU’s international policies. This relationship is likely to remain. However, while European leaders understandably focus on surviving the next onslaught of the markets, they should spare a thought for the longerterm political and security implications of their decisions. If the EU loses its war with the bond markets, foreign policy will be part of the collateral damage – and Europe’s security will be diminished. *Visiting scholar at the Carnegie Europe in Brussels.

opinion

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opinion

It is now the time for a big European policy step. If not, when do you believe it should be happened? The crisis in Greece was the beginning of the Eurozone crisis. And the Eurozone crisis is now on the very first level. It would be really harsh to face up this difficult situation if we do not take action immediately. This is the reason why some radical solutions are needed. The example of Greece consists a proof of its wrong policy...

Βy Antonis Zairis, Economist and George Psathas, Member of the “European Federalists Movement”

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As it may seem, the Greek society is now weak towards the measures, which are necessary in a great level but really difficult to be conformed to and avoid default. These measures burden more and more the number of population that has already suffered from great consequences. This dramatic situation “encourages” the depression, the absurdity and the society’s reaction over the finding of scapegoats and over these measures which are imposed by external powers (Germany, EU, ECB, IMF), as it is estimated. It is obvious that the rescue plans often fell apart without having any prospect of development and political solidarity regardless of the fact that many of these changes are imposed. Under these situations each implausible choice is consid-

ered to be possible due to uncontrolled social tensions and political decisions. The threat of drachma is possible (however 80% of Greek population is opposite to it as they know that it would be even harder than the current situation) if we don’t take immediately action. If something like this happens, the consequences for Greece, Eurozone and European Union would be enormous and there would also be a great impact on the global economic-monetary and political - strategic order! The Greek Prime Minister makes great efforts to change the unfavorable climate and it’s the first time that Mr. Antonis Samaras has focused on the problems deeply and systematically since the beginning of the crisis. It’s true that the Prime Minister has surprised positively many of his voters, even more the most skeptical ones. On the other hand, it can’t be more apparent than the fact that the European Union has reached a deadlock. Unfortunately, the EU’s structure weakens more and more and the prospect of a sound governance of currency, economy, finance and foreign policy is not at all possible. Nowadays there is only one solution. Europe should send

opinion

a strong and clear message of unity and solidarity! But solidarity demands political unity which can only be found within the Eurozone but as a matter of fact it is in low levels. It’s time for the European policy to step forward dynamically, both responding to the crisis and providing a favorable outlook for Europe: the Federalism! It’s a big proof for five years that in Greece and in many other countries of crisis (Portugal, Spain etc) the cuts and the imposition of taxes, mainly during the low season, burden the situation more and more. This has as a result a financial chaos and a debt increase rather than reduction. It’s definitely the wrong way and the chances of recovery, growth and economic prospect are small! But Europe’s growth can’t be anymore based on loans against the rest of the world. Then how should we handle it?

The current recipe is not for success but grows the recession and debt. Borrowing is not anymore the solution to the problem of growth. Even if the structural change and the internal devaluation are supposed to increase the competitiveness, this is impracticable during low seasons and the debt continues to grow.

Deadlock?

No, but under a condition: The political agreement based on the budgetary consolidation and the sustainable growth! How can we define the sustainable growth and which are the conditions of its achievement? First, with a European Plan of guidance to the majority of economic and social operators in Europe. This Plan will set the conditions of a balanced development so as to continue striving and provide environmental sustainability and social Justice.

Second, this Plan will promote an investment budget covered by own resources which would be independent from both society and sound economic activity. There are many original and effective ideas, such as the financial transaction tax, the carbon dioxide tax and the single European VAT system. Third, it’s necessary that a decision should be made because it would be the starting point for the Federalization process. Otherwise each Plan seems to be a plan doomed to fail, either it resembles the Greek one etc or it is proposed as a sustainable development Plan. Fourth, this process will be suggested and accepted if the Eurozone governments take this initiative. Then, parliaments and citizens’ representatives should promote the holding of interparliamentary meetings aiming at the revision of the European treaties. The main purpose is the creation of a Federal European Union. Fifth and the most important reason, people who share the above ideas and vision should cooperate and create a strong pressure and influence group. It will support this Plan, make the social forces more active and encourage the initiatives taken by European citizens. This is the only way to face up resistance, because: Firstly, the sovereign rights will be necessarily transferred from national areas to supranational ones in crucial and decisive fields about the maintenance and solution of major current problems. Secondly, the governments should not undertake each part of taxing power but it is essential to grant the Federal European Union with the necessary resources in order to fund the development (avoiding the usual tendency of National Governments to benefit the small parties). By this way the European citizens would be definitely reconciled with the idea of the Federal European Union because they will be benefited both from the social protection and growth, overcoming attitudes and ideological suspension of the past years. EUROPEANBUSINESSREVIEW

economic outlook

Don’t Leave it to the €conomists In the decades before the collapse of Western financial markets in 2007 and the resulting deep recession, too many policymakers, bankers and regulators were influenced by a brand of economics that was better equipped to design intricate mathematical models than to deal with moral, ethic and practical considerations. Adair Turner, head of Britain’s Financial Services Authority, says that needs to change.

Βy Adair Turner*

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eynes famously wrote that “practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” I suspect however that the greater danger lies not so much with entirely practical men or women exempt from any intellectual influence, as with the reasonably intellectual men and women who are employed in the policymaking departments of central banks, regulatory bodies and governments, as well as in the riskmanagement departments of banks. These individuals are often well aware of intellectual influences, but tend nevertheless to gravitate to simplified versions of the dominant beliefs of establishment

economists (who are still very much alive). It is essential to continually seek to lean against that tendency. It is essential that economics deal with the real world as it is - and in particular with human beings as they actually are - rather than assuming the existence of a rational Homo economicus in order to make economic analysis more mathematically tractable. In my view, robust thinking about economics must be based on the following three requirements. First, it must not assume that additional income - above a certain level required to satisfy essential human needs - will necessarily increase utility or happiness, even if only to a marginally declining extent. Instead, we should concern ourselves with the mathematically and empirically imprecise but important issues of how happiness, welfare, utility and income are defined and related. We may only have imperfect and judgmental techniques to measure success against ultimate objectives such as life, satisfaction and happiness. But we need to remember that these objectives, not income maximization by itself, are what we should be trying to achieve. Second, the new economics must not assume that people participating in financial markets make rational assessments of future probabilities of poten-

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tial outcomes. Instead, we should seek to understand how different people actually make decisions in different circumstances, given that human brains are endowed with instinctive elements. Third, the new economics must accept the reality of unavoidable uncertainty. Much of the old-style economics is devoted to exploring the assumed expectations of economic agents, which are believed to be distributed around the objective probability distribution of future outcomes.

That, however, is what is called a philosophical category error, since no probability of future outcomes objectively exists. Therefore, we must accept that all economic and social developments are subject to an inherent, irreducible level of uncertainty.

No mathematical answers

The logical consequence of these requirements is that the new economics should recognize the importance of political, philosophical and ethical issues,

to which mathematics is incapable of giving precise answers. For example, there is no precise answer to the question “What is the optimal degree of inequality?” It is an issue of politics. Likewise, the case for the market economy - which has been predominantly presented in terms of income-maximization outcomes - should, as Amartya Sen says, be considered in terms of freedom as an end in itself. As John Hicks (although himself a major figure in the development of mathematical and outcomes-oriented economics) has noted wisely, “The liberal principles of the classical ‘Smithian’ or ‘Ricardian’ economists were not, in the first phase, economic principles; they were an application to economics of principles which were thought to apply in a much wider field. The contention that economic freedom made for economic efficiency was no more than a secondary support.” A major deficiency of the current conventional wisdom is that it has focused increasingly - and almost exclusively - on this secondary support, instead of on ethical, moral and practical considerations. That is all the more surprising since increasing prosperity has made further improvements in economic efficiency less important to human welfare. “There is nothing in economics,” wrote the British economist Lionel Robbins, “which relieves us of the obligation to choose.” Too many policymakers and politicians - who at least thought they were drawing on the insights of economists - forgot or chose to ignore that fact in the several decades of applying conventional wisdom and believing in false certainties that led to the financial crisis. * Adair Turner was appointed FSA Chairman in September 2008. He has combined careers in business, public policy and academia. In January 2008, Lord Turner was appointed Chairman of the Climate Change Committee. He is a Visiting Professor at the London School of Economics and at Cass Business School, City University. ** Editor’s note: This article is adapted from Economics After the Crisis: Objectives and Means (MIT Press) by Adair Turner.

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economic outlook

Eurozone II:

The case for muddling through As an early sceptic of the EU’s economic and monetary union, Josef Joffe traces the euro’s birth defects and examines its health prognoses. He favours neither a eurozone break-up nor a great leap forward to political union. By Josef Joffe*

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one of the early sceptics of European monetary union, events are now proving me and other critics right. But I am not going to take a cheap, I-told-you-so shot at the most ambitious integration project in the history of Europe – especially since I hardly have an impressive record on prediction. I am right exactly half of the time, which means my forecasts are just as good as flipping a coin. My purpose in saying so is to make the larger point that the common currency was always a political project, not an economic one. Fourteen years ago, in an article in The New York Review of Books, I started with a fictitious movie scene set in the library of the Elysée Palace in March 1990. Present are France’s François Mitterrand and Germany’s Helmut Kohl. “Mitterrand is in a melancholy mood. During the last few months, ever since the collapse of the Berlin Wall in November 1989, he has tried every conceivable diplomatic stratagem

to stop, or at least break, the quickening pace of German reunification. But to no avail. Glumly, he stares into the fireplace, as his friend Helmut pleads. ‘Look François, this time reunification won’t be like Versailles in 1871, when the new Reich was proclaimed on the ruins of French pride. We have FrancoGerman friendship, we have the European Union, our forces are completely integrated in NATO.’

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“Mitterrand remains glum. So Kohl continues to wheedle: ‘My dear friend, this is 1990 – not 1914 or 1939. These days, my countrymen are polishing their BMWs, not their jackboots. This time, German unification will not bring down Europe. Come on, François, what do you say?’ Mitterrand continues to stare into the fire. At last, he bursts out, ‘Bon, Helmut, c’est ce qu’on va faire. You get all of Deutschland, if I get half of the Deutschemark.’” The point of this imaginary scene is that the euro was born out of the abrupt transformation of world politics: Moscow’s capitulation in the cold war, which suddenly revealed the true power relationships on the continent. Germany would be united and would shed the ancient dependencies that had tied it to the West, and to France in particular. Helmut Kohl understood the precarious position of a reunified Germany. The Deutschemark was the very symbol of German primacy, so what better way to soften the blow than by more integration? This was a wise but not entirely selfless move. The euro was good for Germany, as it would relieve the relentless revaluation pressure on the Deutschemark and protect Germany’s export-led

growth. The euro would be the D-mark writ large, administered by a European Central Bank that would be the Bundesbank writ large, totally independent of political control and the guardian of strict monetary discipline. In the run-up to EMU, would-be members had to live up to the so-called “convergence criteria” of low national debts, low deficits and stable parities. In 1997, Germany bound the rest through the Stability Pact with its penalties to enforce fiscal discipline now and ever more. In other words, Germany would not so much sacrifice its currency as extend its sway beyond the informal zone that encompassed Austria, Denmark and the Benelux countries. So with all this “Germanization” of the common currency, why are we in trouble now? The answer is that good politics do not necessarily make for good economics. Or bad economics will always trump the best of political intentions. Perhaps we should think about monetary union without political union as a train of as many locomotives as there are member states, all running under their own steam. Without a lead engine – political union – each has to maintain exactly the same speed in terms of fiscal policy. If not, the cou-

plings would break and the train would go off the rails. There are only three ways to avoid this. First, those who put too much coal into their locomotives by spending too much and running up deficits, are forced by the virtuous rest of the train to mend their ways. They will impose fiscal discipline on themselves and balance their budgets. This would be the collective dictatorship of virtue. The second way is for those locomotives that run out of coal to be helped out by others that have fuel to spare. As good Europeans they share the wealth. This is what’s being called a “transfer union”. The third solution, being neither common virtue nor an “all for one” wealth sharing, is the decoupling of the locomotives that make up the train. The wastrels either withdraw from the euro or are forced out, but alas the Maastricht treaty that in 1992 set out the rules of monetary union, has no proviso for either of these decoupling options. So once secession or expulsion are ruled out, the choice is between transfers from the outside or adjustment on the inside. This is the logic of a monetary union without fiscal or political union; either the sinners reform or their companions keep them on some form of permanent

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economic outlook

dole. Failing that, the eurozone train leaves the rails. Today we think of Portugal, Ireland, Italy, Greece and Spain – the PIIGS – as the great sinners, yet by the middle of the last decade as many as nine eurozone members had breached the deficit criterion, among them France and Germany – France five times and Germany six. So the moral is that when it comes to the crunch, national egotism always trumps communal virtue. The drivers of those national locomotives don’t observe the common good but rather their domestic electorates or the business cycle. The euro’s birth defect was that monetary union encompassed two incompatible cultures. There’s “Club Med” – France, Italy, Spain, Portugal, Greece and Ireland – and then there is “Club North” – Germany, the Netherlands, Finland and Austria. Club Med is largely Catholic and Club North is generally Protestant, give or take the Austrians. And Club Med spent while Club North saved, so while the northerners’ expenditures stayed more or less in line with their revenues, Club Med was always shovelling coal at a faster rate than its tenders were being replenished. In economic parlance, too, this is called overheating, and its logical consequence is rising debt and inflation. How, then, did these countries stay competitive,

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given rising nominal prices for goods and wages? Before the euro, they did so by devaluing just a little faster than they were inflating, but once in the euro they could no longer use that safety valve, so inflation at home translated one-to-one into rising prices on the world market – not good for countries that sell about one-third of their GDP abroad. Thus the Club Med countries began to price themselves out of world markets. And instead of converging economically, the eurozone’s members were moving farther apart. As German exports soared to 47% of GDP – a ratio that dwarfs even China’s – those of the Club Med countries fell. And not only did the euro impose virtue, it even made vice easier. Before the euro, high-spending countries were forced to pay a devaluation premium on the interest of their debt. With it, they no longer had to issue bonds denominated in devaluationprone liras, francs and drachmas as they could issue debt in solid-gold euros. As their interest charges went down, their borrowing went up. But of course the dream of a Germanised euro has turned into a nightmare. Instead of forcing internal reforms to make the wayward more cost-efficient and productive by liberalising labour markets and levelling privilege, the euro encouraged extravagance. Why should

Club Med countries save if they can borrow, and borrow cheaply? Put in economic parlance, if you can’t devalue on the outside, you have to devalue on the inside by lowering the rent-seeking of privileged groups, driving down costs, extending working weeks and working lives. Where does the eurozone go from here? Rescue mechanisms like the EFSF and the ESM will probably work until next March, when Greece will have to pay out €16bn in interest and redemption. So there won’t be a default until next spring, I presume. But Greece is insolvent, so nobody knows what will happen after next March. Shrinking the Greek economy by about 5% through painful reforms may be a road to solvency, but not to growth. Everybody wants to save the euro, of course, but saving it means a transfer union, and that will only last as long as the Germans are willing and able to pay. The theory of public goods says that those who have the most, and the greatest interest in preserving public good, will pay most for it, so it looks like “transfer union” as far as the eye can see. The alternatives are either a break-up of the eurozone, or the leap into political union with a common fiscal policy and mandated revenue sharing. Because the Utopian state looks impossible for the eurozone’s 17 members, let alone the EU’s 27, it’s probably going to have to be a case of muddling through. And I myself would not recommend anything else. Europe can’t afford to let the euro train run off the rails, yet I’m very doubtful about a great leap forward into a more “perfect union”. Europe’s closer integration since 1950 has been like a slow walk through the foothills, but now we are facing the Alps of core sovereignty. The EU’s easy past doesn’t necessarily lead to the shiny future that is a United States of Europe.

*Josef Joffe is publisher-editor of the German weekly Die Zeit, Senior Fellow at the Freeman - Spogli Institute for International Studies and Abramowitz Fellow at the Hoover Institution, both at Stanford.

opinion

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FILE: TOWARDS A EUROPEAN BANKING UNION?

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FILE: TOWARDS A EUROPEAN BANKING UNION?

Towards a European banking union? At the European Council of 28/29 June, EU leaders agreed to deepen economic and monetary union as one of the remedies of the current crisis. At that meeting, the leaders discussed the report entitled â&#x20AC;&#x2DC;Towards a Genuine Economic and Monetary Unionâ&#x20AC;&#x2122;1, prepared by the President of the European Council in close collaboration with the President of the European Commission, the Chair of the Eurogroup and the President of the European Central Bank. This report set out the main building blocks towards deeper economic and monetary integration, including banking union. On 12 September, the Commission presented proposals to design a single banking supervision mechanism in the euro area, further strengthening its response to the current crisis. This proposal will not change rule-making for the single market of 27 countries, but

change the way in which banks in the Euro area will be supervised; hence it will fully preserve the integrity of the single market. A single supervision mechanism, built around the European Central Bank (ECB), will be a major step forward. It will send a strong political signal of credibility to our partners and to global investors. It will show once again the irreversibility of the euro. The remaining building blocks for a genuine Economic a Monetary Union will include not only the remaining pillars of the Banking Union (single rule book for financial institutions in the single market, strengthening deposit guarantee schemes, and establishing national resolution funds and legislation), but also an integrated budgetary framework (Fiscal Union), an integrated economic policy framework (Economic Union) and a strengthened democratic dimension (Political Union). EUROPEANBUSINESSREVIEW

FILE: TOWARDS A EUROPEAN BANKING UNION?

Europe’s Necessary Union The consequences of Europe’s debt crisis are all too present throughout much of the European Union, as distressed economies attempt to stabilize and grow at the same time. Notwithstanding the important decisions taken over the last couple of years, the reality is that we need to do more to tackle the challenges facing the eurozone.

R Βy José Manuel Barroso*

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eform and consolidation measures are being implemented across the EU. Joint financial backstops have been put in place. And the European Central Bank has consistently shown that it will stand by the euro. Yet experts and partners often underestimate our determination. All of the steps taken so far have resulted in more European integration, not less. It is true that sometimes decisionmaking in our democratic system takes time. But do not misjudge us: the negotiations are about the arrangements, not about the final outcome. There is sufficient political will in the EU to do whatever is necessary to protect the euro, because the future of the single currency will determine that of European integration.

The additional measures that Europe needs must be firmly rooted in a commitment to deeper integration. High levels of sovereign debt, together with the behavior of parts of the financial sector, have amplified the crisis in the eurozone and raised important issues of confidence that now require a systemic answer. That is why we must complete the unfinished business of economic and monetary union – and why the European Commission has long argued for the creation of a banking union as an indispensable step toward that goal. The Commission’s upcoming proposals are part of a broader package leading to economic, fiscal, and political union that will redefine the boundaries of European integration. The crisis has starkly revealed the insufficiencies of existing banking supervision. We must go beyond cooperation and establish an EU-wide supervisory authority, particularly in the eurozone. The link between sovereign debt and bank debt has to be broken once and for all. We must end the vicious circle whereby the use of taxpayers’ funds – more than €4.5 trillion ($5.7 trillion) so far – to rescue banks weakens governments’ budgets, while increasingly

FILE: TOWARDS A EUROPEAN BANKING UNION?

risk-averse banks stop lending to businesses that need funds, undermining the economy further. Europe can stop this negative dynamic now with bold action. A single rulebook for financial services is being put in place for the single market. Building on this, a single European banking-supervision authority would open the way to direct recapitalization of banks through the European Stability Mechanism, as well as to common deposit insurance and a single resolution framework. The Commission presented its proposals for a Single Banking Supervisory Mechanism based on three key principles: Single supervision: Within the eurozone, coordination between national supervisory bodies is no longer enough. Risks that emerge in one country can affect the entire currency area. Com-

mon banking supervision is needed for strengthening confidence among countries using common financial backstops. Credibility: The eurozone’s new banking-supervision mechanism will have the ECB at its heart. The choice of tasks to be entrusted to the ECB will ensure rigorous, high-quality, and equal prudential supervision of eurozone banks, thereby contributing decisively to maintaining confidence between the banks – and thus increasing financial stability throughout the eurozone. Close cooperation with national supervisors will be built into the framework. The ECB’s supervisory role will be fully separated from its monetary-policy responsibilities. In parallel, the European Banking Authority will continue to perform its existing tasks, namely developing the single rulebook for the entire

single market and ensuring convergent supervisory practice throughout the EU. Broad coverage: All banks in the eurozone will be covered by the new European supervisory system. And we will need to bridge the gap between eurozone members and EU members that remain outside the monetary union, some of which may want to participate in the new supervisory mechanisms. The road that we have decided to follow will allow for swift action. The Single Banking Supervisory Mechanism does not require a treaty change and should be in place by January 2013. Common and more integrated supervision is the first step towards a banking union. Next, the Commission will build on our current proposals for depositguarantee schemes and bank resolution mechanisms to move toward a single resolution fund and a single resolution authority. Once these proposals are implemented, the banking union will be complete. Establishing a banking union by 2013 will not give Europe a magic wand with which to wave away the economic crisis overnight; but it is a major and crucial step to restoring the confidence of Europe’s citizens, international partners, and investors. It will ensure financial stability, increase transparency, make the banking sector accountable, and protect taxpayers’ money. Moreover, it is the start of something much bigger. Once again, I would like to stress that the eurozone is drawing lessons from the past and defining a way forward, not backwards, in terms of integration. That is good news not only for the euro, but also for the global economy.

* José Manuel Barroso was Prime Minister of Portugal (2002-2004), and has since been President of the European Commission, where he has overseen implementation of the Treaty of Lisbon, Turkey’s bid for EU membership, the Union’s participation in the Doha Round of global trade negotiations, and European climate-change measures.

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FILE: TOWARDS A EUROPEAN BANKING UNION?

Towards a European financial union and a more solid European banking sector If we want one single European resolution system for failing banks, if national deposits insurance schemes are to be pooled, if the European Stability Mechanism is allowed to recapitalise banks directly, then we need pan-European supervision with real teeth. And we need to decide on who should exercise this supervision.

F By Michel Barnier*

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or more than 50 years, European countries have been integrating their industries, their trade, their economies. The European Union is unique in the world in this regard. Just like the United States was unique at its inception. We still have 27 governments, 27 ministries of finance and 27 central banks in the decision-making process. With the accession of Croatia, we will soon be 28 around the table. Few months ago, the EU Member States agreed on a “Compact for growth and jobs”. It includes in particular 120 billion euros of new joint investments. This is very important. As was underlined recently at the G20 summit, fiscal

discipline and austerity measures – as necessary as they are - need to be accompanied by radical measures to support growth. Eurozone countries also agreed to step up the European Stability Mechanism, our new European intervention fund. The ESM will be entitled to buy sovereign bonds, provided that the countries concerned fulfil their commitments as regards fiscal consolidation and structural reforms. And we are moving towards a banking union. This is not a small step. And it will change the way we deal with financial crises in the future. When the financial crisis spread to Europe in 2008, we had 27 different regulatory systems in place. All based on national rules and national rescue measures. Some form of European coordination did exist. But the goal was limited to exchanges of views and rather informal cooperation procedures. That system was not sufficient. And the result is well-known: Some European banks got into big trouble. All of these banks were considered too big to fail. So they were saved by public money.

FILE: TOWARDS A EUROPEAN BANKING UNION?

Between October 2008 and October 2011, European countries have given 4.5 trillion euros in public support and guarantees to their banks. This is clearly not acceptable. We want to break this link between States and their banks. With the future banking union, the situation will be different. There will be one European Supervisor to deal with ailing banks and financial crises. How are we going to build this Banking Union? Let me make three points: I â&#x20AC;&#x201C; First, we are not starting from scratch. Since I took office two and a half years ago, one of my key tasks has been to strengthen EU banks. It is sometimes claimed that the EU is regulating to the detriment of certain actors, in particular the City of London. I can assure you that this is incorrect. We have seen in recent years that the reckless and immoral behaviour of a few institutions has created enormous dam-

age for the financial sector itself and society as a whole. The recent scandal around Libor is but an example. But I would like to underline that the financial industry in general is a true asset for Europe. And we want our financial centres, including the City, to prosper. That is why it is so important for me to have the British authorities fully on board when we adopt new financial legislation. To make sure that all new rules are proportionate and contribute to making the financial sector more stable, more solid and more efficient. Allowing it to fully serve the real economy. So what have we done so far? We now have three pan-European supervisory authorities for banks, insurance and securities markets. They have been operational since January 2011. And in October last year, European leaders decided on a major capitalisation exercise for the 27 biggest European banks. The European Banking

Authority published the results of this exercise yesterday. The capital shortfall when the exercise started was estimated at 76 billion euros. However, on the 30th of June this year, the banks in question had raised 94.4 billion euros! And substantial parts of this capital were raised directly on the capital markets, with the need for a public backstop only in a very limited number of cases. This is good news as regards the solidity of the EU banking sector.More generally, we are putting in place common rules for all EU banks. Europe will soon be the first region in the world to have translated the Basel III agreement into binding law. We will apply these rules to more than 8,000 European banks. I welcome the fact that the US regulators have taken steps in the same direction by publishing their draft capital rules. We will continue to monitor the progress made on delivering on this and

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FILE: TOWARDS A EUROPEAN BANKING UNION?

other G20 commitments in other jurisdictions. As in other areas of financial regulation – and let me just mention OTCderivatives, international accounting standards and insurance – it is very important that we all advance in parallel. In order to avoid regulatory arbitrage. Ensuring that global financial firms can work in a solid and coherent legal framework. The EU legislation ensures this international consistency through our equivalence-approach. I know that this is not the approach used in the United States. But what matters is not so much the legal methodology but ensuring that we recognise each others’ regulatory and supervisory systems. This is my key message to the American regulators. Let me now revert to the Banking Union and its main building blocks: I have mentioned supervision and capital rules. In early June, we proposed EU rules for bank recovery and resolution. To make sure that supervisory authorities have all the tools they need to deal with bank failures. Without taxpayers’ money. Banks can fail. We know that. Like any other company. Our proposal will ensure that corrective measures are taken at an early stage. And if the worst comes to worst, the rules will make sure that banks can be resolved without any disruption of the real economy. II – That said, we cannot deny that there are still a number of big issues ahead. This is my second point. First, we cannot have more integration and solidarity without clear and effective backstops. The American experience with the FDIC is a source of inspiration for Europe. If we want one single European resolution system for failing banks, if national deposits insurance schemes are to be pooled, if the European Stability Mechanism is allowed to recapitalise banks directly, then we need pan-European supervision with real teeth. And we need to decide on who should exercise this supervision. The recent Summit of the EU leaders stressed that the single supervisor should involve the European Central Bank. We are currently working on the tech-

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nical and legal modalities around this new structure. Many of you wonder whether the Banking Union should apply to all 27 EU countries, or only for the 17 Eurozone countries? Of course, no non-Eurozone country can be forced to participate. But my personal view is that we must do all we can to build a banking union for all 27. To preserve the single market. And avoid fragmentation. As I often say, there is only one single market. And this single market needs a single rule book and integrated supervision. We will present our legislative proposal on the single supervisory mechanism in September. III – Third and last point: we are not losing sight of the broader picture.The Banking Union is part of a more fundamental project. In the longer term, we are heading towards a much more integrated Financial Union: First, a real economic union. The crisis has shown us that we cannot have a monetary union without an economic union. That is why we have reviewed our economic coordination framework and put in place the so-called “European semester”. The European Commission now makes a detailed analysis of each Member State’s imbalances. Followed by targeted recommendations for each country. Second pillar: a fiscal union. We want to complete economic integration with stronger budgetary integration. My conviction is that we will need to pool more resources. Through a higher EU budget. And, one day, through Eurobonds. Eurobonds could for example be issued for amounts of debt below 60% of Member States’ GDP. This would considerably reduce spreads. And increase Eurozone countries’ margins of manoeuvre. However, as you know, some Member States, including Germany, are still opposed to Eurobonds without increased EU monitoring of Member States’ spending. I understand this point of view. Pooling of resources and solidarity must go hand-in-hand with responsibility and transparency. We already have common targets for public debt and deficits. And the “European semester” includes

a collective right to review the annual budget of each Member State before it is finalised. But once again, we need to go further. And collectively agree to give the EU stronger powers to oversee national budgets. Let me conclude by saying that there are two final conditions for this banking, economic and fiscal union to become reality. First, building on the current momentum. Second, stepping-up the democratic support and control of the EU. We need an integrated Financial Union with enhanced democratic control. We need more democracy at the bottom. And we need to provide responses to the many citizens in Europe today, who feel disconnected from their politicians. Citizens who as a consequence increasingly vote for populist parties, on the left and on the right. These parties are on the rise in many European countries, including the one I know best. So we need to explain Europe better. Through more involvement of national Parliaments. And through the European Citizens’ Initiative, which now allows one million EU citizens to submit a legislative proposal to the Commission. But we also need more democracy at the top. My conviction is that we should have an EU Finance Minister, subject to strong democratic control from the European Parliament and national Parliaments. At some point in the future, I also believe that we should combine the role of the President of the European Commission and the President of the European Council. Through more democracy we will build a stronger Europe, both in economic and political terms. A Europe that will continue to be relevant in an increasingly globalised world.

* Member of the European Commission, responsible for Internal Market and Services **Adapted from his speech at Peterson Institute for International Economics, Washington DC

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A banking union:

Q&A 1. What do we want to achieve with banking union? 1.1 What is the banking union that we wish to implement? When the financial crisis spread to Europe in 2008, we had 27 different banking regulatory systems in place, all based on national rules and national rescue measures. Some form of European coordination existed but it was related to exchanges of information and rather informal cooperation procedures. This was not sufficient to respond to the financial sector crisis and its contagion to sovereigns. A fully-fledged banking union will be key to supporting economic and monetary integration. Pooled monetary responsibilities have indeed spurred closer economic and financial integration, and increased the possibility of cross-border effects in the event of bank crises.

Common and more integrated banking supervision for the Euro area is one important pillar to make sure that supervision abides by the highest standards. This will build the necessary trust between Member States which is a condition for using common backstops, notably the direct recapitalization by the ESM of banks. Once common supervision for the Euro area is in place, the Commission’s intention is to build on existing proposals for deposit guarantee schemes and bank recovery and resolution, moving towards a more integrated approach also in these areas. 1.2 Why do we want to achieve this banking union? • To break the link between Member States and their banks: Between October 2008 and October 2011, European countries have mobilised €4.5 trillion in public support and guarantees to their banks. This is not acceptable. With its proposal on capital requirements for banks (“CRD IV”) made in July last year, the Commission wants to ensure that the capital of banking institutions is sufficient both in quantity and in quality to face future shocks. The future European Stability Mechanism (ESM) could have the possibility to recapitalise banks directly once a single supervisory mechanism is established for banks in the euro area. This will contribute to breaking the vicious circle between banks and sovereigns as the ESM loans would not add to the debt burden of countries facing intense market pressure. • To restore the credibility of the financial sector: The proposals already tabled by the European Commission to improve regulation of the financial system represent a solid basis to go further in the harmonisation of our rules, which will be made easier in the framework of a banking union. The European single superviEUROPEANBUSINESSREVIEW

FILE: TOWARDS A EUROPEAN BANKING UNION?

sory system for banks will enable a fully rigorous and independent supervision of our banking sector. Giving to the ECB the ultimate responsibility for supervision of banks in the euro area will contribute to increasing confidence between the banks and in this way increase financial stability in the euro area. • To preserve tax payers’ money: In early June, we proposed EU rules for bank recovery and resolution. To make sure that supervisory authorities have all the tools they need to deal with bank failures without taxpayers’ money. This also aims to protect taxpayers’ money and deposits. To make sure that banks serve society and the real economy: With our financial regulation agenda, we are improving financial markets’ effectiveness, integrity and transparency in order to make sure that the funds available finance the economy. 2. EU banking union: what have we done so far? For each of the four pillars of the banking union (i.e. single rulebook; supervision; deposit guarantees; and bank resolution), the Commission has already taken action providing a solid basis for developing them further. 2.1 Measures to allow for more integrated banking supervision Three European supervisory authorities (ESAs) started work on 1 January 2011 to provide a supervisory framework: • the European Banking Authority (EBA) which deals with banking supervision, including the supervision of the recapitalisation of banks, as well as the coordination and dispute settlement of national supervisors • the European Securities and Markets Authority (ESMA) which deals with the supervision of capital markets; and • the European Insurance and Occupational Pensions Authority (EIOPA), which deals with insurance supervision. The 27 national supervisors are represented in all three supervisory authorities. Their role is to contribute to the development of a single rulebook for financial regulation in Europe, solve cross-border problems, prevent the build-up of risks, and help restore confidence. Individual ESAs have specific roles: for example ESMA is the EU supervisor of credit rating agencies, while EBA and EIOPA carry out “stress tests” of their respective sectors. EBA has also overseen the current recapitalisation exercise of EU banks. ESMA can ban products that threaten the stability of the overall financial system in emergency situations. In addition, the European Systemic Risk Board (ESRB) has been tasked with the macro-prudential oversight of the financial system within the Union. This new financial supervision framework has been in place since November 2010. EBA has quickly established its credibility as a new body, delivering within the constraints of the rules agreed by the Council and the European Parliament, which are centred on an approach of EBA coordinating national supervisors. EBA will remain a key player of the banking union. For more

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information on the 2010 financial supervision package, see MEMO/10/434. On 12 September, the Commission will present a regulation establishing an ambitious single supervision mechanism for banks in the Euro area. The Commission expects these proposals to be adopted by the end of the year, in order for the new system to enter into force early in 2013, as a key component of a banking union. This proposal will address the key questions of the concrete functioning of the new supervisory role for the ECB; the relationship between national supervisors and the ECB; defining the relationship between euro area countries and those not participating in the euro. In addition, the Commission will present an amending regulation clarifying the role and governance of the European Banking Authority in this context. 2.2 Towards a single rule book for the banking sector The European Council of June 2009 unanimously recommended establishing a single rulebook applicable to all the financial institutions in the single market. With its proposal on capital requirements for banks (“CRD IV”) made in July last year (see IP/11/915 and MEMO/11/527), the Commission launched the process of implementing for the European Union the new global standards on bank capital agreed at G20 level (most commonly known as the Basel III agreement). It is recalled that banking institutions entered the crisis with capital that was insufficient both in quantity and in quality, leading to unprecedented support from national authorities. Europe is playing a leading role on this matter, applying these rules to more than 8,000 banks, representing 53% of global assets. The Commission proposals are currently being discussed by the Council and the European Parliament and the Commission is determined that an agreement be reached shortly. With this legislation the Commission also wants to set up a governance framework giving bank supervisors new powers to monitor banks more closely and take action through possible sanctions when they spot risks, for example to reduce credit when it looks like it is growing into a bubble. European supervisors would intervene in some cases, for example when national supervisors disagree in cross-border situations. Further, the completion of the financial regulation agenda forms integral part of the banking union. In this this vein, it is recalled that the Commission is also working: • to examine reform of the structure of the banking sector though the work of the high-level expert group headed by Erkki Liikanen (see MEMO/12/129); • to regulate shadow banking (see IP/12/253) • to make credit ratings more reliable (see IP/11/1355); • to tighten rules on hedge funds (see IP/09/669), short selling (see IP/10/1126) and derivatives (see IP/10/1125 – regulation in force since 16 August 2012); • to revise current rules on trade in financial instruments (see IP/11/1219), market abuse (see IP/11/1217 and IP/12/846) and investment funds (see IP/10/869); • to curb banking pay practices that encourage recklessness (see IP/09/1120);

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• to reform the audit (see IP/11/1480) and accounting (see IP/11/1238) sectors. 2.3 Action taken to offer more protection to bank depositors Thanks to EU legislation, bank deposits in any Member State are already guaranteed up to €100,000 per depositor if a bank fails. From a financial stability perspective, this guarantee prevents depositors from making panic withdrawals from their banks, thereby preventing severe economic consequences. In July 2010, the Commission proposed to go further, with a harmonisation and simplification of protected deposits, faster pay-outs and improved financing of schemes, notably through ex-ante funding of deposit guarantee schemes and a mandatory mutual borrowing facility between the national schemes. The idea behind this is that if a national deposit guarantee scheme finds itself depleted, it can borrow from another national fund. This would be the first step towards a pan-EU deposit guarantee scheme. This proposal is still being discussed by the Council and Parliament in second reading. The Commission calls upon the legislators to speed up the process of co-decision on this proposal, retaining the mutual borrowing facility, and agree by the end of 2012. In managing a number of bank crises over recent years, national authorities have often created a new structure out of the failing bank and transferred some critical functions of the bank to this structure, such as safeguarding deposits. These resolution mechanisms make sure that depositors never lose access to their savings (for example in the case of Northern Rock, the bank was split into a good bank, which contained the deposits and good mortgage loans, and a so-called “bad bank” winding down the impaired loans). For more information on the Commission’s proposal for a European system of deposit guarantee schemes, see IP/10/918. 2.4 Action taken towards a single European recovery and resolution framework The Commission’s proposal on recovery and resolution tools for banks in crisis, adopted on 6 June (see IP/12/570 and MEMO/12/416), is the last in a series of proposed measures to strengthen Europe’s banking sector and avoid the spillover effects of any future financial crisis with negative effects for depositors and taxpayers. To ensure that the private sector pays its fair share in any future bailouts, the EU has proposed a common framework of rules and powers to help EU countries intervene to manage banks in difficulty. Repeated bailouts of banks have created a situation of deep unfairness, increased public debt and imposed a heavier burden on taxpayers. A common EU-wide framework for the managed resolution of banks and financial institutions would offer tools to prevent crises from emerging in the first place and address them early on if they do. The proposal also foresees the mechanisms that national authorities need to put in place to resolve banks in an orderly fashion if need be, with a “bail-in” mechanism from 2018 onwards to call on shareholders and creditors when attributing losses of failed banks. The proposal also

foresees the creation of national resolution funds paid for by national banks in order to cope with the few cases where bailin would not offer sufficient resources to pay for restructuring and closing down of banks. The ultimate aim of the proposal is to make sure that the financial sector pays for its own failings, rather than having to call on taxpayers’ money. If a national resolution fund would not have sufficient resources to pay for a restructuring, the proposal asks Member States to investigate the option of an extra levy on its banking sector, before calling on the option to borrow from national resolution funds of other EU Member States. 3. Banking union and bank recapitalisation The EU has already taken action as regards the recapitalisation of banks in several ways. For instance, extensive financial sector conditionality has been included in the policy requirements addressed to Member States that have received international financial assistance. With respect to the banking sector, the required policy measures consist, on the one hand, of the orderly winding-down of non-viable institutions and, on the other hand, of the restructuring of viable banks. Higher capital requirements, recapitalisations of banks, stress tests, deleveraging targets as well as enhancing the regulatory and supervisory frameworks have also been part of the policy initiatives. While not specific to programme countries, these stabilisation measures are most easily implemented in the context of international financial assistance. The European Financial Stability Facility (EFSF) can provide loans to non-programme euro area Member States for the specific purpose of recapitalising financial institutions, with the appropriate conditionality, institution-specific as well as horizontal, including structural reform of the domestic financial sector. At the euro area summit on 29 June 2012, it was proposed that once an effective supervisory mechanism involving the ECB was established for banks in the euro area, the future European Stability Mechanism (ESM) could, following a regular decision, have the possibility to recapitalise banks directly. The ESM will have a lending capacity of €500 billion. For euro area Member States not subject to a programme, the ESM will have the possibility of providing a loan for the specific purpose of re-capitalising financial institutions. The granting of such financial assistance is subject to a positive decision of the Board of Governors of the ESM, i.e. the finance ministers of the euro area Member States. The conditionality attached to financial assistance shall be detailed in a Memorandum of Understanding and will include institution-specific as well as horizontal conditionality. Recapitalisations can also be conducted by a loan accompanied by a fully-fledged macroeconomic adjustment programme. Modalities regarding direct recapitalisation of banks by the ESM will be specified later on but will also be subject to strict conditionality. Specific bank restructuring under these programmes and instruments goes hand-in-hand with the conditionality of EU state aid rules. EUROPEANBUSINESSREVIEW

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The European Banking Union? In blatant violation of the Maastricht Treaty, the European Commission has come forward with one bailout plan after another for Europe’s distressed economies. Now it wants to socialize not only government debt by introducing Eurobonds, but also banking debt by proclaiming a “banking union.”

S By Hans-Werner Sinn*

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ocializing bank debt is both unjust and will result in a future misallocation of resources. Socialization of bank debt across borders implies that a country’s private borrowing costs are artificially reduced below market rates, as insurance (in the form of credit-default swaps) is provided free of charge by other countries. Thus, capital flows from the core to the periphery would continue to exceed the optimal amount, undermining growth for Europe as a whole. History offers countless examples of the misallocation of resources that can result from socialization of bank debt. One is the 1980’s savings and loan crisis in the United States, which cost US taxpayers more than $100 billion. Under the umbrella of common deposit insurance, US

savings banks made a “gamble for resurrection” – borrowing excessively from their depositors and lending the money out to risky enterprises, knowing that potential profits could be paid out as dividends to shareholders while potential losses would be socialized. In other words, private profits were generated out of socially wasteful activities. And essentially the same happened with US subprime mortgage lending and with the Spanish banking system in the 2000’s. In both cases, banks took excessive risks in the expectation – eventually vindicated – that governments would bail them out. Spanish banks speculated on a continuing increase in real-estate prices, which would bring large capital gains to their customers. Indeed, they often lent homeowners more than 100% of the underlying property’s value. To compensate for the damage that their reckless behavior caused, they received €303 billion ($378 billion) in extra credit through Target, the European Central Bank’s interbank payment settlement system, and can now expect a further €100 billion in help from the European Financial Stability Facility. Much of this money will never return. Debt-equity swaps would be a much

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better way to recapitalize the banks. Rather than imposing the costs of the ECB’s and EFSF’s losses on European taxpayers, the banks’ creditors could give up some of their claims in exchange for receiving shares from the banks’ owners. Debt-equity swaps rescue the banks without rescuing their shareholders. Ideally, bank creditors would not lose money, because their fixed-interest claims would be converted into bank shares of similar value. This would be the case as long as the banks’ losses remained smaller than their equity capital. A true loss would be inflicted on a bank’s creditors only if the write-off losses on toxic mortgage loans exceeded the bank’s equity. But, even then, it would be better for creditors to bear the

loss than for taxpayers to do so, because this would encourage more cautious lending in the future. Socializing public debt is already posing a risk to the still-stable eurozone countries. To do the same thing with bank debt could pull hitherto sound economies into the abyss, because bank’s balance sheets are much larger than the volume of government debt. In Spain, the public debt-to-GDP ratio is 69%, but the debt of the Spanish banking system totals 305% of GDP, or about €3.3 trillion – about as much as the combined public debt of all five crisis-stricken eurozone countries. While the enormous volume of the bank debt implies that governments should shy away from socializing banking risks,

it also suggests that only the banks’ creditors could reasonably be asked to foot the bill without being overburdened. Indeed, if, as some believe, only a fraction of the banks’ equity is at risk, the potential debt-equity swaps would be minuscule. Spanish banks have 7% equity capital on average on their balance sheets. Thus, a debt-equity swap of less than 7.5% of the creditors’ investment would be enough to compensate for the banks’ losses. And, even if the banks’ private depositors, whose claims are 39% of the aggregate balance sheet, were excluded, the debt-equity swap necessary to compensate for a loss of up to 100% of the equity would be less than 12% of the creditors’ investment volume. Debt-equity swaps have been used successfully in many cases, and they follow from normal bankruptcy procedures. Apart from avoiding the excess burden and injustice of taxation, they also have the benefit of inducing banks’ owners to choose a prudent investment strategy, while persuading creditors to scrutinize and select carefully the banks to which they want to lend. The care taken in augmenting and preserving the wealth that current generations inherited from their ancestors is the ultimate reason for economic growth and capitalism’s success. Massive government interventions during the crisis have undermined this principle, and have probably already destroyed much of the inherited wealth. It is time to heed the fundamental laws of economics and put a stop to the imprudence that those charged with fighting the crisis have been allowed to get away with. Europe needs no banking union beyond a common regulatory system.

*Hans-Werner Sinn is Professor of Economics at the University of Munich and President of the Ifo Institute for Economic Research. He also serves on the German economy ministry’s Advisory Council. His book Can Germany be Saved? is one of the most widely read public-policy books in recent German history.

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SPECIAL REPORT: YOUNG PEOPLE LOOKING AT THE CRISIS

EUROPEANBUSINESSREVIEW

SPECIAL REPORT: YOUNG PEOPLE LOOKING AT THE CRISIS

Young people looking at the crisis By N. Peter Kramer

Politicians and the media are talking about the â&#x20AC;&#x2DC;Lost Generationâ&#x20AC;?, the children born in the 80s and 90s. There was never a better educated generation, but there was also never a generation that, for instance in Greece, Spain, Portugal and Italy, suffers from such a high unemployment rate. Will this be the first generation that will be unable to give a better future to their children and a generation that has to consume the savings of their parents rather

than increase their value? Andrea Gerosa, the always inspiring founder of the unique Think Tank Think Young puts serious question marks behind the political platitudes. European Business Review is thankful to Mr. Gerosa and five of his Think Young companions from different European countries to write down their views, opinions and solutions regarding the so called Lost Generation and the European crises. We hope that our readers will appreciate it as well! EUROPEANBUSINESSREVIEW

SPECIAL REPORT: YOUNG PEOPLE LOOKING AT THE CRISIS

Young Europeans and the Crisis It is time to face the truth: Europe and the Euro currency are in serious danger. This August, international investors will not go on holidays as they await a potential disaster. Frankly speaking, we do not know in which currency we will buy our Christmas presents.

By Andrea Gerosa*

he ECB will try to save the Euro using all the power its mandate allows, and if seriously attacked, it will inevitably go beyond this power. “If they shoot at your heart you do not check if the law allows you to defend yourself, you shoot back. The ECB will do the same” (EU Official, Brussels). Will it be enough? Nobody really knows. A better question to ask is ‘what will be left of this crisis in 2020?’ The media use “the Lost Generation” to define who, only a few years ago, were known as the “Digital Natives”, meaning the children born in the 80s and 90s. They say we are the first generation who will be unable to give a better future to our children. We are the first generation to consume the savings of our parents rather than increase their value. We are the first generation who will need sub-

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stantial help from governments. At ThinkYoung we reject this view. We are running an eight month project to study the “Skills Mismatch” of our generation and analyse how to overcome it. Results will be available in November, but the first answers we have are impressive: - 82% of young Europeans are willing to put in high levels of effort to acquire new skills relevant to their job. - 75% are ready to leave their native countries to acquire these new skills. - More than 50% work in order to improve the lives of other people and to contribute to society. Young people are positive, fit and ready to fight. In fact they are already fighting. We have worked with young Europeans since 2002 and we are sure of one thing: this is one generation that will not be lost. “The Lost Generation” may actually be those born between 1955 and 1975 that are waiting to “receive” the necessary leadership from current powers; those born in the 30s and 40s. Darwin theorized natural selection as “the survival of the fittest”. We see the possession of character and skill as key factors necessary to succeed in life. “The

Digital Natives” have grown up during the toughest decades since 1929; a generation for which life long learning is a priority, a pleasure and an attitude. We were born to learn and adapt. We are used to constant streams of disruptive technological change. This crisis will not last forever. However, whether it will be ended by the ECB, a stronger European political union, a dramatic burst or by war is unknown. What we do know is that the fittest will be leading in 2020. The fittest are the young generation. On behalf of young people, we thank everyone for the sympathy, but the lost generation will not be ours.

* Andrea Gerosa is the founder of the notfor-profit ThinkYoung (www.thinkyoung. eu), the first think-tank made only by young people for young people. Alongside some friends, he also founded in Geneva the real estate firm Kefren Sarl (www.kefren. ch). Andrea is former President of JADE, the European Confederation of Junior Enterprises (www.jadenet.org), the world second biggest student organization and former consultant at Oracle Corporation (www.oracle.com) Graduated in business administration, he is an alumnus of Bocconi University and the London Business School. Andrea speaks fluently four languages and is studying the fifth one, arabic, with very poor results. Passionate about football and sailing, he loves to spend weekends at the lake Como, where he was born in 1982.

opinion

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SPECIAL REPORT: YOUNG PEOPLE LOOKING AT THE CRISIS

No country for old men neither young Portugal: youth & crisis A levels exam always showed that math is not the strongest academic skill in Portugal but when the the number of youngsters leaving the country starts to become inversely proportional to the debt numbers everyone can see that something is going wrong.

By Sofia Trindade*

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7.000 is the number of Portuguese youngsters, under 34 yearsold, that have left the country in the three first months of this civic year. If the migration flow keeps the same rhythm Portugal is in risk of “losing” 200.000 young people by the end of 2012, as stated in a study done by the Portuguese National Statistic Institute. Some blame the economic crisis and the unemployment for being the central reasons of the biggest population reduction in Portugal since the 40’s, but the political class has its role in the moral and social demotivation of the country and its population. Mr. Pedro Passos Coelho was elected Portugal’s Prime-Minister in June 2011, when he used to give speeches based on hope. However everything seems to have changed since than apart Portugal’s bad economic situation. Probably inspired

in the common sense “If you can’t beat them, join them” Mr. Passos Coelho speeches are, nowadays, based in hope but a different kind of hope. Hope for a better future outside the country. After recommending Portuguese youth to immigrate to Portuguese speaking countries, like African ex-colonies, Portugal’s Prime-Minister faced a huge and angry movement of social networks, especially Facebook, demanding a public apology. Creative and sarcastic photo montages, product of a no longer dull and apathetic political youth, circulated on the wires for more than one month. However the official feedback didn’t math the expectations. Prime Minister, Pedro Passos Coelho, went public to defend that “being unemployed can not be for many people, as it is still in Portugal, a negative sign” adding that it needs to stop being a stigma and “has also to represent an opportunity to change his life, a free choice, mobility of society itself”. Currently around 29.000 Portuguese youngsters, under 25 years-old, are register in the unemployment centers.

Bad country gone good?

Portugal has always been seen as the country with one of the largest debts and low growth in the European Union.

SPECIAL REPORT: YOUNG PEOPLE LOOKING AT THE CRISIS

With a poor commercial and industrial competitiveness the country was from long time ago labeled by the media as the “new sick man of Europe”, like the Economist did in April 2007. However until pretty recently the media and political trend has changed. Portugal, wouldn’t the name of the country start by a P, is still part of the PIGS, but now a role models for the other countries. Portugal received a €78 billion bailout from the European Union and the International Monetary Fund last year, after borrowing costs on the markets reached unsustainable levels, but the institutional feedback to the implementation of the austerity measures, done to have access to the bailout, is positive. Currently Portugal is slowly winning back the investors confidence under the close supervision of the European Central Bank, the European Commission and the International Monetary Fund. The European Commission thirds re-

view on Portugal’s progress has indeed been very optimistic as official sources argue “overall, the program is on track. The fiscal adjustment in 2011-2012 is remarkable by any standards”. Portugal’s future will pass by creating a new labor reform as well as raise the competitiveness, growth and job creation necessary to trigger once more the national financial sector. An utopian task, for the majority of Portugal left political class, taking in consideration the severe austerity measures implemented and the national fast and positive ratification of the Fiscal Compact Treaty, designed to enforce stricter budget discipline in the eurozone, on the 13th of April. From an European perspective austerity measures and the national Parliament are working pretty good, perhaps is not international news that Portuguese Deputy Minister of Parliamentary Affairs, Mr. Miguel Relvas, did his B.A. in less than one year due to his professional

experience and still owns the University, as reported by national media, 800€ in fees – it’s the crisis. Portugal, a bad country gone good! Sofia Trindade - Media Officer at ThinkYoung, first European Youth Lobby. Sofia holds a Bachelor’s degree in Communication Studies from the University of Algarve, Portugal, where she majored in audiovisual media and she is currently doing a Master in European Journalism at IHECS, Brussels. She was an Assistant Professor at the University of Algarve and along with her academic baggage she has on the field experience. She was a TV journalism trainee at SIC – a Portuguese private broadcasting company and she was also a reporter for the international European affairs radio program at the students’ radio station LN FM, from Louvain-la-Neuve.

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SPECIAL REPORT: YOUNG PEOPLE LOOKING AT THE CRISIS

How do young Greeks look at the crisis? Politicians, technocrats, citizens in Greece and in Europe have their own conception of the Greek and European economic crisis and what has to be done. No matter how many different opinions have been heard, everybody, regardless of the background or political orientation, agrees on one single point: There has to be a change!

T By Alexandros Vigkos*

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he rector of Athens University of Economics and Business, Mr K. Gatsios, said in an interview: â&#x20AC;&#x153;The political problem in Greece was the generator of our economic problems and our economic deficits are generated from our politic deficits.â&#x20AC;? There is no doubt that in the Greek case what is required are not only financial measures, but most importantly, radical political changes. My generation has not yet met inspiring leaders. We have been introduced into a system of corruption, cronyism and lack of social justice. Lots of us have been raised with the guidance to become a part of this system in order to succeed in this society. Probably, my generation would tolerate the same political situation or even be a part of it, if we were not experiencing such a severe

economic crisis. This political situation was the generator of the austerity measures that Greece is currently applying or planning to apply. This affects not only the financial situation of all of us, but also the dreams of my generation and our faith in a prosperous future or even a national political stability. The disappointment of Greek people about politics was clearly illustrated in the previous parliamentary elections on May 6th, when approximately the 50% of Greek citizens either abstained from the elections or voted for parties which are not represented in the parliament after the elections (as they received less than the required percentage of 3% to be represented in the parliament). At the same elections and the ones that followed (June 17th), the reaction of the young people who voted the two biggest political parties in very low percentages is impressive. Unfortunately, in some cases the above mentioned disappointment was expressed by voting extreme political parties which can even set democracy at risk. This is currently the Greek situation, definitely not very optimistic and promising for the future, but not necessarily catastrophic as it is sometimes presented. I strongly believe that the Greek crisis can be a beginning for a deeper involve-

SPECIAL REPORT: YOUNG PEOPLE LOOKING AT THE CRISIS

ment of young people in politics as well as for a change that everybody expects to take place. In other words, the young generation can make the beginning for a healthier involvement in politics and public life. Greece needs not only to overcome this crisis, but also to move towards a more prosperous future. A future where “People want to fall in love again with politics, with political parties with leaders” argues Mr K. Gatsios, the rector of Athens University of Economics and Business.

What about the future of Greece within Europe?

During the last years, questions, such as “Will Greece stay in the Eurozone?” or “Would it be better for Greece to leave or stay in Eurozone?” were often appeared as headlines in the press. As the purpose of this article is to give a youth approach on the issue, I will not

comment on the austerity measures or financial data. As I mentioned in the first part of the article my hope for a more prosperous future initiated by the youth generation requires a change of attitude, which has to come internally from Greece. Even though the change has to be internal, it will not be successful unless it is supported from the rest of Europe. For example, while the Greek youth generation is ready to make a change, at the same time in European level stereotypes about PIGS countries exist and arise, making it even harder to believe in ourselves. The youth generation should not be obliged to tolerate unfair stereotypes. To conclude, I am optimistic about the future not because the current Greek situation and financial data are ambitious, but because putting the misery and pessimism aside is the only solution for a better future. In any case, Greece is a

gifted country: with beautiful landscapes which are unique tourist attractions and competent people who are able to lead the country’s future. Greece, of course, cannot make it alone; we need the constructive guidance and support of the rest of Europe. * Project Manager at ThinkYoung, the first European Youth Lobby Born and raised in Greece, Alexandros arrived at Think Young in March 2012. He is a student of economics and currently doing his internship in Brussels as he found Think Young a great opportunity to live this experience in the center of Europe with young people and learn more about European affairs. He has also lived abroad during his Erasmus exchange in Lisbon one year ago and he is an active ESN member. Loves cinema, traveling, swimming and summer in Greece.

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SPECIAL REPORT: YOUNG PEOPLE LOOKING AT THE CRISIS

How do young Spanish look at the crisis? Spain. 1944. Emerged in a global economic recession and suffering from a brutal internal economic crisis, the dictator Franco recognizes the right of Christmas bonuses for public sector workers. Spain. 2012. The Prime Minister, Mariano Rajoy, democratically elected, suspends the Christmas bonuses.

By Andrea Pavon*

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eanwhile, newspapers echo the clashes between protesters and police and devote their time reporting the rate of unemployment, the amount of the debt, the budgets slashed and so forth. Sometimes, newspapers put faces to the numbers: dramatic stories about young people who have to move back to their parents (two-thirds aged below 30 still live at family’s home, indeed), or, who, despite being well prepared, are unable to find a job. Monica Martin, a young journalist, is 23 years old, and she firmly thinks the crisis has turned her into a more realistic person: “One year ago, when I slept, I always dreamed of being able to fly. Now, I am always dreaming about people who try to kill me”. Yet, in a country where one in two young

people are unemployed, what is the point of telling their daily lives without knowing what they think about what is going on? Nacho Bernardo, a student of Laws, agrees with the austerity measures except with the suspension of the Christmas bonuses: “Few days ago, the Constitutional Court of Portugal said that the same measure in Portugal was unconstitutional, as it is discriminatory because it was taken only against public employees”. Also, it is worth noting that the National Statistics Institute released last year that emigration surpassed immigration for the first time in decades. And whilst José Ignacio Wert, the Minister of Education, insists on denying a ‘brain drain’, Leire Escalada, journalist aged 24, roundly asserts it: “We are facing a huge problem because living abroad is no longer a choice but an obligation”. However, Laura Montes, a student of Criminology, believes people who leave are behaving badly: “Our country is going through bad moments, now it’s time to stay here and strive to lift the country”.

Economic Crisis versus Political Crisis

Lamentably, not only is Spain living through an economic crisis, but it is also experiencing a political one. Has the for-

SPECIAL REPORT: YOUNG PEOPLE LOOKING AT THE CRISIS

mer triggered the latter or vice versa? “In my opinion, the political crisis was already there, but when people have money in their pockets, they don’t care whether the institutions are losing prestige or we have a healthy democracy”, considers Emma Rodriguez, a Laws student. Moreover, Sergio Alonso, unemployed biologist, deems “the political crisis concerns to an archaic democratic system, which was valuable to overcome a dictatorship but it needs a restructuring”. Also, there are some Spaniards who focus the problem on the politicians themselves: “I am tired of them: they are always criticizing the opposition, breaking promises, stealing money from the citizens, whilst they afford the luxury of receiving salaries for life”, says Aroa Rodrigo, student of Medicine, completely outraged. Nacho Bernardo, meanwhile, sets the political crisis in the education: “our politicians have one of the lowest education levels in Europe”. Pilar Toranzo, waitress in a pizzeria, underlines: “Democracy does not work when the only thing we do by voting is choosing one party to prevent the triumph of the other one. We live in a genuine partitocracy”. And, Maria Malo, a journalist aged 22, ascertains that “it is com-

monly believed that we will never have politicians as good as Adolfo Suarez or Felipe Gonzalez were”. On the other hand, Carolina Diaz, PhD Journalism student, feels we are going through an overall crisis of values: “During the past years, we were immersed in a very hedonistic culture, which led us to live above our means, culminating in the current crisis”.

PIGS versus European Sense of Belonging

Then, do we deserve to be called as PIGS? “It is the most disrespectful word I have ever heard”, considers Emma Rodriguez. Nevertheless, Spanish people tend to be known for their good humour: “They envy us because it is better our ‘jamon’ from the ‘PIGS’ than their ‘fish and chips’”, laughs Sergio Alonso. Besides, Marco Fernandez, a Laws student, remembers the violation (without consequences) of the Stability and Growth Pact by Germany and France: “our economy is different than theirs but it doesn’t imply we should be called that way”. And, Llara Alvarez, Philology student, who was spending her Erasmus in Germany, confesses: “I might say I suffered from ‘an economic racism’: they al-

ways asked me how it was possible I wore clothing brands if I were Spanish”. All in all, is still it possible to keep a European sense of belonging? “European diversity ought not to be seen as an obstacle but as a virtue, because it involves a multiplicity of new ideas to implement”, thinks Sara Sanz, a Laws student. Beatriz Suarez, student of History, agrees with Sara but misses an education focused on a European culture. Nacho Bernardo ascertains Europe will have no say in the future unless it becomes the ‘United States of Europe’. And Antonio Fernandez, a journalist aged 26, concludes: “A Spanish Eurosceptic is a Spanish person without memory”. Andrea Pavοn Guinea is a Journalist and Political Science student and a member of ThinkYoung’s writing team. Andrea studied Journalism in the University of Navarra and, currently, she is studying Political Sciences in Oviedo (Spain), the city where she comes from. She is interested in national and international politics and her huge passion is travelling around the world, as she finds it the best way to understand everything.

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SPECIAL REPORT: YOUNG PEOPLE LOOKING AT THE CRISIS

How do young Italians look at the crisis? In Italy, the final exam concluding secondary school is called “maturità”, which means that now you are ready, “mature”. It tests all the subjects, and succeeding such exam provides you the formal “ticket” to start to contribute to society, building on a centuries-long legacy of poetry, scientific research and history.

T By Alessandro Niccoloò Tirapani*

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his is the story we’ve been told since ever, the sole narrative: “go out and take the world!”. But now reality strikes. And reality is done by media as much as by the social context: with the crisis getting stronger and stronger, moving down from abstract financial market to daily purchasing decisions, all the goals have been reset and the standard lowered. As Italians, we have the execrable habit to restlessly complain, but, up to now, there has always been this ethereal feeling that, fighting to give your best, you could eventually achieve outstanding results, despite all the obstacles typical of our society. Then, the tougher got the crisis, the more the inefficiencies (before considered no more than a colorful regional habit) got unbearable.

Italian society found itself grown up overnight, suddenly held responsible from its European brothers for its debt and its condescension toward illegal practices. This external pressure has been a call for shouting out loud best practices and national excellences. Anyway, the spectrum of all the previous problems came to knock at the door of policy makers, economic leaders and social institutions: political corruption, huge inequalities between North and South, a production system based on small-medium enterprises always struggling between low competitiveness and an extremely high taxation and so much more. All these issues have been there before, and youth have always discussed them, starting from late 60s, amid strikes in the cities or during open discussions at school and university. In the big cities, wide movements have produced a huge amount of proposals; still, most of these ideas have been ignored, at least until the crisis have steered media’s attention back to these topics. Suddenly, youngsters have found themselves squeezed between social representatives, now screaming what they have been asking for years (need of deep reforms and revision of the decision making procedures inside and outside companies) and job market needs. The

SPECIAL REPORT: YOUNG PEOPLE LOOKING AT THE CRISIS

the actions to be undertaken to avoid this disaster are clear: radical reform of the resources’ redistribution, rebuild of the social contract through a lower fiscal pressure and, only then, a lower tax evasion, a stronger European identity (i.e. empowering school programs or learning English, or providing incentives to travel). In a recent meeting in Bologna, leading industrial leaders and politicians have called for a third industrial revolution, as reported from IlSole24Ore. These points represent youth way more than old labels like “right vs left” or “conservatives vs progressists”, as most of these antithesis are enrooted in a bipolar reality unknown to the majority of under 30. It is true that the Italian political affiliation is peculiar, and is way more based on gut feeling or family traditions than in other countries: on top of that, Italy does not have a liberal party strictly comparable with any existing in the Anglo-Saxon world. Nonetheless, youth is more united than divided today. Italian youngsters have not forgotten their roots, and most of us have clear in mind older relatives’ stories about our country right after the Second World War or during the years of terroristic attacks in the 70s. The need for a reformed country, a stronger European consciousness and better working contracts, is shared among young Italians. The crisis has just made clear that “tomorrow” is not an answer. latter is facing maybe its toughest time, since competitions went global and high unemployment is threatening the social security mechanisms (today more difficult to be financed). Italian political scenario has passed through some changes in the last two years, but for youth not much has changed. On one hand, the quoted issues affecting the system have not be tackled (as several interests are too deeply rooted to be abandoned in few months); on the other hand, middle-class has paid a high price to secure its elder years, and now is not willing to risk everything to reform the labour market structure, which actually affects the most those under 40s. So, after having built a sense of security through school years and having devel-

oped self-consciousness during university, Italian youth is faceing an open society in the envelope of an old country: whilst public narratives celebrate art and literature, industries are lacking hard scientists and niche experts. This contrast is nevertheless giving birth to a wide range of innovations: in example, the literature movement of “New Italian Epic” (which tries to embed political critic in first-person romances getting over post-modernism), or the increased adoption of new technologies among young, or even a strong emigration of skilled people. This crisis has affected young Italians differently from older generations, since we cannot afford another lost decade. Despite generic political discussions,

*Policy Researcher at ThinkYoung. Born and raised in Bologna, Italy, Alessandro Niccol arrived at Think Young in February 2012. He got a bachelor in economics and then he earned a MSc in International Management at HEC Lausanne. Interested in political issues, he completed an Erasmus exchange program at Freie Universität in Berlin, focusing on International relations. Besides, he has followed his eclectic passion for travelling and discovering new cultures by working in some Mediterranean destinations during summer. He is keen on writing, but he does not really like being alone: for this, he loves meeting other young foreigners to develop an European identity.

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SPECIAL REPORT: YOUNG PEOPLE LOOKING AT THE CRISIS

How do young French people look at the crisis? Being young in an aging country immersed in an economic crisis can be a real hardship for many, and France is no exception. Crisis in France, alike the rest of Europe, is a multiform crisis but is primarily economic and budgetary.

Βy Bénédicte Le Galliot*

rowth, specifically within the labour market has slowed and unfortunately, it does not come as a surprise that the young generations are among the first victims of unemployment. According to Eurostat, in May 2012 the youth unemployment rate in France reached 22.7%. Before this point, the national average for all demographic categories was deemed high at 10.1%. This figure had peaked in November 2009, where it reached 24.6%. However, if we compare this data with that

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of nations such as Spain and Greece, it appears less abominable. So the conclusion would be that there are very few or next to no opportunities for young people in the job market. Young people are generally cast away in job interviews because of their lack of experience and skills and it appears that often the vacant positions are filled by those less qualified. But how can someone launch a successful career if extensive work experience is always mandatory? How can the young generation compete effectively against these senior workers and job seekers? Mobility and thus starting a career can be also hindered by the high rent. This is especially true in Paris, where it is almost impossible to rent a decent flat without providing a guarantor with a suitable salary. For this reason young French people tend to stay at home longer and sometimes even borrow their parents’ car to commute to

work. When eventually hired, we are not always trusted with real intriguing work, often introduced to rather bland admin work. Being unemployed grows the feeling of despair and injustice among youth as well as those poorly paid basic jobs and internships. This appears even worse when interns work as hard as any other employee. Believe me, still relying on family help or state support is always lived with embarrassment and shame. Blame it on the previous generations, blame it on the economical context, blame it on a lack of flexibility in the labour law, the result is the same: youth unemployment should be a priority in France. The largest problem that needs quick resolution is the mismatch between perceptions, knowledge and skills gained at university and the specific requirements of the labor market and HR departments. However, the situation is not that gloomy for everyone. Despite the multitude of degrees now offered in France and throughout Europe. Those highly qualified in the most desired fields such as computer science and engineering are finding employment with little trouble. Although the conditions are still tough in terms of the economic recession, access to capital and sheer volume of legislation, some young entrepreneurs

SPECIAL REPORT: YOUNG PEOPLE LOOKING AT THE CRISIS

are adapting to thrive in their field of activity. Working abroad is also becoming more and more attractive for European students. This is thanks to the Erasmus year, offered by many universities in the EU, which encourages students to study or work in a different country to that of their nationality. For this reason, French youth are now granted greater opportunities to develop their linguistic abilities, although this change is occurring at a slow pace. In spite of this increase in foreign study and work mobility, globalization is strangely a topic of concern, but only for a minority of French youth. So this economical crisis is also coupled with an identity crisis partly due to the lack of jobs offers but it has not turned into a major political crisis in France. Traditional political parties still seem to be the best answer to the crisis even though far right gained weight. Its appeal to youth in France is a bit worrying in such a context. It is so particularly among dropouts and the least graduated ones according to the far right specialist Sylvain Crépon. In an interview to the French newspaper Le Monde, he explained this seduction by the antisystem and elite denunciation speech. Even if François Hollande, current

French president from S&D and Nicolas Sarkozy, former French president from EPP, were the frontrunners in the presidential race, the support of Marine Le Pen among youth steadily grew during the campaign. She was the second choice for 18-22 years old last March with 23% voting compared to the previous figure of 19% in November 2011. According to Sylvain Crépon she benefited from her party’s modernization campaign, which she had personally initiated, and from the volatile economic environment. She also managed to constitute a younger team around her and targeted young voters with a clear, concise and direct speech. At European level, French youth do not expect much from the public authorities and the Unions seem distanced from their daily preoccupations. Most are fairly naïve and have little understanding about the concept of the European Union, even if they consider themselves to be European - They support the idea of the unification of the European continent but not consequently the European Union and its institutions as they are now. French youth is at a crossroad; despite the crisis, it must find its own way without resorting to extremism. Youth organizations, public authorities and

universities should collaborate to ensure every diploma or degree leads either to quality employment or to the launch of a new business. We should also remember generations of baby-boomers are about to leave the workforce. France will recover and must make more efforts to integrate its youth to its workforce because the country needs them as much as they need it.

Bénédicte Le Galliot works as a Policy Researcher for ThinkYoung, the first European Youth Lobby. Born and raised in Brittany, France, Bénédicte joined the Think Young team in March 2012. Always keen on European affairs, she is currently a student in Strasbourg at the Institut d’Etudes Politiques, in the graduate program of European policies and public affairs. Wanting to see more of the world, she spent her exchange year in Mexico City and then gained some experience in the diplomatic field with an internship at the French embassy in México in the press and communication department. She is now happy to confront her theoric knowledge of Europe to its regular functioning in Brussels and to meet other young European people.

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the world

Taiwanese visa-free travel to the US ROC President Ma Ying-jeou welcomed Taiwan’s inclusion in the US Visa Waiver Program following an announcement by Janet Napolitano, Secretary of the US Department of Homeland Security. Napolitano described Taiwan’s inclusion in the VWP as a ‘logical development’ in close security, economic and peopleto-people ties between the two nations. Starting November 1 ROC nationals will be allowed to visit the US without visas. By N. Peter Kramer

avid Yung-lo Lin, ROC’s Minister of Foreign Affairs said: ‘The fact that Taiwan is the only VWP country with no formal US diplomatic relations is evidence of close bilateral ties’. Minister Lin mentioned that a total of 129 countries now offer ROC nationals visa-free entry, compared to 54 before President Ma took office in May 2008. Lin was till the end of September Taiwan’s permanent representative to the EU. During his presence in Brussels Taiwan could welcome inclusion in the EU Visa Waiver Program nearly a year ago. It was European Parliament Vice-President Edward McMillan-Scott who congratulated Lin on his appointment saying that ‘he had displayed diplomacy of the highest standard during his time in Brussels’.

‘Closer economic relations with Taiwan in interests of EU’ Beginning of September, Taiwan’s Mainland Affairs Council Minister Mrs Lai Shin-yuan* addressed the European Parliament. ‘The resumption of dialogue between Taiwan and mainland

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the world

Ambassador and now Minister of Foreign Affairs, Mr. David Lin

China in recent years has created a stable environment for Cross-Strait trade and economic activities and with it a more positive environment for trade and economic ties between Taiwan and Europe. ‘As Taiwan and Europe have maintained steady economic ties for a long time, signing an economic cooperation agreement (ECA) should expand and deepen bilateral economic exchange and cooperation. Signing an ECA will help expand the economic benefits for both sides”. She continued, “The improvement of Cross-Strait relations has eased international concerns about China’s possible opposition to such an agreement. The proposed ECA will help the

European Union promote its economic strategy in Asia and already has the support of the European people,” adding that “now is the best time to promote the Taiwan-EU ECA.” Minister Lai asserted that the China policies of the Ma administration along with the joint efforts of the two sides of the Taiwan Strait have resulted in substantially improved bilateral ties and created a path toward peace and prosperity. She added that “the key to the success of the Republic of China’s Mainland Policy is that President Ma is of the view that human rights are the benchmark for measuring the distance between the two sides of the Taiwan Strait.”

*In the meantime Taiwan’s Mainland Affairs Council Minister Mrs Lai Shinyuan has been appointed Taiwan’s permanent representative to the World Trade Organisation.

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the world

The US and the EU:

Capitalisms Compared With the eurozone up against the ropes, all signs are that the U.S. economy and economic model reign supreme. Sure, the United States has its problems too, including a severe bout of long-term unemployment. But everything is relative, after all. Stephan Richter explains why, viewed on a global scale, the failings of the U.S. model are actually bigger. By Stephan Richter*

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emember all the talk -much amplified by the mainstream mediathat CEO talent is so rarified that its price can only be measured in doubledigit millions per annum? That audacious proposition, trumpeted confidently from media towers in New York City and London, used to be a core tenet of the U.S.UK consensus on the global economy. The evidence, meanwhile, is undeniable that plenty of that presumably extraordinary talent is imbued with many shortcomings. CEOs aren’t so superhuman after all. From launching failed corporate strategies, egregious errors of proper oversight, gross infidelities with staff, pumping up resumes in the style of blustery 19-year olds (who really do not yet know better), the C-suite increasingly seems like a comedy of human failings. To be sure, CEOs are put under great pressure. But these are tough times for most people working in large corporations. The difference is that certain “talent” has been indoctrinated since the

days of business school that they are something special -and, unlike the rest of the corporate workforce, certainly deserve something very special: namely, exorbitant compensation. But on this front, the U.S.-UK alliance is finally cracking. Just as is the case in the field of banking, the “old country” is no longer prepared to toe the American line either on the uniqueness of the financial sector or the extraordinariness of executive talent. A long time in the making, there is finally solid pressure on restricting top executive pay in London. That is long overdue, all the more so as the political cultures of both countries, Britain and the United States, traditionally pride themselves of being such exemplary democracies. Wherever their special democratic character can be found, it certainly is not in the corporate world. U.S. CEOs often reign supreme in a near-autocratic manner, imbued with multiple titles -from Chairman to Chief Executive to President -and all-encompassing powers. No separation of powers here whatsoever. How about annual shareholder meetings? You must be kidding. They are about as significant as rubber-stamp sessions in Soviet-style parliaments. Often lasting less than an hour, they are merely a perfunctory exercise so that the corporate secretary can tick off a box. “Annual meeting?” Done. Check. Any real debate at shareholder meetings about items that are essential to the future vitality of capitalism in democratic

the world

societies are, as much as possible, prevented. A vote about levels of executive pay? Motion denied. Not debated here. The prevailing mindset is this: “You, Mr. or Mrs. Shareholder, give us your capital and we then set our pay. You ought to be grateful that I serve thee as chief executive. It’s your privilege, not mine.” And they call that “shareholder capitalism?” SHT -or Shareholder Hostage Takingwould be more appropriate. It’s no better when one looks at the role of boards of directors. Ever since the days of Enron, it’s been clear that these are important bodies that can -and shouldprevent bad things from happening. But in the United States and Britain, they are still largely “friends and family” affairs, meaning they are packed with likeminded cronies, if not in fact the CEO’s own friends.

The German model

The biggest battle over capitalism in the age of global democracy, quite irrespective of all the Occupy Movements, isn’t even over preventing disasters like the meltdown of Enron. Rather, it concerns a proper weighting of the competing interests at stake between corporations and society at large. If corporations largely act in a vacuum, if there is no real control over them from society’s perspective, then things can become truly unhinged -such as in the case of exorbitant executive pay. Read most news reports about U.S. corporations in the newspapers and you will

find that it’s almost always about reducing staff size, reorganizing the corporate structure and the like. Optimizing corporate strategy for the future, working with employees to make the most of existing or future business opportunities? Such things happen all too rarely in the largely top-down American corporate model. With the media largely complicit (dependent as they are on corporate advertising dollars), corporations see any advances from society on issues such as executive pay and corporate strategy as untoward attempts to soil the heavenly domains of The Corporation. Yet, the results are clear enough. The U.S. model of corporations, put in a global context, is better only in what it delivers to the insiders at the very top of the corporate hierarchy. For them, the corporate till is for the looting, provided the board has approved it. Compare that, for example, to large German corporations. Historically, Germany hasn’t been known as a bastion of democracy. And yet today it is -and nowhere more so than in its boardrooms. You are reading this right. In Germany, these august bodies are half filled with representatives of the workforce. Little wonder then that they cast a much closer eye on corporate pay. In fact, the mere presence of company workers and unions representatives in the boardroom does much to prevent the more egregious, self-serving propositions from ever seeing the light of day which top executives, left to their own devices, might

come up with. Whatever the “it” is, they realize it would never pass even the most basic smell test with the unions. Nor does oversight in Europe end at the boardroom. Moves to reign in the C-suite are taking on steam in the European Parliament, which has increasingly become a reform engine for a more accountable capitalism globally. Just this month, the EU’s top financial services regulator, Michel Barnier, launched initiatives to curb “morally indefensible” pay and to reduce the disparity between executive and ordinary work pay in Europe’s financial institutions. The United States has not yet caught up with (or caught on to) these efforts. The very self-absorbed and self-referential debate (or, worse, the lack of any true debate) that has become the hallmark of U.S. corporations has done much the weaken the case for capitalism in democratic societies. If the practice of corporate power constantly exhibits core traits of the feudalist era, as it does in the U.S. case, rather than pursuing a more open, democratic and enlightened model, then it goes to show that the rot currently afflicting many developed economies has a lot to do with other nations still following, even aping, many elements of the autocratic U.S. model. The relevance of society at large in that model is about as significant as the role of finance was, at least until recently, in the made-in-America macroeconomic models -that is, not at all. Both excel by their absence. In short, it is high time to push the U.S. corporate model from the pedestal on which it still stands. To a large degree, its elevated status is no longer a function of actual performance and what it delivers in a larger societal context, but just a result of the benefits it offers to the insiders at the top of the corporate pyramid.

*Stephan Richter is the publisher and editorin-chief of The Globalist, the daily online magazine on the global economy, politics and culture, which he founded and launched in January 2000. He also is the President of The Globalist Research Center.

EUROPEANBUSINESSREVIEW

management

Becoming more strategic: Three tips for any executive You don’t need a formal strategy role to help shape your organization’s strategic direction. Start by moving beyond frameworks and communicating in a more engaging way.

By Michael Birshan and Jayanti Kar*

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e are entering the age of the strategist. As our colleagues Chris Bradley, Lowell Bryan, and Sven Smit have explained in “Managing the strategy journey,” a powerful means of coping with today’s more volatile environment is increasing the time a company’s top team spends on strategy. Involving more senior leaders in strategic dialogue makes it easier to stay ahead of emerging opportunities, respond quickly to unexpected threats, and make timely decisions. This is a significant change. At a good number of companies, corporate strategy has long represented the bland aggregation of strategies that individual business unit heads put forward. At others,

it’s been the domain of a small coterie, perhaps led by a chief strategist who is protective of his or her domain-or the exclusive territory of a CEO. Rare is the company, though, where all members of the top team have well-developed strategic muscles. Some executives reach the C-suite because of functional expertise, while others, including business unit heads and even some CEOs, are much stronger on execution than on strategic thinking. In some companies, that very issue has given rise to the position of chief strategy officeryet even a number of executives playing this role disclosed to us, in a series of interviews we conducted over the past year, that they didn’t feel adequately prepared for it. This article draws on those interviews, as well as our own and our colleagues’ experience working with numerous executives developing strategies, adapting planning approaches, and running strategy capability-building programs. We offer three tips that any executive can act on to become more strategic. They may sound deceptively simple, but our

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interviews and experience suggest that they represent foundational skills for any strategist and that putting them into practice requires real work. We’ve also tried, through examples, to present practical ways of acting on each suggestion and to show how doing so often means augmenting experience-based instincts with fresh perspectives. 1. Understand what strategy really means in your industry By the time executives have reached the upper echelons of a company, almost all of them have been exposed to a set of core strategy frameworks, whether in an MBA or executive education program, corporate training sessions, or on the job. Part of the power of these frameworks is that they can be applied to any industry. But that’s also part of the problem. General ideas can be misleading, and as strategy becomes the domain of a broader group of executives, more will also need to learn to think strategically in their particular industry context. It is not enough to do so at the time of a major strategy review. Because strategy is a journey, executives need to study, understand, and internalize the economics, psychology, and laws of their industries, so that context can guide them continually. For example, being able to think strategically in the high-tech industry involves a nuanced understanding of strategy topics such as network effects, platforms, and standards. In the utilities sector, it involves mastery of the economic implications of (and room for strategic maneuvers afforded by) the regulatory regime. In mining, leaders must understand the strategic implications of cost curves, game theory, and real-options valuation; further, they must know and be sensitive to the stakeholders in their regulatory and societal environment, many of whom can directly influence their opportunities to create value. There is a rich and specialized literature on strategy in particular industries that many executives will find helpful. Tailored executive education courses can also be beneficial. We know organizations that have taken management teams off-site to focus not on setting strategy but on deepening their understanding of

how to be a strategist in their industries. For example, one raw-materials player headquartered in Europe took its full leadership team to Asia for a week, in hopes of shaking up the team’s thinking. Executives explored in depth 20 trends that would shape the industry over the next decade, discussing both the trends themselves and their implications for the supply of and demand for the organization’s products. They also looked across their industry’s full value chain to understand who was making money and why-and how the trends would change that. A number of the executives in the discussion were surprised by how much value certain specialized intermediaries were capturing and others by how the organization was losing out to competitors that were financing retailers to hold their inventory. The executive team emerged with a clearer appreciation of where the opportunities were in its industry and with ideas to capture them. Building this kind of industry understanding should be an ongoing process not just because we live in an era of more dynamic management but also because of the psychology of the individual. Experience-based instincts about “the way things work” heavily influence all of us, making it hard, without systematic effort, to take advantage of emerging strategic insights or the real lessons of an industry’s history. War games or other experiential exercises are one way executives can help themselves to look at their industry landscape from a new vantage point.

ogy trends, such as the impact of sensors and the burgeoning “Internet of Things.” Moreover, many senior executives are happy to delegate thinking about such technology issues to their company’s chief information officer or chief technology officer. Yet it’s exactly such cross-cutting trends that are most likely to upend value chains, transform industries, and dramatically shift profit pools and competitive advantage. So what to do? Some executives choose to spend a week or two visiting a technology hub, such as Silicon Valley, to meet companies, investors, and academics. Others ask a more technophile member of the team to keep abreast of the issues and brief them periodically. We know a number of executives who have developed “reverse mentoring” relationships with younger and more junior colleagues (or even their children) that focus on technology and innovation. And of course, there’s no substitute for seeing what your customers are doing with technology: during several store visits, an executive at a baby care retailer saw mothers compare the prices of products on their smartphones at the store and leave if they could get a better deal elsewhere. The store visits brought home how modern mothers research their buying decisions, the interaction between mobile technology and store

2. Become expert at identifying potential disrupters Expanding the group of executives engaged in strategic dialogue should boost the odds of identifying company or industry-disrupting changes that are just over the horizon-the sorts of changes that make or break companies. But those insights don’t emerge magically. Consider, for example, technological disruption. For many executives, the rise up the corporate ladder requires a deep understanding of industry-specific technologies-those embedded in a company’s products, for example, or in manufacturing techniques-but much less knowledge of cross-cutting technolEUROPEANBUSINESSREVIEW

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visits, and the importance of advertising a price-matching scheme to keep techsavvy customers buying in stores. Nascent competitors are another easyto-overlook source of disruption. Senior strategic thinkers are of course well aware of the need to keep an eye on the competition, and many companies have roles or teams focused on competitor intelligence. However, in our experience, often too many resources-including mental energy-are devoted to following the activities of long-standing competitors rather than less conventional ones that may pose an equivalent (or greater) strategic threat. For example, suppose you are an executive at an oil company with assets in the UK Continental Shelf. It is natural for the competitors that you meet regularly at board meetings of Oil & Gas UK, the regional industry association, to be more top of mind than Asian players that have only just acquired their first positions in the region. And that’s exactly why many long-standing industry leaders were surprised when Korea National Oil Corporation (KNOC), South Korea’s national oil company, clinched a hostile takeover of Dana Petroleum in late 2010, in what was to be the largest oil and gas transaction in the United Kingdom in several years. The transaction was a harbinger of future investments by less traditional players in the North Sea oil and gas industry. Similar dynamics prevail in mining: developed-world majors (such as Anglo American, BHP Billiton, and Rio Tinto), which have long competed with one another globally, now must also take into account players from Brazil, China, India, and elsewhere. Picking up weak competitive signals is more often than not a result of careful practice: a systematic updating of competitive insights as an ongoing part of existing strategic processes. Executives with diverse backgrounds can boost the quality of dialogue by contributing toand insisting on-issue-based competitive analyses. Who is well-positioned to play in emerging business areas? If new technologies are involved, what are they, and who else might master them? Who seems poorly positioned, and what does that mean for competitive balance in the industry or for acquisition opportuni-

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ties? Focusing competitive reviews on questions like these often yields insights of significantly greater value than would be possible through the more common practice of periodically examining competitors’ financial and operating results. It also helps push the senior team away from linear, deterministic thinking and toward a more contingent, scenariobased mind-set that’s better suited to today’s fast-moving strategy environment. 3. Develop communications that can break through A more adaptive strategy-development process places a premium on effective communications from all the executives participating. The strategy journey model described by our colleagues, for example, involves meeting for two to four hours every week or two to discuss strategy topics and requires each executive taking part to flag issues and lead the discussion about them. In such an environment, time spent looking for better, more innovative ways to communicate strategy-to make strategic insights cut through the dayto-day morass of information that any executive receives-is rarely wasted. This requires discipline, as it is always tempting to invest in further analysis so that the executive has a deeper grasp of the issues rather than in communications design to ensure that everybody has a good grasp of them. It also may require building new skills; indeed, developing messages that can break through the clutter is becoming a required skill for the modern strategist. Experiential exercises are one way of boosting the effectiveness of strategic communications within a top team. A strategist we know at a shoe manufacturer wanted to illustrate the point that many of his company’s products were both unattractive and expensive. He started with a two-by-two matrix. So far, so predictable. But his matrix was built using masking tape on the floor of the executive suite, and the shoes were real ones from the company and its competitors. His colleagues had to classify the shoes right there and then-and he made his point. Similarly, we know another strategist who spent an afternoon cutting the labels off samples of men’s

boxer shorts. She wanted the board members to put them in order of price so they could see how their perceptions of quality were driven by brands and not manufacturing standards. We would add that as strategy becomes more of a real-time journey, it’s important to figure out ways to support discussions with data that’s engaging and easy to manipulate. To the extent possible, executives need to be able to push on data and its implications “in the moment,” instead of raising questions and then waiting two weeks for a team of analysts to come back with answers. Ideally, in fact, anyone in a room could drill into thoughtfully visualized data with the flick of a finger on a tablet computer. The proliferation of tactile mobile devices and new software tools that help make spreadsheets more visual and interactive should facilitate more dynamic, data-driven dialogue. Executives hoping to become more strategic should look for opportunities to innovate in their communication of data, while prodding their organizations to institutionalize such capabilities. Breakthroughs abound-look no further than the interactive visualizations in the New York Times in the United States or the Guardian in the United Kingdom; the 2006 TED.com video “Hans Rosling shows the best stats you’ve ever seen”; Generation Grownup’s interactive tool Name Voyager, which examines the popularity of baby names over time; or Kiva.org’s Intercontinental Ballistic Microfinance visualization of loanfunding and repayment flows. But few companies have kept up. It’s not enough to increase the number and diversity of executives engaged in setting strategy. Many of those leaders also must enhance their own strategic capabilities. We hope these three tips help them get started.

*Michael Birshan is a principal in McKinsey’s London office, where Jayanti Kar is a consultant. The authors wish to thank Emma Parry for her contribution to the development of this article.

opinion

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leadership

Developing better change leaders Putting leadership development at the heart of a major operations-improvement effort paid big dividends for a global industrial company. By Aaron De Smet, Johanne Lavoie, and Elizabeth Schwartz Hioe*

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ew companies can avoid big, periodic changes in the guts of their business. Whatever the cause -market maturation, a tough macroeconomic environment, creeping costs, competitive struggles, or just a desire to improve- the potential responses are familiar: restructure supply chains; rethink relationships among sales, marketing, and other functions; boost the efficiency of manufacturing or service operations (or sometimes close them). Such changes start at the top and demand a relentless focus on nitty-gritty business details from leaders up and down the line. Too often, however, senior executives overlook the “softer” skills their leaders will need to disseminate changes throughout the organization and make them stick. These skills include the ability to keep managers and workers inspired when they feel overwhelmed, to promote collaboration across organizational boundaries, or to help managers embrace change programs through dialogue, not dictation. One global industrial company tackled these challenges by placing leadership development at the center of a major operational-improvement program that

involved deploying a new production system across 200 plants around the world. While the need for operational change was clear -the performance of the company’s factories was inconsistent and in many cases far below that of competitors in terms of efficiency, productivity, and cost- so too were the organizational obstacles. Drives for improvement, for example, carried a stigma of incompetence; current performance was considered “good enough”; conflict tended to be passive-aggressive or was avoided entirely; and shop floor employees felt that they were treated as cogs and that their supervisors were enforcers. The effect of all this on employees was disengagement, a lack of trust in senior management, and a pervasive fear of making mistakes -a worry reinforced by the company’s strong culture of safety and of risk aversion. These challenges were impossible to ignore, and that was probably a blessing in disguise: the senior team had to look beyond technical improvements and focus on helping the company’s leaders to master the personal behavioral changes needed to support the operational ones. To that end, the company mounted an intense, immersive, and individualized leadership program. The results are still unfolding, but after three years the company estimates that the improvement program has already boosted annual pretax operating income by about $1.5 billion a year. Fur-

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thermore, executives see the new leadership behavior as crucial to that ongoing success. Indeed, the senior executive who launched the program believes that without the inclusion of leadership development, it would have made only half the impact it actually did. She adds that the company has seen a tenfold return on its investment in each of the dozens of leaders trained thus far.

Scenes from the front lines of change

In this article, we’ll share the stories of three such leaders and examine how the changes they made in their leadership styles contributed to improved business results. Then we’ll step back and offer a few general leadership-development principles that we hope will be useful to other organizations contemplating large-scale, transformational changes.

Making sourcing more efficient

An executive we’ll call Annie is the company’s director of sourcing and logistics. Her charge: to help the sourcing operation improve its performance, from the mid- to the first quartile, without additional resources. Annie and her supervisor (the group’s vice president) concluded that the way to achieve this goal was to create a single global sourcing system instead of relying on the existing patchwork of regional and divisional ones. This approach would improve efficiency, take advantage of cheaper sources, and cut interaction costs. But that meant engaging a global group of stakeholders, many of whom preferred acting independently. Some even mistrusted one another. The vice president knew that this problem would be very difficult for Annie; as he put it, “she used to move too fast, and people would miss her train.” Somehow, Annie had to build the skills -and quicklyto engage her colleagues on a journey where turning back was not an option. Annie realized she needed to engage them not just intellectually but also emotionally, so they would become committed to the new approach and understand why it was better, even though many saw it as threatening to their autonomy and their ability to tailor services to local needs. Annie also recog-

nized that she had a strong tendency to do all the work herself to ensure that it was done quickly and correctly. Learning to overcome that inclination would help her to articulate a more inspiring vision and bring more people on board. Along with a colleague who was going through leadership training at the same time, Annie worked on a number of skills, such as how to keep discussions focused on solutions and how to build on existing strengths to overcome resistance. She also developed 20 coaching vignettes, which helped her bring to life the mind-sets and behavior that had to change. These moves helped Annie establish the new vocabulary she needed to encourage colleagues to identify and eliminate issues that were getting in the way of the new sourcing approach. As more than 1,000 employees across four regions adopted the new system, operational efficiencies quickly started to appear. What’s more, the effort encouraged interpersonal interactions that helped some employees overcome longstanding barriers to collaboration. The vice president highlighted the way the effort had encouraged North American employees to begin openly addressing issues they had with colleagues at a logistics service center in India, for example, and to move beyond mistrusting the workers there and resenting them for holding “exported jobs.” Such engagement skills spread across the network and began to take hold. As collaboration improved, the cost savings grew: within 18 months, the sourcing group had eliminated the need for 50 positions (and helped the workers who held them to get new jobs elsewhere in the company). In the same time period, benchmarking suggested that the group as a whole had achieved first-quartile performance levels. What’s more, the experience strengthened Annie as a manager. “My answer might have been right before,” she says, “but it got richer... I feel more confident. It is not about needing to prove myself anymore. I have much greater range and depth of influence.”

the company’s new production system. In the past, the industrial giant would have assigned engineers steeped in lean production or Six Sigma to observe the shop floor, gather data, and present a series of improvements. Conor would then have told plant employees to implement the changes, while he gauged the results-a method consistent with his own instinctive command-and-control approach to leadership. But Conor and his superiors quickly realized that the old way wouldn’t succeed: only employees who actually did the work could identify the full range of efficiency improvements necessary to meet the operational targets, and no attempt to get them to do so would be taken seriously unless Conor and his line leaders were more collaborative. Workers were skeptical. A survey taken at about this time (in 2009) showed that plant workers saw Conor and his team as distant and untrustworthy. Moreover, the company couldn’t use salary increases or overtime to boost morale, because of the ongoing global economic crisis. Conor’s leadership training gave him an opportunity to reflect on the situation and provided simple steps he could take to improve it. He began by getting out of his office, visiting the shop floor, and really listening to the workers talk about their day-to-day experiences, their workflows, how their machines functioned, and where things went wrong. They’d kept all this information from him before. He made a point of starting meetings by inviting those present to speak, in part to encourage the group to

Boosting yields at a factory

Conor, as we’ll call one European plant manager, needed to boost yields using EUROPEANBUSINESSREVIEW

leadership

find collective solutions to its problems. Conor explained: “As I shared what I thought and felt more openly, I started to notice things I had not been aware of, as other people became more open. We’d had the lean tools and good technology for a long time. Transparency and openness were the real breakthrough.” As the new atmosphere took hold, workers began pointing out minor problems and additional areas for improvement specific to their corners of the plant; within just a few months its yields increased to 91 percent, from 87 percent. Today, yields run at 93 percent.

Closing a plant

Pierre, as we’ll call him, was managing a plant in France during the darkest days of the global financial crisis. His plant was soon to close as demand from several of its core customers went into a massive and seemingly irreversible tailspin. The company was in a tricky spot: it needed the know-how of its French workers to help transfer operations to a new production location in another country, and despite its customers’ problems it still had €20 million worth of orders to fulfill before the plant closed. Meanwhile, tensions were running high in France: other companies’ plant closures had sparked protests that in some cases led to violent reactions from employees. Given the charged situation, most companies were not telling workers about plant closures until the last minute. Pierre was understandably nervous as he went through leadership training, where he focused intently on topics such as finding the courage to use honesty when having difficult conversations, as well as the value of empathic engagement. After a lengthy debate among company executives, Pierre decided to approach the situation with those values in mind. He announced the plant closing nine months before it would take place and was open with employees about his own fears. Pierre’s authenticity struck a chord by giving voice to everyone’s thoughts and feelings. Moreover, throughout the process of closing the

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plant, Pierre recounts, he spent some 60 percent of his time on personal issues, most notably working with his subordinates to assist the displaced workers in finding new jobs and providing them with individual support and mentoring (something other companies weren’t doing). He spent only about 40 percent on business issues related to the closure. This honest engagement worked. Over the next nine months, the plant stayed open and fulfilled its orders, even as its workers ensured that their replacements in the new plant had the information they needed to carry on. It was the only plant in the industry to avoid violence and lockouts.

Lessons observed

While every change program is unique, the experiences of the industrial company’s managers offer insights into many of the factors that, we find, make it possible to sustain a profound transformation. Far too often, leaders ask everyone else to change, but in reality this usually isn’t possible until they first change themselves. Tie training to business goals. Leadership training can seem vaporous when not applied to actual problems in the workplace. The industrial company’s focus on teaching Pierre to have courageous conversations just as the ability to do so would be useful, for instance, was crucial as Pierre made arrangements to close his plant. In the words of another senior executive we spoke with, “If this were just a social experiment, it would be a waste of time. People need a ‘big, hairy goal’ and a context to apply these ideas.” Build on strengths. The company chose to train managers who were influential in areas crucial to the overall transformation and already had some of the desired behavior -in essence, “positive deviants.” The training itself focused on personal mastery, such as learning to recognize and shift limiting mind-sets, turning difficult conversations into learning opportunities, and building on existing interpersonal strengths and managerial optimism to help broadly engage the organization. Ensure sponsorship. Giving training participants access to formal senior-executive sponsors who can tell them hard

truths is vital in helping participants to change how they lead. Moreover, the relationship often benefits the sponsor too. The operations vice president who encouraged Annie, for example, later asked her to teach him and his executive team some of the skills she had learned during her training. Create networks of change leaders. Change programs falter when early successes remain isolated in organizational silos. To combat this problem, the industrial company deployed its leadershipdevelopment program globally to create a critical mass of leaders who shared the same vocabulary and could collaborate across geographic and organizational boundaries more effectively. When Annie ran into trouble implementing the changes in some of the company’s locations in Asia, the personal network she’d created came to her rescue. A plant manager from Brazil, who had gone through the training with Annie, didn’t hesitate to get on a plane and spend a week helping the Asian supply chain leaders work through their problems. The company allowed him to do so even though this visit had nothing to do with his formal job responsibilities, thus sending an important signal that these changes were important. Another tactic the company employed was the creation of formal “mini-advisory boards”: groups of six executives, with diverse cultural and business perspectives, who went through leadership training together. The mutual trust these teammates developed made them good coaches for one another. Pierre, for example, reported getting useful advice from his board as he finalized his plans to talk with his plant employees. The boards also provide much-needed emotional support: “The hardest part of being at the forefront of change is just putting your shoes on every day,” noted one manager we talked to. “Getting together helps me do that.” *Aaron De Smet is a principal in Mc Kinsey’s Houston office, Johanne Lavoie is a senior expert in the Calgary office, and Elizabeth Schwartz Hioe is an associate principal in the New Jersey office.

opinion

EUROPEANBUSINESSREVIEW

SKILLS

Secrets of a Master Negotiator Use these skills from a former trial attorney to increase your ability to negotiate a deal. By Matthew Swyers*

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ife is negotiation. So much of our daily lives revolve around this practice, and yet so few of us spend any time truly learning what it takes to become great at this requisite skill. Think about it: How much of your life involves negotiation? Most people don’t realize when it is taking place. But it surrounds us. It is who we are. Sure, everyone knows that you have to negotiate to buy a car. Some may even know that almost every retailer-if pushed-will negotiate a better price for an item. But what about the more subtle forms of negotiation? Do you even recognize when these occur? Have you ever said to your spouse, “I’ll take out the trash. Can you load the dishwasher?” Negotiation. When you ask for a raise? Negotiation. Who’s driving? Negotiation. Since I was a child, my parents have always told me I was good at manipulating others. Negotiation. Perhaps it was inevitable that I went into law, at least initially. A profession that heightened my abilities at reading people and knowing how to react to the tells they were giving me.

SKILLS

After half a lifetime of negotiating and learning the techniques to do so better, here are a few of the secrets I have picked up:

Basic Skills

1. Listen To negotiate, you must learn how to listen and apply what you hear to formulate your next move. Every word has a purpose. Every statement a hidden tell. If you listen carefully, I mean really carefully, you will be able to hear and understand what your opponent in the negotiation truly wants. Listening is the bare minimum skill you must have to start building your abilities as a good negotiator. 2. Be Willing to Walk Away When two sides are negotiating, one of the other most basic skills you must retain is the ability to walk away if the deal does not satisfy your requirements. Some may think this is axiomatic, but it is not. Once I was assisting a friend in negotiating the purchase of a new car. At the end we were close, but the dealer refused to remove some extra charge that was just more fat on the bone for his sales price. After much back-and-forth over this item, we reached an impasse: The salesman would not take it out of the price, and I would not move on him taking it out. I stood up, politely thanked him for his time, and said to my friend, “Let’s go.” To my surprise, my friend remained seated, turned his eyes toward me, his expression quickly changing to that of a child’s wanting a toy in a toy store, and said, “But I really want the car.” At that point, any chance of continuing to negotiate a better deal evaporated like a puddle on a hot Southern summer afternoon. If he would have stood and walked, we would have never made it to the door before that item was taken off the cost. But by not being willing to walk away, we gave the other side a critical advantage: He knew we would not walk. Always be willing to walk away from a deal, and let it be known in either a subtle or not so subtle manner, as the situation dictates.

Intermediate Skills

1. Feign Indifference, Don’t be Indifferent Obviously we care about the thing we are negotiating for, otherwise there would not be a negotiation. But just as we must be willing to walk away from the deal, equally as important is that you must never let the other party know how much you want or need to make the deal. For example, for anyone who is familiar with my other writings you may recall that I am a trial attorney who has tried hundreds of cases in my career and litigated thousands more. At some juncture during the course of litigation, the parties will discuss settlement. Irrespective of my client’s concerns and directives, I always feign indifference during settlement discussion. Why? Because if the other side ever gets a whiff that you are not willing to try the case, it will have a decided advantage over you in the negotiation process. So no matter if my client is ready to take the case to the mat or can’t afford or does not want to move forward anymore, opposing counsel gets the same routine from me every time: “We can try to settle the case or just go to trial. I’m good with what-

ever.” The goal in feigning indifference is to be as difficult to read as a blank page. In the end, however, it is a valuable skill to have in any negotiation. So you may not be indifferent, but never let them know. 2. Have the Ammunition You Need In litigation, this is about having your case ready to go to trial if it does not settle and making sure the other party knows you are ready. In other negotiations, such as in real estate, it’s about letting a prospective purchaser know you have another buyer on the line and that if he does not meet your terms, you’ll just sell it to the other guy. In any negotiation that involves an alternative action if the terms are not met, you must let the other party know you can, and will, do a specific act it does not want you to do in the event terms are not met. In short, let the other party know that you have your ammo and are willing to use it. Many years ago, my then firm represented a man who had been horrifically injured by a product. Our firm was brought in to represent his interests against the manufacturer. Because of certain confidentiality provisions, I cannot mention the product or even the type of product it was. Suffice to say, however, it was the first case of its kind and had significant national exposure on not only a media level but political as well. Well, as in any litigation case, the parties are required to exchange documents whether they are detrimental or not to your case. We knew that the defendants were holding out on us and saying that these specific very damaging reports did not exist despite the fact we had witnesses that testified to the contrary. We knew if we got our hands on these reports, they would be shaking in their boots. Well, to make a long story short while referencing a great episode from Seinfeld, we employed a special team of people to “retrieve” the reports for us, and “yadda yadda yadda,” we appeared at pretrial with these ultradamaging reports in hand. The case, one of the most contentious and longest I had ever been involved in, settled minutes later. Why? Because we had the ammo. So it does not matter if it is litigation, real estate sales with an alternative buyer, or otherwise, always have the ammo-or appearance thereof-to support your side in the negotiation.

Advanced Skills

1. What Motivates the Other Party? Use It As a prerequisite, you must always listen. Listening, as stated above, is critical to hearing what the other side wants. But on a higher level, you must strive to understand why. What is motivating the why? If you can listen between the lines to understand that which truly motivates the other party, you will gain a decided advantage in the negotiation of the deal.

*Matthew Swyers is the founder of The Trademark Company, a Web-based law firm specializing in protecting the trademark rights of small to medium-size businesses.

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Securitas Diplomatic Services in Brussels: discrete and all around!

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By N. Peter Kramer

Brussels, Belgium – the dynamic capital of the European Union with institutions such as the Council of Europe and the European Parliament, not forgetting NATO. Nobody knows exactly how many embassies, consulates and permanent representations there are.

he number of visits to Brussels by ministers, other politicians, and high-ranked officials are countless as is the number of their meetings. On top of that, according to the Head of the Belgian National Security recently, Brussels seems to be the most attractive city in the world for espionage. And let’s not forget the permanent threat of terrorism. Conclusion: Brussels is the place to be for security companies! For ‘Securitas’, operating worldwide, all business is local! In 49 countries nearly 300.000 employees offer security solutions to meet the needs of the customers. It is about specialised guarding, mobile security services, monitoring, investigation, and consulting. In Europe Securitas is active in 29 countries including Belgium. In Brussels, Securitas operates special Diplomatic Services for embassies and consulates. As Jan Walravens, Team Leader of the

Securitas Diplomatic Services in Brussels, explains: ‘The circumstances in embassies are more complicated and the risks are higher than elsewhere. There is often a mix of public functions, meetings and visiting high ranked officials and politicians. To do your security work well, you have to understand the organisation and the functions of an embassy; you have to be able to recognise the important people.’ Mr Walravens speaks five languages, very useful for his job as supervisor of the security in more than fifteen different diplomatic premises spread out over the city. ‘Of course security first’, he told us, ‘but often, posted in the entrance hall of an embassy, people ask you where the next tram or metro stop is, for a special shop or the mail box. We need to give this service too and with pleasure. Sometimes new staff members in an embassy rely on you as well, especially when they are not from a European country and when they

don’t speak the languages of Brussels. We help them to find their way in the metropole. That’s all a part of our job. But of course, we are well trained and know when it is necessary to cooperate with the police or the State Security. We know about first aid and how to manage conflict situations’. Jan Walravens is proud to be a Belgian as he told an audience at the end of a meeting in an embassy. By his presence alone he seems to make people feel safe. Yet at the same time he gives the clear impression that there is not much going on that he doesn’t see. Chapeau Mr Walravens!

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Who Was the Richest Person Ever? Frustration over income inequality has given rise to “Occupy Wall Street” protests in the United States and related demonstrations throughout the developed world. In this excerpt from “The Haves and the Have-Nots,” World Bank economist Branko Milanovic answers the question of who was the richest person to have ever lived. By Branko Milanovic*

omparing incomes from the past with those of the present is not easy. We do not have an exchange rate that would convert Roman sesterces or Castellan 17th-century pesos into dollars of equal purchasing power today. Even more, what “equal purchasing power” might mean in that case is far from clear. “Equal purchasing power” should mean that one is able to buy with X Roman sesterces the same bundle of goods and services as with Y U.S. dollars today. But not only have the bundles changed (no DVDs in Roman times), but were we to constrain the bundle to cover only the goods that existed both then and now, we would soon find that the relative prices have changed substantially. Services then were relatively cheap (because wages were low). Nowadays, services in rich countries are expensive. The reverse would be true for bread or olive oil. Thus, to compare the wealth and income of the rich in several historical periods, the most reasonable

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approach is to situate them in their historical context and measure their economic power in terms of their ability to purchase human labor (of average skill) at that time and place. In some sense, a given quantum of human labor is a universal yardstick with which we measure welfare. As Adam Smith wrote more than 200 years ago, “[A person] must be rich or poor according to the quantity of labor which he can command.” Moreover, this quantum embodies improvements in productivity and welfare over time, since the income of somebody like Bill Gates today will be measured against the average incomes of people who currently live in the United States. A natural place to start is ancient Rome, for which we have data on the extremely wealthy individuals and whose economy was sufficiently “modern” and monetized to make comparisons with the present, or more recent past, meaningful. We can consider three individuals from the classic Roman age. The fabulously rich triumvir Mar-

cus Crassus’s fortune was estimated around the year 50 BCE at some 200 million sesterces (HS). The emperor Octavian Augustus’s imperial household fortune was estimated at 250 million HS around the year 14 CE. Finally, the enormously rich freedman Marcus Antonius Pallas (under Nero) is thought to have been worth 300 million HS in the year 52. Take Crassus, who has remained associated with extravagant affluence (not to be confused, though, with the Greek king Croesus, whose name has become eponymous with wealth). With 200 million sesterces and an average annual interest rate of 6% (which was considered a “normal” interest rate in the Roman “golden age” -that is, before the inflation of the third century), Crassus’s annual income could be estimated at 12 million HS. The mean income of Roman citizens around the time of Octavian’s death (14 CE) is thought to have been about 380 sesterces per annum, and we can assume that it was about the same 60 years earlier, when Crassus lived. Thus expressed, Crassus’s income was equal to the annual incomes of about 32,000 people, a crowd that would fill about half of the Colosseum. Let us fast-forward more closely to the present and apply the same reasoning to three American wealth icons: Andrew Carnegie, John D. Rockefeller and Bill Gates. Carnegie’s fortune reached its peak in 1901 when he purchased U.S. Steel. His share in U.S. Steel was $225 million. Applying the

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same return of 6%, and using U.S. GDP per capita (in 1901 prices) of $282, allows us to conclude that Carnegie’s income exceeded that of Crassus. With his annual income, Carnegie could have purchased the labor of almost 48,000 people at the time without making any dent in his fortune. (Notice that in all these calculations, we assume that the wealth of the richissime individual remains intact. He simply uses his annual income, that is, yield from his wealth, to purchase labor.) An equivalent calculation for Rockefeller, taking his wealth at its 1937 peak ($1.4 billion), yields Rockefeller’s

in 2003, was estimated at $24 billion. Globally speaking, he was much less rich than Bill Gates. Yet if we assess his fortune locally and again use the same assumptions as before, he was able to buy more than a quarter million annual units of labor, at their average price. In other words, contrasted with the relatively low incomes of his countrymen, Mikhail Khodorovsky was richer, and potentially more powerful, than Rockefeller in the United States in 1937. It is probably this latter fact -the potential political power- that brought him to the attention of the Kremlin. Without touching a penny of his

Another complication that may be introduced is the size of populations. When Crassus lived and commanded the labor incomes of 32,000 people, this represented one out of each 1,500 people living in the Roman Empire at the time. Rockefeller’s 116,000 Americans were a higher proportion of the U.S. population: one person out of each 1,100 people. Thus, in both respects Rockefeller beats Crassus. Can we then say who was the richest of them all? Since the wealthy also tend to go “global” and measure their wealth against the wealth of other rich people living in different countries, it was prob-

income to be equal to that of about 116,000 people in the United States in the year 1937. Thus, Rockefeller was almost four times as rich as Crassus and more than twice as rich as Andrew Carnegie. The people whom he could hire would easily fill Pasadena’s Rose Bowl, and even quite a few would have remained outside the gates. How does Bill Gates fare in this kind of comparison? Bill Gates’s fortune in 2005 was put by Forbes at $50 billion. Income could then be estimated at $3 billion annually, and since the U.S. GDP per capita in 2005 was about $40,000, Bill Gates could, with his income, command about 75,000 workers. This places him somewhere between Andrew Carnegie and John D. Rockefeller, but much above the “poor” Marcus Crassus. But this calculation leaves open the question of how to treat billionaires such as the Russian Mikhail Khodorovsky and Mexican Carlos Slim, who are both “global” and “national.” Khodorovsky’s wealth, at the time when he was the richest man in Russia

wealth, Khodorovsky could, if need be, create an army of a quarter-million people. He was negotiating with both the Americans and the Chinese, almost as a state would, the construction of new gas and oil pipelines. Such potential power met its nemesis in his downfall and eventual jailing. However, Russian history being what it is, the shortest way between two stints in power often takes one through a detour in Siberia. We might not have seen the last of Mr. Khodorovsky. The Mexican Carlos Slim does Khodorovsky one better. His wealth, also according to Forbes magazine, prior to the global financial crisis in 2009, was estimated at more than $53 billion. Using the same calculation as before, we find that Slim could command even more labor than Khodorovsky at his peak: some 440,000 Mexicans. So he appears to have been, locally, the richest of all! No stadium in Mexico, not even the famous Azteca, would come close to accommodating all the compatriots Mr. Slim could hire with his annual income.

ably Rockefeller who was the richest of all because he was able to command the highest number of labor units in the then-richest country in the world. But when the richissime decide to play a political role in their own countries (which may not be the richest countries in the world, such as, for example, Russia and Mexico), then their power there may exceed even the power of the most globally rich.

*Branko Milanovic is a lead economist in the World Bank research department and a visiting professor at the University of Maryland. During his 25-year career as an economist, his main area of research has been income distribution. **Editor’s Note: This feature is ada pted from THE HAVES AND THE HAVE-NOTS: A BRIEF AND IDIO SYNCRATIC HISTORY OF GLOBAL INEQUALITY by Branko Milanovic. Copyright Basic Books 2011.

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Why Strategies Go off the Rails Have you ever been in a situation where everyone seemingly agrees on a particular strategy, but somehow it never happens? By Ron Ashkenas*

ee if you identify with this example: A technology firm -with a number of different product areas, geographic units, and service functions- was figuring out how to integrate services for their largest global customers. After extensive planning, the senior management team decided to assign experienced executives to a dozen of these customers, and give them the authority to manage the accounts end-to-end. What they failed to address was that many of the best sales executives couldn’t be released to take on these roles; the financial systems couldn’t provide the right information on a customer-bycustomer basis; compensation plans didn’t support integrated selling; and research programs remained geared towards new technologies instead of integrated solutions. So while everyone agreed that an integrated approach was needed, very little change actually occurred. The fascinating thing about this case, and many others like it, is that nobody took accountability for the lack of strategic execution. In other words, everyone felt individually successful, even though the company experienced a collective failure. I recently saw this dynamic play out at a meeting of a large consumer products firm, where the top 100 managers were anonymously surveyed with two questions: How aligned are you with the company’s ambitious change strategy; and how aligned do you think your peers are with the strategy? Over 90%

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of the managers said that they, personally, were aligned with the strategy -but 50% felt that their peers had doubts. In other words they were saying, “I’m fully on board, but many of the other people here are not.” Obviously something about these answers does not make sense. So to understand them, let me suggest three underlying psychological factors that often cause strategies to derail: Passive aggressive disagreement: It’s unlikely that everyone in an organization will agree with all of the nuances of a major strategic shift. Disagreement can be based on logic, experience, or (perhaps unconsciously) discomfort with change or loss of power. In any case, if the culture of the company does not encourage dissent, the resistance will go underground. People will voice their support but not actively do anything to make it happen. For example in our technology case above, the newly appointed account executives found that the finance function, while not standing in the way of the integrated customer approach, also was not doing anything to help.

Fear of confrontation: In most nice organizations where teamwork is encouraged, managers hesitate to confront colleagues who are not fully engaging in the strategic shift. They may not want to make waves or fear harming the relationship. So instead they try to work around it and end up sub-optimizing the strategy. Again, in our case, the account executives and their sales leaders didn’t want to push too hard on finance for fear that it could make things worse for them later by damaging relationships. Lack of persistent top-down demands: If the successful implementation of a strategy requires change across a number of functions, then a senior leader needs to get everyone on board. Without this explicit expectation -reinforced again and again- people will avoid taking action even though they will continue to smile, nod, and profess support. Many senior leaders are hesitant to push too hard for fear that they will have to take drastic action, like firing someone. So instead they just assume that the pieces will fall into place. Obviously it’s not easy to change these dynamics, especially when they are often invisible and rooted in long-standing cultural patterns. A good place to start is to point them out and provoke some dialogue, which was the purpose of that survey used at the consumer products meeting. Most people do not want to be part of a collective failure -so holding up a mirror can be a powerful way of helping managers realize when they are headed in the wrong direction.

*Ron Ashkenas is a managing partner of Schaffer Consulting and a co-author of The GE Work-Out and The Boundaryless Organization.

opinion

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