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34 Special Report: European Business Summit, Brussels 2011

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Reset Turkey / EU relations,

by Javier Solana

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The next Microsoft: Here’s a partial list

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06 A BRUSSEL’S VIEW

Editorial, by N. Peter Kramer, editor in chief

08 OPINIONS

A Greek crisis of cronyism and corruption China’s zigzagging response to the Arab revolutions Are Universities working hard enough for their students?

14 EUROPEAN AFFAIRS

Reset Turkey / EU Relations The eurozone enters adulthood Germany’s exit from history?

Accident investigation

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26 ECONOMIC OUTLOOK

A finance minister for Europe?

Money & Inflation Why we must stop talking about “emerging markets”

Gunther Oettinger, EU Commissioner for Energy: “Preparing today for the energy networks of tomorrow”

34 SPECIAL REPORT

European Business Summit, Brussels 2011

52

42 COVER STORY

Preparing today for the energy networks of tomorrow

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46 TRENDS

Weaknesses in past Shell scenarios Advancing energy scenario analysis

50 THE WORLD

EP support for Taiwan-EU trade agreement and Taiwan’s participation in UN agencies

Whither Globalisation,

by Pascal Lamy

Why we must stop talking about “emerging markets”

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Whither globalisation

56 MANAGEMENT Beyond expats

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58 ENTREPRENEURSHIP Europe’s Next Business Entrepreneurs The Next Microsoft Will selling your business make you happy?

10,000 km rail link the Port of Antwerp to China For previous editions archive and up-to-date information on major topics and events you may visit our website http://www.europeanbusinessreview.eu

A finance minister for Europe

The eurozone enters adulthood,

by Jean-Claude Juncker

Will selling your business make you happy?

A BRUSSELS VIEW

The end of the European dream?

I

by N. Peter Kramer, Brussels correspondent

How to solve the Eurozone debt crisis?

Nout Wellink, the Dutch central bank governor, wants a European finance ministry. That could be an important step in the right direction, he thinks.

Jean-Claude Trichet, the head of the European Central Bank, backed the Dutchman’s vision of a European finance ministry, which implies an even larger European central budget and more decisions on spending and taxation taken in ‘Brussels’ rather than in national capitals. But isn’t it a bit simple minded to think that if Europe was just equipped with a finance ministry to tax citizens directly and the facility to issue Eurozone bond that this would be the structural solution?

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n his column in the Financial Times (June 21) Gideon Rachman called it a ‘misdiagnosis’! ‘The crisis is not an institutional problem’, he wrote, ‘the real problem is political and cultural’. He points out what is going on in the EU, especially in the Eurozone countries. Greek, Irish, Spanish and Portuguese people were told that the Euro was the way to equal the prosperity of northern EU countries.

But now they are confronted with losing jobs, decreasing income and cutting pensions. The German public is increasingly Eurosceptical and dreams of the return of the beloved lost D-Mark. Anti-European political parties are on the rise in France, Denmark, The Netherlands and Finland.

The relations between peoples in the EU are cracking under the strain of the crisis. In Greece demonstrators wave EU flags with swastika’s super imposed upon them. In Germany and The Netherlands the euro crisis has made it permissible that politicians and leading newspapers denounce profligate and corrupt southern Europeans. Some EU governments are talking about closing their borders again to stop the stream of refugees that are entering the Schengen area via badly controlled EU borders.

Another point is that the politics of transfer money from rich to poor regions always seems to be tricky, even within established nation states. Think of strains between northern and southern Italy, between Flanders and Wallonia in Belgium and not to forget between the two united Germanys. In a newly created Eurozone of 17 nations with very different histories, cultures and levels of economic development ignoring this and trying to press ahead with a deeper political union would cause a dangerous backlash in the future. To argue that such a deeper po-

litical union is the solution is like recommending that ’a man with alcohol poisoning should treat himself with a bottle of vodka’, Rachman wrote. He goes even further and stated that the origins of the current crisis lie in the dream of political union in Europe: ‘for the true believer, the single currency union was always just a means to that greater end’. But if political union is not the answer to Europe’s problems, what is?

It looks as though some of the EU’s top politicians don’t have the slightest idea of what is going on in the streets of not only Athens and Madrid, but also in London and Amsterdam. At a time of unprecedented austerity, with Europe’s governments slashing spending, it might be smart for EU leaders to keep quiet.

But one of the EU’s top officials, the Belgian Herman van Rompuy, president of the Council of the EU government leaders, did the opposite. He handed out to his 27 bosses a glossy brochure about his new office: a brand new €240 million super high-tech modern building, which because of its distinctive womblike shape has already been nicknamed in Brussels the ‘EU-uterus’. The reaction in the Council was not universally positive. ‘It is immensely frustrating to see this brochure’, Britain’s Prime Minister David Cameron told the media, ‘and you do wonder whether these EU institutions actually get what every country, what every citizen in the EU is having to go through as we cut budgets and try to make our finances add up’.

May be it is the moment to focus on finding the right answer to the existential question: does the EU exist for its citizens or are the citizens there for the highly overpaid, happy few in Brussels?

OPINION

A Greek crisis of cronyism and corruption Greece faces an even deeper political and social crisis.

Given this crisis has been created by most Greeks, politicians and society alike, it will take more than a restructuring to fix.

By John Sfakianakis*

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OPINION

T

he Greek political landscape is ingrained with vested interests, endemic kleptocracy and bribery. Since the days of Andreas Papandreou, an economist and father of the current prime minister, our politics has been predicated on the expansion of the public sector, patronage and borrowing. But while he failed Greece as an economist, as a politician the elder Mr Papandreou succeeded in turning his party into the most potent political player, with the unconditional support of trade unions in return for perks.

As a result it became nearly impossible to reverse Greece’s system of populist support and entitlements. Public debt as a percentage of gross domestic product tripled from 28 per cent in 1980 to 89 per cent in 1990. The conservatives applied the same policies predicated on vested interests and corruption, and so are currently also suffering from their history of Greek PM, George Papandreou covering up deficits and perpetuating a culture of cronyism and mismanagement.

The result is a dearth of leaders with integrity and expertise. growth averaged just 3.9 per cent (of which 90 per cent was The wider left, communists, and extreme right are intellectually consumption, plus the multiplier of the 2004 Olympics). bankrupt. Greece’s prospects of arising from the crisis with its A haircut and restructuring of the debt is therefore unavoidpresent political elite are slim, despite international calls for a able, as Germany’s move suggested. This would have been new political consensus. Meanwhile, the media, traditionally in- made easier had restructuring of older debts been carried tertwined with the politicians, fail to hold this elite to account. out before the recent bail-outs. But in the meantime further This lack of leadership partly explains Greece’s economic tra- changes are needed. vails. We have become a net importer, and lost international Further privatisation is inevitable – it too should have happened competitiveness. In the decade from 2000 Greece ran a trade at the outset of the crisis. Privatisation proceeds will not reach the deficit of 10 per cent of GDP, while exports fell by 12 per expected amount in a recession-prone economy today. Greece cent. From being a net exporter of agricultural products in needs a smaller public sector, with fewer employees. Measures 1981, we became a food importer. Industry also shrank, due to improve hourly productivity, 44 per cent below the eurozone to poor competitiveness and direction. average in 2009, must also be a priority.

Even tourism grew less than it ought Elsewhere, the Greek state – the counto have done, while unit labour costs Greece needs a smaller public try’s largest land owner – should properly rose by 40 per cent during the 2000s. sector, with fewer employees. utilise and privatise its holdings.

Greece’s accession to the eurozone, for Measures to improve hourly Greece has wasted two years. It could which its government fought long and productivity, 44 per cent below now face a bank crisis as household hard, led to unreasonable price increases, the Eurozone average in 2009, confidence in its banks dwindles, while with consumer prices rising more than unemployment will hover above 20 per must also be a priority.

15 per cent over the average of the eurocent this year. But the biggest problem zone between 2000 and 2010. is that Europe will gradually lose paAt the same time, higher taxes led to lower output, as small tience. When French and German banks are out of the woods businesses shut down at the highest pace in modern histo- and Spain, Portugal and Ireland become less crisis prone, the ry. Revenue policy, supposedly based on battling tax fraud, neo-Hellenes could well be left to their own tragedy. So to largely failed. And instead of lowering the highest pensions, avoid this, and to begin an economic rebirth, we Greeks must all were reduced across the board, leading to social discontent rediscover and discipline ourselves. And this must start with a and widening income inequality. generational change – morally, ethically, and politically.

Take all this together, and we can be sure that debts amassed by the Greeks will never be paid in their entirety. For that to happen Greece would need to grow by 12 per cent a year * The writer is chief economist of Banque Saudi Fransi. in real terms, for more than three decades. Yet in 2001-08, EUROPEANBUSINESSREVIEW

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OPINION

China’s zigzagging C response to the Arab revolutions: How Europe can benefit?

hina was caught off guard by the Arab revolutions. Its first response in Libya was to go along with international sanctions against Gaddafi for abuses on his people while undertaking its largest evacuation mission of Chinese citizens. It then changed tack and verbally opposed international military action. The protection of citizens abroad didn’t extend internally in China, where a crackdown was carried out in response to minor breezes of the Jasmine Spring.

This zigzagging response to the crisis points to the new pressures that Beijing is under, from growing international interests, pressuring traditional non-interference principles abroad, to a population that is also increasingly connected to events across the globe.

A new policy memo published by the European Council on Foreign Relations, ‘China’s Janus-faced response to the Arab revolution’, explores these arguments. The authors, Jonas Parello-Plesner and Raffaello Pantucci, argue that: • China has now laid down a ‘responsibility to protect’ its own citizens abroad. China’s international interests (it had an estimated 38,000 nationals in Libya, along with contracts worth $18.8 billion) mean it can no longer remain aloof from developments like the Arab revolutions.

• Beijing’s behaviour is increasingly influenced by relationships with other nations, for instance South-South cooperation. Its initial support for sanctions in Libya was influenced by the stance of Arab nations and the Arab League.

• Beijing’s domestic crackdown, including the arrest of artist Ai Weiwei, demonstrate the authorities’ concerns about increasing connections to the outside world and the internal development of a bustling public sphere with more than 400 million internet users and where microblogs are used to dodge censorship and expose official corruption.

The authors argue that the EU has the opportunity to push for Chinese responsibility on the international stage because China sees a pragmatic need to protect its investments and citizens. They recommend that: 1. The EU should engage with China on framing stability in a broader bandwidth and look at joint approaches to crisis management and good governance in third countries.

2. EU should develop a strategy for influencing China through others, as Arab and African reactions to Libya counted more than Western pressure. A discreet China component could be added to EU dialogues with other emerging countries.

3. The EU needs to remain vocal and consistent on Chinese human rights and internal reforms.

“ Chinese zigzagging is a reflection of a broader realisation that its previous posture of absolute non-interference is increasingly at odds with its global economic presence.”

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5 years www.sbctv.gr

the first financial channel in Greece

In cooperation with Channel Hymettus 55 UHF | Parnes 36 UHF

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OPINION

Are Universities working hard enough for their students?

By Ann Fawdry*

A

s Europe’s universities get fuller, with students from a more diverse range of backgrounds than ever before, it is not unusual to hear the complaint that university degrees are losing their value. Both the degree of competition in the job market and the level of unemployment amongst young graduates serve, moreover, to compound this belief. Whilst the culture dictating that one should have a university degree to progress in life is not necessarily healthy, a major proportion of young Europeans wish to continue to higher education. This motivation was demonstrated last winter by the many high school students in the UK who took to the streets to protest against raising university tuition fees and should not be dampened. Equally objectionable is a return to an elitist system where the income of one’s parents determines whether students can access higher education.

As long as a university education remains nonobligatory, universities are not only teaching institutions but also service providers. If European students are willing and able to achieve in both class and in the workplace, then is it Europe’s universities who are responsible for the so-called “gap” between learning and employment?

Inconsistency in teaching style and the level of exigency between universities within a country and between European countries renders transferability of results more difficult and may disadvantage students from certain countries in the eyes of employers.

The EU has done well in creating an ever closer union amongst European students who are more mobile and more likely to look for employment in other countries having studied abroad through programs such as Erasmus, which essentially funds young people to explore whether living and working abroad appeals to them.

Despite efforts to regularise exam results through the European Credit Transfer System (ECTS) there is still disparity between the amount of work required for any given module at any university in any European country. The question of tuition fees also influences university cultures within Europe. Whilst in Germany the relatively low cost of Master courses means that students who don’t complete Master studies are the exception, they are the rule in the UK where Master courses rarely cost less than £10,000. For a future employer familiar only with the university culture in his or her own country, comparison between candidates can be difficult.

The highly theoretical nature of many studies programs has perhaps de-professionalised academic degrees, with the knock-on effect that employers expect graduates to know a little about everything. This is a difficult mix for the young graduate to navigate. Often professors have never worked outside academics and thus the content of

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degrees often contains little practical training on how to work in the sector one’s degree is concerned with. Even twenty years ago, young people took up studies that directly channelled them into a profession that they had chosen beforehand, such as Nursing or Architecture. Nowadays, the tendency towards thematically specific but professionally open-ended degrees such as Abuse and Outdoor Studies, Palaeobiology and Evolution or Criminological Psychology means that course choices are often made along the lines of “not knowing what you want to do afterwards”. Whilst some students fix their career preferences over the course of their degree, more often than not the cycle of uncertainty perpetuates and students often fall into jobs after graduation that have nothing to do with their studies.

The academic culture of teaching tools for learning is so broad and theoretical that it both disallows decision-making on career pathways and fails to provide advanced knowledge and practical skills that make graduates appealing to future employers.

Thirdly, the fallacy that a good education alone will secure graduates good jobs is also perpetuated by courses that fail to effectively support students to gain practical experience. Whilst an internship is mandatory part of an increasing number of courses, these courses remain restricted to certain subjects and feature rarely amongst the most traditional academic subjects such as Law and History. Students who clinch high-flying internships during summer holidays are considered assets to their university, but recruitment networks between university and businesses mainly target graduates. This means that practical training begins for many students at the very time that they are supposed to demonstrate their professional experience to potential employers. Internships are often unpaid and so not formally integrating them into academic degrees can disadvantage poorer students in the labour market. Students should be given the opportunity to undergo professional training whilst they still have access to student loans or grants. Academic knowledge and practical experience has to be a potent mix and thus the framework of university degrees should maximise student’s potential.

As a British undergraduate, studying and working abroad yet soon to graduate, these criticisms are motivated by personal anxieties. The EU, national governments and academic institutions are good at providing financial backing and practical opportunities for enrolled students. These same support networks need to work harder for students, however, to ensure that they do not pull the rug out from under the feet of those new graduates who are still finding them in the job market. A good start is to rethink the ECT System and to integrate greater professional training and accreditable work placements into academic degrees. As long as students pay (increasingly large) amounts to enjoy the privilege of higher education in Europe, they should be allowed access to quality education that will prepare them to succeed in the professional world. Similarly, as long as Europe prides itself on the brains its universities produces, change is in the interest of both policy-makers and higher education institutions.

*A nn Fawdry is Erasmus student at Université Libre de Bruxelles (ULB) and Policy Thinker at ThinkYoung

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EUROPEAN AFFAIRS

Turkey’s PM, Recep Tayyip Erdogan

Reset Turkey / EU Relations Just five months ago, Osama bin Laden was alive, Hosni Mubarak was firmly in control in Egypt, and Zine el-Abidine Ben Ali ruled Tunisia with an iron hand. Today, popular rebellion and political change have spread throughout the region. We have witnessed brutal repression of protests in Syria and Yemen, Saudi troops crossing into Bahrain, and an ongoing battle for Libya.

By Javier Solana*

F

or Europe, the “Arab Spring” should refocus attention on an issue largely ignored in recent months: the benefits of Turkey’s full membership in the European Union. Given the tremendous opportunities present in the current circumstances, the advantages for Europe of Turkey’s accession should be obvious.

With Recep Tayyip Erdogan now elected to another term as Turkey’s prime minister, and with Poland, a country well acquainted with the importance of Europe’s strategic position in the world, assuming the EU presidency at the end of the month, now is a time for the Union and Turkey to “reset” their negotiations over Turkish membership.

The good that Turkey can bring to Europe was visible even before the “Arab Spring.” Europe is, by definition, culturally diverse, so diversity is the EU’s destiny. And, if Europe is to become an active global player, rather than a museum, it needs the fresh perspective and energy of the people of Turkey.

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Europe today is both larger and different compared to the Europe of 1999, when Turkey was invited to begin the accession process. It is also experiencing a profound economic crisis, which erupted around the same time that the Lisbon Treaty - aimed at accommodating EU enlargement - was finally approved. Had the treaty been approved in 2005 as intended, it would have been in place for six years, and the strain placed by the crisis on EU economic governance - so visible in the eurozone’s recent problems - would have been much more manageable.

But the EU always faces problems, resolves them, and moves on. Today, we don’t have a treasury, but we are about to have something similar. Similarly, the European Central Bank has capacities today that no one imagined in, say, 1997.

A major challenge that Europe must still face is migration, which will only become a bigger problem over time. Between now and 2050, Europe’s workforce will decrease by 70 mil-

EUROPEAN AFFAIRS

lion. Maintaining our economy requires migration and open EU borders - and facing down the populist movements in Europe that would shun “outsiders.”

Today’s Turkey has also changed dramatically since 1999, both politically and economically, and this has much to do with the EU accession process. Indeed, without the attraction of the EU - its “soft” power - such changes would not have occurred.

Economically, Turkey is now in the G-20 - and playing an effective role there. And, politically, Turkey has emerged as a regional leader, a role that it takes extremely seriously.

With just-concluded parliamentary elections, and a new constitution to be approved, Turkey is approaching an epochal moment. I was a member of the Spanish Constitutional Commission that wrote the Spanish constitution in 1975 and 1976, following the death of Franco, so I know what it is to move from dictatorship to democracy - and how important it is that a constitution be framed by consensus.

The EU-Turkey relationship began with an association agreement signed in 1963. Now the accession negotiations have started, and 35 “chapters” - covering everything from agriculture to energy, competition, environment, employment, social policy, and beyond - must be opened. We have already opened 19 chapters - fewer than we would like. But the real problem is that we have closed only one, and, worse, the pace of negotiations has slowed. In fact, in the second half of 2010, nothing happened. I hope that meaningful progress comes in 2011.

Turkey and the EU need each other. The EU now accounts for 75% of foreign investment in Turkey and roughly half its exports and inward tourism. Likewise, Europe’s energy security depends on cooperation with Turkey on transit of oil and natural gas from Central Asia and the Middle East.

We need each other politically as well. Turkey’s neighborhood is our neighborhood; its problems are our problems.

The security benefits and strategic advantages for the EU with Turkey as a member would be many, starting with the relationship between the EU and NATO, of which Turkey has long been a member.

Likewise, the EU’s involvement in today’s problems in the Mediterranean region would be much easier in concert with Turkey. In Bosnia-Herzegovina, EU-Turkey cooperation is fundamental to achieving a durable solution.

In 1999, Turkey did not want to become an accession candidate, because its leaders thought that the conditions would

Javier Solana

be too tough. I was there; I talked to Prime Minister Bülent Ecevit at midnight, then to President Süleyman Demirel.

And, two days later, Ecevit was in Helsinki to declare formally Turkey’s wish to become an EU member. And we said: Turkey will be an EU member. I supported the signature of that document; I would do the same today.

In these times, difficult and unpredictable but full of hope, the world needs Turkey and the EU to work together. That does not mean meeting every now and then to decide how to handle a certain problem. It means something much deeper and well defined. It means Turkey’s admission to the EU. That is my dream, and I will continue to fight to make it a reality.

* Javier Solana formerly the European Union’s High Representative for Foreign and Security Policy, and a former Secretary General of NATO, is a Distinguished Senior Fellow in Foreign Policy at the Brookings Institution and President of the ESADE Center for Global Economy and Geopolitics.

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The eurozone enters adulthood The euro area’s 13-year history is a success story, says Jean-Claude Juncker. It’s a strong currency that is also more stable than any of the national ones it replaced.

He sets out the advances in governance that are now needed.

By Jean-Claude Juncker*

T

hey say that too many cooks spoil the broth, and quite a few observers of eurozone policymaking over the last year and a half may have been tempted to apply the saying to Europe’s economic and monetary union.

Policymaking in the European Union in general, and the euro area in particular, is difficult, complex and at times tiresome. But even the harshest critics of the EU’s functioning would have to acknowledge that the often-decried “democratic deficit” is an absurdity. To take the eurozone, there are 17 member states run by 17 democratically elected governments composed of more than 40 political parties. It’s a reality people too often tend to ignore when criticising the alleged slowness of eurozone decisionmaking.

In fact, the euro area’s 13-year history is a success story. The euro is a strong and stable currency, and it’s certainly more stable than any of Europe’s former national currencies. In its first 10 years, the euro has provided price stability, contributed significantly to the EU’s economic development and been a support for job creation. And ever since the economic and financial crisis first hit the European continent in 2008, the euro has played a decisive role in protecting Europe’s economy. It doesn’t take an enormous effort of imagination to see that without the euro the EU’s member states would have drifted apart and ended up in unspeakable monetary, economic and social chaos.

At the same time, the eurozone’s members have undertaken major structural reforms, and are still doing so; not always at EUROPEANBUSINESSREVIEW

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a satisfactory pace, but the direction in which they are moving is the right one.

Until September 2008, the economic and fiscal outlook for the euro area was bright, to the point where in April 2007 eurozone finance ministers were even in a position to commit to delivering balanced budgets by 2010.

But then, across the Atlantic, Lehman Brothers failed and the sub-prime bubble exploded. Within just a few weeks we were faced with the biggest financial and economic crisis since 1929.

Was the eurozone prepared for this? Of course not. Nobody was. More important though was the fact that the eurozone lacked the one decisive feature it needed to deal with the situation in Jean-Claude Juncker a more timely and efficient manner: a central decision making body or, to put it more bluntly, a central government.

In mid-October of 2008, less than a Where the United States could very rapmonth after “Black Monday”, the leaders In fact, the euro idly take the necessary steps to stabilise of the then 15 eurozone members met in the financial system and deploy huge fi- area’s 13-year history Paris and decided on measures to stabilise nancial packages to keep up investments is a success story. financial sectors. These measures were forand internal demand, European countries The euro is a strong mally adopted by all 27 EU member states responded individually, and co-ordination and stable currency, three days later at a European Council was sometimes haphazard. So it was una- and it’s certainly more meeting in Brussels. The same EU leadvoidable that the initial actions taken in ers then decided in December to create a individual countries gave the impression of stable than any of common framework of measures to supEurope’s former a somewhat chaotic European response. port economic activity to be implemented Most observers agree that the “original national currencies. by member states according to their indisin” of European economic and monetary In its first 10 years, vidual situation. These were the first steps union has been the absence of a “central the euro has provided on a long path of decisions that have been government” that could have lifted ecotaken ever since to secure Europe’s econoprice stability, nomic policymaking onto the same level my at a time of hardship and prepare the of integration as the creation of the Eu- contributed significantly future with new and more stringent rules ropean Central Bank did with monetary to the EU’s economic to avoid possible future crises that could policy. Speaking as one who was person- development and been again shake the Union and the eurozone ally involved in negotiating the Maastricht a support for job creation. especially to its foundations.

Treaty, my impression has always been that And ever since The decisions taken in late 2008 on the concept of evolving from an economic spending programmes and stabilisation of and monetary union to a political union the economic and financial the financial sector – which I still believe was never a project. Instead, it was a hope crisis first hit the European were absolutely necessary – uncovered that political union might one day become continent in 2008, very serious problems in some countries, a reality. But if the likes of Helmut Kohl, the euro has played notably in Greece and Ireland.

François Mitterrand, Felipe Gonzalez or a decisive role The “Greek tragedy” as it is now called is Jacques Delors were unable to get things a perfect example of the shortcomings of in protecting moving in this direction, should we really economic and monetary union, as well as expect of today’s political decision-makers Europe’s economy. of the euro area’s ability to overcome unthat they can rekindle the flame? foreseeable events and use them to move The past months have confirmed the old towards closer integration. wisdom that for the EU crises are always an opportunity to The fact that the Greek economy had been steadily losing advance along the path of closer integration – not voluntarily, ground in terms of competitiveness, and that Greek public of course, but strictly out of necessity. And I for one believe we finances were deteriorating at an alarming pace, had been have made progress that is frankly impressive and that we have known to the eurozone members since 2006. As President of obtained results that were unthinkable only a few years ago. the eurozone finance ministers who make up the Eurogroup,

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I can remember many discussions with the Greek Prime Minister and the finance minister in which I repeatedly warned them that their situation was by no means sustainable. And although by mid-2007 Greece no longer came under the Growth and Stability Pact’s excessive deficit procedure, we the eurozone finance ministers again and again expressed our worries that the state of Greece’s public finances was unsatisfactory. The Council’s opinions on successive updates of the Greek stability programme are a matter of record, as are press conferences I myself held at that time after every meeting of the Eurogroup. What we didn’t and couldn’t know then was that the Greek authorities were submitting false figures to the European Commission, whose recommendations are the basis for decisions to be taken by the Council. Nor were we aware of the real dimensions of European banks’ exposure on the Greek sovereign debt market, and nor did we have access to information on Greece’s military spending.

By the end of 2009, Greece was in dire straits, and combined with the often irrational but regrettably always decisive behaviour of financial markets, this led to a boost in the economic, financial and fiscal integration of eurozone countries that under normal circumstances would have taken years, perhaps even decades.

The Greek facility, the European Financial Stability Fund (EFSF) and the future European Stability Mechanism (ESM) mean we now have a strong, co-ordinated and structured response to sovereign debt crises in the eurozone. These are instruments of solidarity between member countries in difficult times, and of solidity for the area as a whole since their ultimate goal is to rapidly enable members to stabilise their financial situation and regain access to financial markets. The message is clear; the stability of the eurozone is guaranteed once and for all. Market players should stand warned not to underestimate this.

The limited treaty change and the global response formulated by the euro area, and later adopted by the EU as a whole, means that the strengthening of the Stability and Growth Pact and fiscal co-ordination through the European semester now represents a quantum leap forward. It is the first time that the eurozone has instruments at its disposal not only to watch over and co-ordinate economic and financial policies, but also to enforce them at an early stage when possibly excessive imbalances are first observed.

But we have to go further still. The euro area is not the simple arithmetic of 17 states today and more tomorrow. In monetary, economic and financial affairs it is a single entity with regional variations. This has already been acknowledged by eurozone national leaders, and it was a good start that they themselves want to guide the process in essential areas of economic and financial governance. More has to be done. Italy’s finance minister and I have launched the idea of eurobonds that would be issued by a European debt agency, and while I realise that this idea doesn’t yet command unanimous support, I’m confident that its time will come. The eurozone’s teething troubles are long gone, and its turbulent teenage years are behind it too. Adulthood beckons, so now it should begin to behave like an adult – with maturity.

* Jean-Claude Juncker is Prime Minister of Luxembourg and President of the Eurogroup EUROPEANBUSINESSREVIEW

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Germany’s Exit from History?

Buffeted by European and global headwinds, many in Germany wish for their country to “exit from history” and chart a more peaceful and insular course. But as Ludger Kühnhardt argues, Germany can only engineer a good future for its people as an engine of further European integration, as a partner of the United States and as a defender of universal human rights.

By Ludger Kühnhardt*

W

hen President Barack Obama invited Chancellor Angela Merkel for dinner at the Georgetown restaurant 1789, pundits in the U.S. capital rushed to explain that no symbolism was involved, as the name of this restaurant refers to the founding year of Georgetown University — and not to the notorious French Revolution.

Yet one could not help to think Ms. Merkel’s state visit in early June 2011 was more about history than about the future. The German Chancellor was awarded the Presidential Medal of Freedom in recognition of her outstanding contribution to freedom in Europe. In the end, it seemed as if her visit was a good opportunity for the U.S. administration to celebrate itself.

For once, President Obama could bask in the memory of the great days of 1989 — to which neither he nor Angela Merkel had really contributed. Hence, it was a state visit of nostalgia.

Merkel and Obama celebrated the good old days of GermanAmerican friendship, but did not give answers to the leadership questions of today and tomorrow for which they were elected

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in the first place. They did not judge the effects of 1989 on the German-American partnership.

Some German newspapers remained realistic enough and asked when and how Mr. Obama might present the political bill. Demanding more burden-sharing for the ongoing military campaigns in Afghanistan and Libya, demanding more support for reconstructing Iraq and other Arab countries or demanding more support for Greece and other countries with sovereign debt in the interest of the fledgling U.S. economic recovery — the sky is the limit.

It would have been interesting to compare how Obama and Merkel reported the state visit back to their staff, aides and cabinets. Is the U.S. president saying that Germany would remain relevant but had become less relevant than in the past?

And is the German chancellor reporting that the glamorous reception in Washington was but proof that no scars were left after the German abstention from the United Nations Security Council decision to intervene in Libya?

Germany, indeed, has become an issue of nostalgia and is only a secondary concern in forward strategic thinking. German government officials themselves try to portray this uncomfortable fact as a blessing by arguing that in the future Germany would lead from the second row. It remains difficult to explain, and even more difficult to understand, what that actually may mean.

For the United States — as for most other countries — leadership means leading from the front seat. The Libya issue is representative of a much deeper structural transformation underway in today’s Germany.

During the latter half of the 19th century and much of the first half of the 20th century, Germans were inclined to think that the world was there for them: to provide them with their legitimate nation-state, to grant them their rightful place under the sun, to let them dominate it militarily or, worst, racially.

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Merkel and Obama celebrated the good old days of German-American friendship, but did not give answers to the leadership questions of today and tomorrow for which they were elected in the first place.

After the catastrophe of 1945, the noviolence. They had learned their lesson tion of Germany’s global centrality did from history — and wanted the world not disappear: Now, it was up to the The unspoken issue for many to do so as well. world to protect the Germans — from Germans is unfortunately this: An exit from history? This could also themselves and from Soviet aggression. be said about the abrupt u-turn of the Shouldn’t one think of ways Then came 1989, the fall of the Ber- to exit from the EU to escape German government on nuclear enlin Wall and the end of the Cold War. ergy. While 443 nuclear power plants With Germans united in one state all the evil history others produce are operating around the planet in 43 of a sudden, they became nothing but and impose on Germany? countries, 65 more are in planning or citizens of an ordinary sovereign coununder construction. try, ready to share this sovereignty out The German government, however, deof enlightened self-interest with their European partners. clared an exit from nuclear power as the morally sound way to They also continued to share the strategic alliance with the cope with the future. Not only to cope with its country’s fuUnited States, but a tacit divorce began to unfold. While the ture energy demand, but to cope with the future of mankind.

United States began to project NATO as a global military In that view, the German exit from nuclear energy should, and instrument, the Germans promoted a global future without surely would, serve as a model for others around the world.

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cal fear of being encircled should never return into the public sphere of a country and society that has been blessed with the enormous luck of a second chance by history after 1945. The alternative is as bad: to bury one’s head into the sand when confronted with the headwinds of the real world.

Political wisdom at home and good partnerships abroad may prevent such a drama from unfolding in Germany. But for the time being, nothing seems to be predictable and certain any more in German politics — except for two things: The Germans want protection from the realities of this world, and they want change only on the basis of an overly consensual political culture.

Some call this dreamland a big Switzerland, which, its critics say, is a mountain in search of a purpose. Germany has always acted best when it is a reliable and proactive partner in Europe and of the United States without letting the mountains cloud its vision.

Only as an engine of further European integration, as a partner of the United States in global affairs and, most importantly, as a defender of universal human rights can Germany engineer a good future for its people.

Germany had found again its language of (morally, others would say self-righteously) leading the way for the world.

The nuclear exit strategy is a logical expression of this trend.

In bits and pieces, the contemporary German mindset has penetrated most issues of relevance for the future of mankind. This is about an exit from history in order to live a peaceful and green life. Neither the freedom fighters in Libya nor the nuclear construction planners in Poland or Brazil were impressed. But Germany, with about 1% of mankind’s population, has come to find its restful soul.

Since the days of Goethe and his Faust, the world has been accustomed to the fact that two souls are dwelling in those German chests. The biggest struggle over the current state of mind is still to be fought out: continuously committing the country to European solidarity and its implications — or giving way to those who suggest retrenching from the benefits and costs of true, solid and lasting political EU integration.

The debate about the bailout necessities for indebted EU partner countries and, more generally, on the future of the euro, has taken a highly uncomfortable turn in Germany.

The issue is no longer Greece and convergence criteria which, of course, must be adhered to strictly by every EU member state (including Germany).

The unspoken issue for many Germans is unfortunately this: Shouldn’t one think of ways to exit from the EU to escape the evil history others produce and impose on Germany?

So far, it is, and was, consensus in Germany that the histori-

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* Ludger Kühnhardt is a professor of political science and director of the Center for European Integration Studies (ZEI) at the University of Bonn, Germany, positions he has held since 1997. Before that, he taught at Freiburg University, where he was also dean of the faculty.

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Accident investigation: the truth and nothing but the truth It is easily taken for granted that a plane crash is followed by an inquiry, and after the initial shock has worn off we tend to trust the investigators and let them do their work in peace.

Nobody is truly interested in the rules and regulations surrounding an air crash inquiry. A recent piece of Brussels legislation, strengthening them for the EU, passed almost unnoticed.

the subject of an investigation with the report ready within 12 months. The new EU legislation ensures the independence of the investigators, but it also it touches upon the safety of passengers and their rights. For instance: passengers are now entitled to name a friend or a relative, to be informed in the event of a crash, before they board a European plane. ‘Brussels’ also requires that, almost immediately after a crash, every European airline produces a passengers list and a list of dangerous goods on board. A European airline is also obliged to have a detailed plan on how to assist survivors and relatives.

But first and foremost the new EU regulation is there to ensure that safety investigators can do their work without local authorities, and without the judiciary, looking over their shoulder. The witnesses involved - pilots, cabin crew, ground personnel- want to be certain that they testify without fear for the judiciary. Voice and image recorders in the cockpit and the air traffic control units may be used only for

By Hetty van Rooij* safety investigation, unless there is an overriding reason for disclosure to the judiciary. An act of terrorism, for instance.

Or a hijacking.

How important is that independence? Just remember the achat regulation deserved cident in Tripoli in May 2010, where 33 better”, says Mme de First and foremost people were killed when an Air AfriqiVeyrac, French member of the new EU regulation yah Airbus crashed close to the Libyan the European Parliament (EPP group) is there to ensure that capital. The Libyan authorities quickly who guided it through the EP. ,, An inderailed the work of the investigators; dependent inquiry into the causes of a safety investigators can do they decided that the pilot died from a crash is of extreme importance for the their work without local heart attack and that nobody, and cerbereaved. It deals with the ‘why’ and authorities, and without tainly not state-owned Air Afriqiyah or the ‘how’. It bares the truth and in do- the judiciary, looking over the Libyan state itself, was to blame. Or ing so, it can turn a page. Because it is their shoulder. think of the tragedy last year near Smothe truth, and nothing but the truth, lensk, Russia, where a crash with a Polish that can bring peace of mind to victims military plane killed 95 people- among and relatives”. them prime minister Jaruzelski. The Polish government reUnder the new regulation, each EU member state must ap- fused to accept the findings of the Russian investigators, who point a national civil aviation safety investigation authority effectively blamed the Polish plane crew for deciding to land (SIA) with a budget big enough to conduct full investigations. despite fog and warnings from (Russian) ground controllers.

Every plane crash, but also every near- plane crash, must be The international ‘constitution’ of accident investigation is

“T

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Τhe tragedy last year near Smolensk, Russia, where a crash with a Polish military plane killed 95 people among them prime minister Jaruzelski.

The Polish government refused to accept the findings of the Russian investigators, who effectively blamed the Polish plane crew for deciding to land despite fog and warnings from (Russian) ground controllers.

the now- famous annex 13 of the International Civil Aviation Convention, better known as the Chicago Convention.

Annex 13 states that the sole objective of an accident investigation is to prevent accidents and incidents, and the investigation is ‘not apportion blame of liability’. Also under Annex 13, the State where the accident occurs is automatically appointed to lead the investigation. Under that rule, Russia and Libya where leading the investigations after the crashes near Smolensk and Tripoli. So they were in a position that may have given them the opportunity to meddle with the answers to the ‘why’ and the ‘how’ and come up with their own interpretation of the facts.

Polish investigators, looking into the air disaster in Smolensk last year, plan to complain about Russia’s alleged mishandling of the probe at a new EU civil aviation club. ,, It’s about raising awareness at the EU level about problems in the crash investigation and problems in co-operating with the Russians.

So that people in the EU know that it’s not so easy to work

with the Russians,” explains Edmund Klich, a Polish lieutenant who worked with Russia’s Interstate Aviation Committee (MAK) on the Smolensk crash. The European Network of Civil Aviation Safety Investigation Authorities, a spin-off of the new EU-legislation, was created last September to advise EU institutions and to make EU-wide air safety recommendations. Klich: Russia violated the rules in Annex 13 on numerous occasions. Now let the specialists decide”.

And the crash in Libya? Since the civil war broke out, the phone lines in Tripoli are dead. It is just one big question mark” says Veeru Meewa, a lawyer who represents the bereaved of 33 victims. ,, My clients don’t hear anything. And I have told them: they may never hear the truth`.

* Ms Hetty van Rooij is freelance journalist in Brussels EUROPEANBUSINESSREVIEW

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A finance minister for Europe?

The outgoing president of the European Central Bank has floated the idea of a finance minister for Europe. This column argues that such a statement from someone who has been in charge through the worst financial crisis in living memory is significant. It asks what the academic literature has to say on the matter.

By Charles Wyplosz*

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J

ean-Claude Trichet, president of the European Central would have to be covered by member countries. Indirectly, Bank, has created a buzz by proposing to appoint a fi- it could trigger a contagion of further defaults. For these reanance minister for Europe. In fact, he comes close to the sons, the ECB is vehemently opposed to any default and presidea of a fiscal policy committee, which has been advocated sure has been applied to keep the lending going. for a long time and with increasing frequency since the onset Similar tactics have been applied in the past and, more than of the sovereign-debt crisis. once, prompted the US to heavily weigh on the IMF to keep As befits a central banker, the proposal is couched in care- lending because the delinquent country was important, either ful hypothetical terms. Maybe, in the future, when a country economically (Mexico, Argentina) or politically (Egypt, Rusonce again does not live up to its commitments, “would it go sia). This time it has led the Eurozone countries to quickly too far if we envisaged giving euro area authorities a much put together a new programme with more public money, and deeper and authoritative say in the formation of the coun- to start thinking of a bailing-in of private creditors, i.e. some try’s economic policies? […] Would it be too bold, in the form of default, causing enormous chagrin at the ECB. economic field, with a single market, a single currency and a Trichet’s idea aims at avoiding such a situation in the future. single central bank, to envisage a ministry of finance of the Shunning the incentive approach of the IMF – threatening Union? Not necessarily a ministry of finance that administers to punish in order to elicit the desired response – he proposes a large federal budget. But a ministry of finance that would to assume control of the delinquent country in this “second exert direct responsibilities in at least three domains.” stage” of bailout. The IMF clearly has no authority to do so, The first of his domains is fiscal policy oversight, the second hence the idea to give control to the EU. “In the new conis vaguely defined but concerns financial integration, and the cept, it would be not only possible, but in some cases compulthird is external representation in international financial insti- sory, in a second stage for the European authorities – namely tutions, presumably a single Executive Director at the IMF. the Council on the basis of a proposal by the Commission, It is of course of great significance that a departing ECB Presi- in liaison with the ECB – to take themselves decisions apdent – one who was in charge during the deepest crisis since plicable in the economy concerned. One way this could be the 1930s – has come to such a conimagined is for European authorities clusion. Because the proposal is highly to have the right to veto some national imprecise, it can be interpreted in a economic policy decisions. The remit myriad of ways. The idea, it seems, is The idea that some could include in particular major fiscal to let policymakers react as they see fit, centralised benevolent spending items and elements essential to propose their own interpretations of a dictator could direct for the country’s competitiveness”. The deliberately vague pronouncement, un- national governments proposal intersects three issues: til something that is agreeable emerges.

• the link between monetary and politiTrichet’s text includes countless refer- to do a better job is attractive cal union; ences to great European philosophers of and justified, but is it realistic?

• the need for fiscal policy coordinaprevious centuries and to Jean Monnet Now that the president tion; and and other Founding Fathers of the EU, of the ECB has formulated • the need for fiscal discipline. but not a single one to the academic the proposal, at least, The first issue has long been debated. literature, which has obviously considThe empirical evidence is that currency we can hope to have a debate. ered many options. It may help, thereand nationhood normally come togethfore, to consider what the literature has er but with countless counterexamples, to say about the issues at stake. mostly small states.

Beyond symbolism, the main reason is that the “optimal curAcademic literature on centralising rency area” criteria stands to be better satisfied within unitary states.1 But then Frankel and Rose (1998) observed that the finance ministry functions Trichet’s call for institutional reform seems to be directly re- mere existence of a monetary union stands to make a clearly lated to the current situation of Greece, so it is worth outlin- suboptimal monetary union “more optimal” as time passes ing how his thinking flows from Greece’s problems before by. So we knew all along that bad things could happen beturning the scholarship on this. cause the Eurozone is not (yet) an optimal currency area, and We are dealing here with a country that has been bailed out that they could be mishandled because we don’t have the inby the other Eurozone countries and the IMF under strict struments of a unitary state. conditions, but also a country that fails to deliver. In such It is logical, at this stage, to see the emergence of proposals cases, the IMF normally suspends payments, letting the that aim at giving the Eurozone some attributes of a political country deal with the consequences. This is, in fact, what the union. Alongside Trichet’s proposal, we have seen suggesIMF recently threatened to do. tions that Eurobonds be collectively issued, which is partly A consequence would have been default. In the current cir- what the European System of Financial Supervisors has been cumstances, the strategy of “teaching a good lesson” would doing. The largely unnoticed, but historically significant directly hurt the other Eurozone countries whose govern- presence of the Eurozone in IMF negotiations means that, ments and banks are creditors, as is the ECB whose losses in what Trichet calls the “first stage” of rescue operations, a EUROPEANBUSINESSREVIEW

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• Second, with the monetary instrument lost, fiscal would have to become the main countercyclical instrument (Melitz and Zummer 1999).

It then transpired that fiscal policies were mostly procyclical before the adoption of the euro and that they have become, at best, mildly procyclical afterwards (Fatas and Mihov 2010). The idea that some centralised benevolent dictator could direct national governments to do a better job is attractive and justified, but is it realistic? Now that the president of the ECB has formulated the proposal, at least, we can hope to have a debate.

The third issue, the need for fiscal discipline, is the heart of current preoccupations. We all know the long debate about the Stability and Growth Pact. The very fact that Trichet wants something new is comforting; it is in line with my long-held view that the Pact could not work as intended, and that it mostly focuses policymakers on the wrong criteria (Eichengreen and Wyplosz 1997).

Over recent years, following von Hagen and Harden (1995), a large literature has developed the view that fiscal discipline is a matter of adequate institutions and that different countries require different institutions. This has recently turned into a rich debate about the use of rule and of institutions, with increasing interest on independent fiscal councils (see for instance Besley and Scott 2010). Within the monetary union, national councils may not be country can find itself accepting conditions imposed by oth- enough because of the externality that arises when one country er. Because the first stage can fail, as is now happening with fails to deliver fiscal discipline. The current crisis is a potent reminder of the importance of this externality. It is therefore entirely Greece, thinking about a second stage is unavoidable.

The second issue – the need for fiscal-policy coordination – reasonable that the president of the ECB goes in this direction. harks back to the Delors Report: President Trichet’s proposal is original, it is remarkable, “In order to create an economic and monetary union the sin- perhaps even historic, but not very clear. He envisions not a gle market would have to be complemented with action in council but an individual. Yet, the decision to take over rethree interrelated areas: competition policy and other meas- sponsibility for fiscal discipline would come from “the Counures aimed at strengthening market mechanisms; common cil on the basis of a proposal by the Commission, in liaison policies to enhance the process of resource allocation in those with the ECB”. A number of questions arise: economic sectors and geographical areas where the working • Would this “minister” just be the Commissioner for Ecoof market forces needed to be reinforced or complemented; nomic and Monetary Affairs, like Baroness Ashton? macroeconomic coordination, includ• Would this be a new position, like ing binding rules in the budgetary The idea of imposing that of Herman van Rompuy? field; and other arrangements both to fiscal policies on national • Would (s)he just be the head of an limit the scope for divergences between independent fiscal council? member countries and to design an governments and their The experience so far with a High Repoverall economic policy framework for respective parliaments, resentative for Foreign Affairs and Secueven in the “second stage” the Community as a whole.” rity Policy and with a permanent President of the European Council is not The voluminous literature that fol- of a bailout programme very encouraging. It shows that memlowed the Delors Report in the late is radical and sure to meet ber states are most unwilling to give up 1990s made two points. stiff resistance. national sovereignty for the common • First, it would be desirable to have a way of achieving the right fiscal-mone- It would require a very collective good. Things change over strong personality to carry time, however, and the EU’s six dectary policy mix at the Eurozone level.

This question has been set aside in aca- out such a task, perhaps ades are full of examples. demic work, perhaps because of theoreti- a former President The idea of imposing fiscal policies on cal uncertainties about the role and effects of the ECB? national governments and their respecof fiscal policy, or because the problem tive parliaments, even in the “second had not yet materialised. The question, Member countries have stage” of a bailout programme is radihowever, is very much alive at the political shown no inclination cal and sure to meet stiff resistance. It level where we hear periodic calls for “an for having strong personalities would require a very strong personaleconomic government of Europe”. ity to carry out such a task, perhaps a in Brussels, however.

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President Trichet’s proposal is original, it is remarkable, perhaps even historic, but not very clear.

He envisions not a council but an individual.

former President of the ECB? Member countries have shown no inclination for having strong personalities in Brussels, however. Perhaps, then, they might start with a European advisory fiscal council that would oversee national advisory fiscal councils, a proposal recently made by the Commission.

That would be a useful step.

* Charles Wyplosz is Professor of International Economics at the Graduate Institute, Geneva; Director of the International Centre for Money and Banking Studies. CEPR Research Fellow EUROPEANBUSINESSREVIEW

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Money & Inflation:

what’s going on in the world?

Are America and the world at risk for another inflationary episode similar to the 1970s and early 1980s? Or do current low rates of inflation portend low inflation for the foreseeable future?

By Gerald P. O’Driscoll, Jr.*

D

avid Wessel revisited this question in his “Capital” column in the February 24, 2011, Wall Street Journal. He correctly stated that the Federal Reserve under Chairman Ben Bernanke takes the position that the course of inflation depends on expectations: Inflation will stay low if people expect it to stay low. Wessel quotes Bernanke: “The state of inflation expectations greatly influences actual inflation and thus the central bank’s ability to achieve price stability.”

The Fed chairman has the causation precisely backwards. Fed

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policy systematically shapes inflation expectations. His statement focuses on the short-run and ephemeral over the longrun and permanent. In so doing, Bernanke follows in a long line of central bankers.

In A History of the Federal Reserve (volume 1: 1913-51), Carnegie-Mellon University Professor Allan Meltzer summarizes the central-bank mindset. To the degree there is theory behind the policies of central bankers, it derived from the nineteenth-century banking school thinkers. Chief among them was Thomas Tooke, who “denied that money, credit, or base money bore any consistent relation to prices. Most Federal Reserve officials remained in this tradition in the 1920s.

They denied that their actions affected prices” (57–58).

Unfortunately for defenders of current Fed policy, inflation is accelerating around the world. Singapore’s economy has benefited from revived global trade, but consumer price inflation is now running at an annual rate of 5.5 percent. In Vietnam, an emerging economy of note, consumer price inflation is running at 12 percent. Food riots plague India. Even American consumers are starting to feel the lash of inflation, as anyone who goes to the grocery store can attest. It is not a question of whether inflation is on the horizon. Inflation is here.

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In a February 23 Wall Street Journal Monetary policy is not the sole dollar. Their exchange rates are either a op-ed, retired Journal editorial writer culprit in the rise of food prices. constant or change only slowly. The Hong George Melloan explained how ecoKong dollar is an example of the former, There have been a number of nomics has contributed to the turmoil the Chinese yuan of the latter. Even soin the Middle East. Consumer price in- negative supply shocks affecting called floating currencies are not really flation in Egypt rose to 18 percent an- the supply of various foodstuffs, floating. Central banks intervene to prenually in 2009 from 5 percent in 2006. and these shocks have certainly vent their value from rising rapidly against In Iran inflation rose to 25 percent in contributed to higher prices. a flagging U.S. dollar. The only important 2009 from an already high 13 percent central bank that seems to be letting its rate in 2006. Inflation surges hit family currency float freely against the U.S. dollar budgets hard, especially for the many in these countries living is the Swiss, and the Swiss franc is appreciating against the dollar at the margin. Desperate people take to the street. As Melloan fairly steadily. wryly observes, “About the only one failing to acknowledge a Thus, as a practical matter, when the Fed creates dollars it problem seems to be the man most responsible, Federal Re- results in an increased money supply in other countries. It is serve Chairman Ben Bernanke.” not necessarily one for one, but it is proportional. The Fed’s Monetary policy is not the sole culprit in the rise of food low-interest policy has fueled not only a commodities boom prices. There have been a number of negative supply shocks but a real-estate bubble in Asian countries and elsewhere. affecting the supply of various foodstuffs, and these shocks Some countries have imposed capital controls to counteract have certainly contributed to higher prices. Central bank- Fed policy, but these are seldom fully effective. ers often point the finger at these to deflect accusations that The Fed chairman argues that foreign central banks can offset monetary policy is at fault.

Fed policy. Doing so confronts them with a Hobson’s choice.

Two points must be made. First, global food production and Foreign central banks pegged to the dollar can break the peg prices have been rising. Rising prices and output reflect rising and let their currencies appreciate and domestic interest rates demand relative to supply. Second, nearly all commodities, not increase. If they act effectively they risk sending their own just agricultural commodities, have been caught in a monetary economies into the tank. Based on experience, it is equally updraft. Along with food prices we have seen rising prices of oil likely that higher interest rates in those countries would at(even before the Middle East turmoil), gold, silver, copper, and tract more speculative capital, fueling asset bubbles, commoda whole range of other commodities used in production. One ity prices, and eventually consumer price inflation. The last is noteworthy laggard is natural gas, whose price has been kept what has in fact been happening. Small, open economies in down by positive supply shocks of new discoveries. This, con- practice are unable to offset a tsunami of dollars.

Bernanke is being disingenuous about the options foreign trary to the narrative of central bankers, is the supply story.

Commodities, along with most globally traded goods, are priced central banks and governments have to counteract the Fed’s in dollars. The Fed creates “base money”: bank reserves plus cur- easy-money policy, which threatens a global outbreak of inrency. Banks then expand on base money by lending out re- flation similar to the 1970s. serves. The more base money and bank money produced, the higher the dollar prices of commodities and other goods. It is the old story of too much money chasing too few goods and driving up their prices. That is inflation conventionally defined.

The inflation story this time has been complicated by a weak U.S. economy, whose growth is still dampened by the consequences of the housing boom and bust. The bank expansion of the money supply through lending has occurred not in the U.S. economy but in emerging economies, particularly in Asia and Latin America.

Bernanke promised his easy-money policy would create jobs, and it has-but not in the United States. Of course, to the degree that prosperity in these countries has depended on the Fed’s easymoney policy, it has been a false prosperity. The citizens of these countries are paying for it now in the form of inflation.

The Fed has been paying a low interest rate on reserves, which to some extent has restrained lending by banks. With loan demand weak or of poor quality, banks have chosen to keep money on deposit at their local Federal Reserve bank and earn a safe return. As loan demand picks up, however, banks will likely begin lending out their reserves. That appears to be happening as this is being written. * Gerald P. O’Driscoll is a senior fellow at the Cato Institute and Here are some details of the linkage between Fed policy and gloa former vice president of the Federal Reserve Bank of Dallas. bal inflation. The currencies of many countries are pegged to the EUROPEANBUSINESSREVIEW

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Why we must stop talking about “emerging markets” Rapid growth in some parts of the world and economic stagnation in others is making emerging markets an outdated term.

Jim O’Neill, who coined the term “BRIC”, proposes a replacement.

By Jim O’Neill*

I

s it time to re-define emerging markets? The answer is a pretty straightforward “Yes”, at least for some of them.

Across the board, for the world’s 190-plus poorer countries the answer is probably “No”, but for the largest ones that are helping re-shape our wonderful, exciting world, the answer is straightforward.

It is now nine years since I had the good fortune of thinking up the acronym BRIC, which has become synonymous with the remarkable rise of those four countries - Brazil, Russia, India and China - as well as some others, and their influence on the world economy. It is also more than seven years since my group first published an outlook to 2050 in which we suggested that over that timespan, these four economies could collectively be bigger than the G7 economies, and along with the U.S. would constitute the five biggest in the world, based on the likely dollar value of their gross domestic products. It is also more than five years since we first introduced another acronym, the “Next 11”, or the “N11” as it

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has become known. That phrase was a simple description to bracket the eleven largest countries by population and to see what their BRIC like potential might be. It is my contention that most of the positive momentum behind the world economy is being driven from these 15 countries, or at least by the majority of them. This is in turn affecting the lives of all of the world’s 6.5bn citizen’s, not just those of their own people. The result of this is that many profound changes are occurring, not least of which is that globally we are probably seeing the largest and fastest rise of people out of poverty for many generations. As a consequence, to describe many of these countries as “emerging markets” seems not only a bit inappropriate but quite possibly insulting.

China last year overtook Japan as the second largest economy in the world, probably around $5.5 trillion in size. China is about the same size as the other three BRIC countries collectively, which in aggregate puts them at around $11 trillion, some 80% of the U.S. If you observe their collective growth rates for 2010, on average they grew by around 8.5% can you imagine what we would all be thinking if the U.S. had grown by around 8.5%? That is close to what the four BRIC countries alone have done last year. In 2009, arguably the worst world economic performance for decades, the BRIC countries collectively grew by around 5.5%.

Brazil is close to reaching the size of Italy, and both India and Russia are not far behind. Within the N11, Indonesia and Turkey are growing at rates which encourage some to believe that I should change the BRIC acronym to include them.

Looking at domestic demand in the BRIC countries, the growth rate is even more impressive. In 2010, they probably grew by close to 10%, and in some cases, China most of all, their own consumers appear to be more and more important. The collective dollar value of BRIC consumers can currently be estimated conservatively at just over $4 trillion, and possibly $4.5 trillion. The U.S. consumer is worth around $10.5 trillion, more than double the level of the BRIC consumer, but the BRIC consumer is currently growing at an annual rate in dollar terms of around 15%, which means an annual rate of about $600bn. If this pace is maintained, then by the middle of this decade their collective consumers will be adding another $ 1 trillion to the world economy. And by the end of the decade, their consumers will be worth more than that of the U.S. consumer. How can we call them Emerging Markets?

In line with all this, at some stage in this decade the four BRIC economies will become as big as the U.S., with China alone reaching about two-thirds the size of the U.S. economy.

The four will be responsible for at least half of the real GDP growth in the world, possibly as much as 70%.

Looking around the world as a whole, amongst the likely top ten contributors to global GDP growth this decade, others in addition to the BRIC countries may well include Korea, Mexico and Turkey. Only the U.S. is guaranteed from within the so-called developed world, and others that might be in

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there, could include Indonesia. The top 20 could also include Iran, Nigeria, the Philippines and Vietnam.

With this in mind, how should we think about the phrase “Emerging Markets”?

A few weeks ago, I decided along with my colleagues to pursue the phrase “Growth Economies” a bit more scientifically. At Goldman Sachs, the firm adopted this phrase at the start of 2010 to describe how we treated many of the world’s most dynamic economies. I thought we might go one step further, and actually define what constitutes a growth economy? At its most simple, I think it should be regarded with one that is likely to see rising productivity that combined with favourable demographics suggests they are likely to grow at a faster rate than the world’s average.

If this were the only necessary condition, then it would likely include many countries beyond just the BRIC and N11. But is it sufficient? Probably not, especially from a business and investing perspective. It also probably needs to be an economy that has sufficient size and depth that allows investors and business sufficient scale and liquidity to not only to invest and develop, but also perhaps to exit as and when appropriate. An amusing phrase a colleague told me many years ago to describe the commerciality of emerging markets was that “submerging” would be more appropriate, and he added for good measure that the only time to get involved was when they were on the verge of collapsing because then a lot of money could be made. With this in mind, perhaps another way of thinking about what is no longer an emerging economy or market is one where if things turn for the worse, you can exit and not worry about submergence!

With this sort of framework in mind, we studied more closely the size of some of the BRIC and N11 economies, their likely growth rates over the next decade and beyond and their productivity performance and attributes. We then decided that somewhere we would need to make an arbitrary decision, so we opted for the following: Any economy outside the so-called developed world that is at least 1% of current global GDP or more, should be defined as a growth economy. At this size, currently around $600bn or more, it should be large enough to allow investors and business in general to operate along the same general principles as in the more advanced economies, yet are likely to grow more. All others, we would somewhat arbitrarily still define as emerging markets.

Under this definition, eight countries currently satisfy our criteria; the BRIC countries including Russia along with Korea, Indonesia, Mexico and Turkey.

We also explored our future projections to see how the list might be expanded to include those countries that we forecast might account for at least 1% of global GDP in the next 20 years. Among those that could be added. Saudi Arabia, Iran, Nigeria and the Philippines came up.

With this in mind, we at Goldman Sachs Asset Management (GSAM) are now treating these eight countries not as emerging markets, but as growth economies.

It is also about time that investors started to benchmark their investing portfolios more appropriately. In the past few decades, it has become convention for equity investors to base their investing around neutral benchmarks determined by the market capitalisation of companies and indices. But this gives much more weight to the U.S. economy and its companies, and less to so called emerging markets than would GDP. An alternative approach that some investors adopt is to use a current GDP weighted benchmark, and for a few, bold and aggressive investors, a future predicted GDP weighted benchmark. This gives a lot more weight to emerging markets, and especially to the growth economies.

When we studied this approach in detail, despite its obvious appeal to us, we thought it was perhaps a bit extreme to encourage investors to adopt, as it might over-correct. Nor it would account for the larger share of revenue growth that many Western or developed companies are witnessing as a result of their own expansion into the new exciting world around us. So, we have decided to incorporate this aspect directly into our research, and as a result are developing benchmarks that take all of these things into account. The consequences will be that “neutral” investors will need to invest more in the emerging world especially the growth economies, but not dangerously so, and we also incorporate volatility characteristics as another constraint.

The index that Goldman Sachs calculates every year for around 180 countries is called a Growth Environment Score (GES) and is used to monitor productivity and likely sustainable growth. The index level goes from 0 up to 10, with 13 sub-indices for overall growth and productivity.

Currently, Korea’s GES score at 7.5 is higher than that of the U.S. at 6.9. For countries that are still rather small and have low GES scores, it is almost definitely appropriate to treat them as emerging markets with lots of risk. While they may grow significantly and escape from their current situation, it also keeps them somewhat vulnerable to adverse developments at the centre and core of developed markets and their financial markets, especially the U.S. I believe that this should not be forgotten in the rush to embrace all that is so exciting about the world.

Another way of looking at this is that countries with low GES scores need to undertake policies which will allow them to rise. Nigeria is an interesting case because we forecast that within the next 20 years Nigeria could-not will, could! – become as big as 1% of global GDP. Its current GES score of 3.9 is significantly below the average of the BRIC and N11 countries, and so needs to rise. On the other hand, it has already nearly doubled over the last 13 years, and if it maintains this progress it will before 2030 no longer be an emerging economy. As Nigeria accounts for around 20% of Africa’s population, that could be an exciting development.

* Head of Global Economic Research at Goldman Sachs International and a member of the board of the Bruegel think tank.

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SPECIAL REPORT

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SPECIAL REPORT

Special Report:

European Business Summit, Brussels 2011 N. Peter Kramer Editor-in-chief European Business Review (an EBS media partner)

9th European Business Summit (EBS), a key meeting place and networking platform for the EU’s business and political elite, concluded on a note of optimism on 18-19 May in Brussels.

Two statements made during the programme which included over 100 high profile speakers illustrate, in my view, the general spirit of the event.

‘Business leaders are more optimistic about growth prospects in Europe than they were last year’,

according to Pierre De Smedt, President of the Federation of Enterprises in Belgium (FEB) and ‘SME’s should be at the heart of the Europe 2020 strategy and its implementation (Hungarian Economic Secretary Zsolt Becsey).

The EU is a ‘strong emerging power’ according to European Commission President Barroso. However, let us be honest: recovering of the on-going financial crisis and repairing the EU weaknesses is not yet completed...

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SPECIAL REPORT

EUROPEAN BU

PAVES WAY FOR EU IN THE GLOBAL ECO

By EBR

9th European Business Summit (EBS), a key meeting place and networking platform for the EU’s business and political elite, concluded on a note of optimism in Brussels. The summit, held on the 18 and 19 May, discussed the internal and external challenges that lie ahead for Europe in maintaining its position in the global economy.

Under the theme ‘Europe in the world, leading or lagging?’, the summit united over 1,500 prominent participants from the EU and its main global trading partners.

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“C

reating growth and jobs, protecting the environment and social inclusion are key elements of our European model,” stressed Van Rompuy. “We want to maintain the European way of living in our globalised world, but other major economies are racing ahead. Our businesses and workforce are facing major challenges in competitiveness, innovation and labour participation. Only together we will be able to ride new waves of growth.”

In a keynote speech, European Commission President José Manuel Barroso complemented a programme which included over 100 high profile speakers, including European Commissioner for

SPECIAL REPORT

BUSINESS SUMMIT

EUROPEAN GROWTH ECONOMY Economic and Monetary Affairs Olli Rehn, Hungarian Prime Minister Viktor Orban and Hitachi European Group Chairman Sir Stephen Gomersall.

Federation of Enterprises in Belgium President Pierre De Smedt - one of the main initiative drivers behind the event - said: “According to the recent FEB/Accenture survey, business leaders are more optimistic about growth prospects in Europe than they were last year. They are convinced of the EU’s growth potential but they believe that a major effort is still required in order to remove remaining obstacles from trade and mobility within the EU, stabilizing national budgets and removing uncertainty from the financial markets.”

Alluding to the European Commission’s forthcoming agenda, De Smedt explained: “As part of the collective effort to reinforce economic governance, the European Commission needs to carry out an objective analysis of national reform programmes. On that basis, it should exert sufficient pressure on governments to speed up essential structural reforms that will boost competitiveness, in anticipation of shouldering the costs of an ageing population, and that will pave the way for conquering new growth abroad, especially in emerging countries.”

With the worst of the financial crisis now behind us, the summit took place at

a time when corporate and government sectors are regaining confidence in Europe’s future. Regional coordination and cooperation will be central to picking up the pieces after the crisis, as well as seeking new markets and opportunities.

“European companies are working hard to recover from the crisis. There are still plenty of opportunities and talent in Europe that entrepreneurs can and want to develop, provided the environment is conducive to business.

EU and national governments on their side must aim at structural reforms and secure budget discipline,” concluded BUSINESSEUROPE President Jürgen R. Thumann.

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SPECIAL REPORT

José Manuel Barroso: EU as a ‘strong emerging power’ The President of the European Commission sounded an upbeat note on the future of Europe in his keynote speech to a packed auditorium at the 2011 European Business Summit.

Brushing aside concerns that Europe was in decline, Barroso presented the European Union as a ‘strong emerging power’.

By N. Peter Kramer

‘T

he European Union today is far stronger than it was ten years ago’, he asserted, ‘with five hundred million consumers, twentytwo million businesses, it’s the world’s biggest trading partner, it has a unique and viable political, economic and social model based on an open economy and societies with the rule of law.’

He went on to address the recent economic and financial crisis, stating that ‘Europe is steadily recovering from the crisis and repairing its weaknesses’. Expanding on how this is being done, Barroso explained: ‘we are putting in place a positive business environment, constructing the innovative and competitive of Europe of tomorrow… [and] we are enforcing our position in the world by strengthening our competitiveness and working ever more closely with our partners.’

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The European centre and its constituent parts will emerge stronger from recent difficulties, Barroso argued: ‘the EU and Member States have shown the determination to overcome difficulties together and addressing weaknesses in the banking, regulatory and public finance systems. At the same time they have embraced a new model of economic governance which strengthens the Euro area and to Europe as a whole.’

‘The European Council next month is expected to confirm a number of key decisions in this field, he said, adding that ‘a new economic governance coupled with structural reforms and more intensive policy co ordination will stabilise the foundations of Europe’s economy and internal cohesion.’

Reflecting on Europe’s response to the economic crisis, Barroso said that ‘the leaders in Europe are drawing the lessons from the crisis and understanding that they need to adapt to a much more competitive environment.’ He went on to describe his vision for where the region should aim to be over the next few years: ‘the common goal is for Europe is to be a leader among global giants’ and ‘for it to be a top region to invest in and to learn from’.

As further testament to the achievements of the European Union and its potential moving forward, Barroso hailed its ‘stable currency, mobile workforce, smart and sustainable growth.’

He went on to describe the Europe 2020 strategy, which seeks to re-enforce Europe’s strengths, as a ‘long term growth roadmap with concrete steps and targets towards [a] smart, sustainable, inclusive economy.’

Emphasising that ‘the task is not simple’, he finished with his key message to business leaders: ‘we can only achieve this goal if business and regulators all pull in the same direction’.

SPECIAL REPORT

Entrepreneurship and SME’s, from declaration to implementation There was broad agreement on the main challenges facing policy makers when it comes to the policy environment for entrepreneurship and SME’s: simplification of the regulatory environment, access to finance and encouraging internationalisation. Moderator Julian Oliver, Secretary General of EurActiv, framed the debate against the continuing importance of the 23 million SME’s in Europe to economic recovery.

By EBR

H

ungarian Economic Secretary Zsolt Becsey was keen to emphasise that SME’s should be at the heart of the Europe 2020 strategy and its implementation; and that synergies between the different measures taken to help SME’s are crucial to their success.

As the first speaker, he also introduced what were to become the three central themes of the debate; deregulation, access to finance and internationalisation.

“We need to concentrate on programmes that cut the legislative burden” he argued, “In Hungary, for instance, there is a policy of cutting red tape which we hope will lead to an 1% increase in GDP”.

Becsey also discussed the Hungarian Presidency’s focus on the SME prob-

lem, highlighting an award for best practice in Budapest and discussions of the way forward which took place under its chairmanship of the Competitiveness Council.

The Commission’s SME Envoy Daniel Calleja Crespo welcomed the Minister’s presentation, saying that he had succeeded in describing the three main points of salience to the debate. He was also keen to stress the EU’s policy achievements in this area, citing the launch of the Small Business Act; the passage of the Late Payment Directive, a reduction is the startup costs for new businesses and the E-Invoicing Directive.

However, he continued, the economic crisis had caused the loss of 3.25 million jobs in the SME community. In response, he suggested that Europe should set itself targets based on the three key challenges outlined by Mr Becsey: it should take less than 3 days and cost no more than €100 to set up a business; the SME test should be extended to all future regulation; gold plating should be avoided; each Member state should appoint an SME Envoy (as 23 have already done); and 200,000 new startups should receive help with financing over the next 3 years.

Péter Futo, President of Businesshungary, focused on research and innovation in his presentation, stating that ‘an increase in competitiveness is unimaginable without research and innovation, but the EU is not as innovative as its main competitors, the US and Japan.

Progress is not fast enough”.

In response, he argued, there needs to be better co-operation between SME’s and universities; and venture capital needs a unified administrative system rather than 27 separate national systems.

BUSINESSEUROPE SME Committee President Hugh Morgan-Williams

returned the focus to the three key challenges set out by the Minister. He advocated in one-in-one-out approach to new regulation and cutting red-tape, which works in Denmark. And his remarks on finance provided an analysis of the problems facing small business in this area: “The banks caused the current crisis, not loans to SME’s, but it is SME’s who are paying the price” he said. “It’s not fashionable to lend to SME’s, and Basel III further restricts funding by imposing tougher capital adequacy requirements. But EIB and EIF investments could free up capital – if they can guarantee loans this frees up capital and has a powerful multiplier effect”.

He was also keen on further internationalization, pointing out that a 1% increase in exports leads to a 3% increase in GDP – a disproportionate multiplier effect.

Finally Luuk Borg, EU-EUREKA Eurostars Programme manager and head of the Secretariat, gave more details on which SME’s could best provide for future growth. “Europe is very diverse and there is not enough harmonisation” he said, “But it is very creative”.

Borg said that the most important SME’s are those with a technology base – so accelerated de-regulation is urgently needed in this area. Co-operation between Member states is also required, particularly to encourage businesses that create products and processes.

The session concluded with a trio of questions to the audience, answered with an electronic handset. 70% thought that efforts to eliminate hurdles to venture capitalism would work; but 70% also thought that SME’s they know would not be hiring new staff in thee coming six months, and that the economic crisis had negatively affected their ability to address green issues.

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SPECIAL REPORT

The way back to Brazil renewed European interest

By Niels Schreuder*

A

fter being so taken up with the financial and economic crises, Europe lost out of sight some enormous trade and investment opportunities. Both in Europe and around the world in the so-called emerging markets.

The question than emerged, Europe in the World: Leading or Lagging? So was the theme of this year’s annual European Business Summit (EBS). This time business leaders and politicians meeting again on 18-19 May focused on the world around it rather than on itself. One of the sessions organized was on the business opportunities in Brazil. Moderated by a Brazilian business affairs analyst, companies already active in the former Portuguese colony exchanged their success stories and advices on how to harvest from the low hanging fruits. Trade Commissioner Karel de Gucht’s head of

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cabinet, Marc Vanheukelen, speaking almost exactly in the style of his chief, gave an update of the EU-Brazil Partnership negotiations hoping for breakthrough results at the 2012 Latin-Americas Summit. Being the EU’s 9th export market after India and with Brazilian exports to the EU already up to 20%, the trade relation has become eminent.

Following large investments in Brazil in the late ’90, European companies now seem to have renewed interest for Brazil. Seen from Portugal, currently suffering with its own economic and budgetary problems, Brazil is not far from Europe and not too of a foreign adventure either. Besides speaking a European language, Brazil is easily and frequently accessible by planes from Lisbon, a hub for many airlines. The availability of clean energy and great reserves of agriculture fields are interesting for investment.

Brazilian agriculture often seen as a threat to European food products could well become good investment also. However, the trade and investment dialogue between Mercosur, the Latin-American trade block, and the European Union has often proved to be troublesome with Mercosur’s growth percentages on the rise, already about 2 times higher than EU numbers.

Companies such as Shell, Total, Intel, Embraer and a lot of US diesel producers have found their way to Brazil over the past years and more are to follow.

Bio-ethanol production and raffineries have created a new fuel that enables to attain a positive energy balance and to produce against better greenhouse gas (GHG) emissions. In partnership with SME’s the sugar canes sector is booming and both renewable energy and feed stock are areas of the economy’s future.

Years after Pedro Alvares Cabrals (14671520) and Amerigo Vespucci (14511512), the Europeans seem to have found the way back to Brazil. Since it’s all about energy today, the renewed interest for Brazil let’s explain itself easily by the enormous opportunities to be harvested from clean energy deals. If you don’t want to be legging but rather want to be leading, you better invest in Brazil.

* Niels Schreuder is a Brussels-based EU observer

SPECIAL REPORT

Europe and Social Media - the digital highway to high growth?

By EBR

S

oumitra Dutta, moderator and an academic specialising in the technology business from INSEAD Business School, opened the debate by emphasising the growing role technology and communications play in our everyday lives. A poignant example of this is the fact that globally, more people have access to technology than to clean water or toilets, a fact underlined by the show of hands from the audience, confirming that most had two or more digital devices with them in the auditorium.

Vice President of the European Commission Vivianne Reding, who was Commissioner for the Digital Agenda in the previous Barroso cabinet, opened by pointing out the fact that, although historically, Europe has been strong when it comes to developing technological innovations, the commercialisation of these innovations has often taken place in the United States.

She also touched on a number of successful European policies in this area, including the rollout of high-speed broadband across much of the European Union, and the opening of telecoms markets to more competition. She sounded a note of caution by saying that the market was still fragmented and hindered by national boarders where infrastructure has traditionally stopped.

The advent of broadband, however, has the potential to overcome these boarders.

William Kennard, US Ambassador to the European Union and a former investor in technology startups, argued that innovation needs to be seen as a holistic concept: as chairman of the FCC (the regulator of the telecoms industry in the US) he saw that success wasn’t just about what government did.

For instance, although the US authorities undertook the initial research on creating the internet, entrepreneurs and venture capitalists created an ecosystem which encouraged its development alongside a favourable tax system and the ability of the US to attract highly skilled immigrants, such as the founders of Google.

Kennard also noted that the Commission’s work on the digital agenda showed that Europe now recognises the need for a holistic innovation ecosystem; and pointed out that the ICT market is the same size in the US and the EU - $1 trillion – but that Europe has 200,000 more inhabitants, representing a ‘big upside opportunity’ for businesses in this sector.

IBM’s European Chairman, Harry van Dorenmalen, said that there were two major areas that should be on Europe’s ‘to do’ list. The first relates to standards and interoperability, where politicians and businesses know what needs to be done. The second relates to improv-

ing the business environment faced by technology companies. He sounded a positive note on the future, though, asserting that ten years ago Europe’s technology businesses faced many more problems which have since been resolved, meaning Europeans can be optimistic about what is to come.

For the manufacturers, Hitachi’s group Chairman for Europe Sir Stephen Gomersall agreed with the Commissioner that Europe is a great producer of innovation, but the speed at which these innovations are adopted in the wider market is slower than in many of its competitors, notably in Asia.

Despite this, Europe is at a distinct advantage due to the size of its technology market, in a similar way to Japan, which used its own customer base as a test bed for innovation, leading to increased uptake and a booming industry.

Finally, Alan Mottran of Alcatel-Lucent, commented on the speed that the industry has developed. ‘Ten years ago, we wondered what we could do with 2 Megabits’, he mused, ‘today we think about what we might do with 1 gigabit’. He argued that broadband had been a ‘massive engine’ for growth; and that innovation is a team game that requires co-operation throughout its infrastructure, and legislation which promotes cross-industry innovation.

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COVER STORY

Preparing today for the energy networks of tomorrow A new energy infrastructure policy for Europe.

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COVER STORY

By Günther Oettinger, EU Commissioner for Energy

W

e have recently witnessed two energy related accidents which constitute a turning point in the energy world: the Gulf of Mexico oil spill one year ago and most recently the nuclear accident in Fukushima. It is unclear what the energy mix of the future will be; one thing is clear, however: energy infrastructure will be key to optimise any energy mix.

Energy networks are at the heart of our energy system

Without secure, intelligent and sustainable energy networks we cannot meet our energy and climate targets in Europe. Within the horizon of the next decades our energy system, notably thanks to technological progress, will go through a deep transformation process, with huge challenges, but also opportunities in particular in the way we generate, transport, distribute and consume electricity. Europe’s current energy infrastructure is ageing and not prepared for these future challenges.

By 2014, as confirmed by the February European Council, the internal electricity market should be completed, and by 2015, no Member State should remain isolated from the electricity and Gas networks. This, in addition, to the previous established goals for 2020 on renewables and greenhouse gas emissions. By 2050, EU emissions are to be reduced by 80-95%.

This transition process has already begun, notably thanks to EU legislation on the internal market, on emission reductions, renewable energy and soon on energy efficiency. But, because it takes a long time to overturn existing infrastructure and reorient our patterns of energy use, we must redouble our efforts today. The recent events make it the more compelling to address the energy infrastructure challenges.

The challenges for our energy infrastructures are clear

Electricity grids will have to cope with steadily increasing demand, with increasing electrification of energy, changing demand patterns and increasingly variable supplies both from centralised production as well as from many small (decentralised) producers. Our gas networks will have to reach out to new sources and become more diversified and interconnected, to maintain and increase our current levels of security of supply, but also to serve, one day, as a buffer system for electricity storage thanks to power-to-gas technologies.

The share of renewables in electricity could grow from 19.5% today to around 35% in 2020, with about half of this increase coming from variable energy sources, such as wind and solar.

Over 40 GW of installed capacity are foreseen for offshore wind alone, mostly in the Northern Seas. This will create unprecedented challenges for the grid, and bigger risks for our energy systems and our economies, if we are not unable to deliver on them.

Just remember the November 2006 black-out, which originated in Central- Western Europe and hit several EU countries from Austria to Spain with around 15 million people literally “sitting in the dark”. For a country like Germany, it is estimated that a full black-out would cost about 500 million euro per hour!

Or think about the day when the supplies of Russian gas through the Ukrainian pipeline system to South-Eastern Europe came to a halt in January 2009 and there were no sufficient reserve storages or other pipelines capable of bringing gas from Western Europe to ensure the uninterrupted supply of countries like Bulgaria, Hungary or Slovakia. The economic price the region has paid is estimated to be about 2 billion Euros, and this for just a couple of days!

The facts are clear: We need new, smarter energy infrastructures. They will be vital for our energy system, for our economies, for our well-being as citizens. For electricity alone, we are talking about something like 45,000 km of new or upgraded lines for the next ten years.

I have therefore been working, since my arrival as European Commissioner in charge of energy, on a new energy infrastructure policy for Europe that will make our energy grids fit for 2020, but that will also allow us to plan ahead and make our networks “future proof”. In November 2010, the Commission has proposed European infrastructure priorities, which have been endorsed by the Heads of State and Government in February 2011. We now know what we need: • Offshore grids connecting the huge offshore wind energy potential in the Northern Seas and onshore networks transporting this energy to consumption centres in Central Europe and storage hubs; • Diversification of our gas supplies, sources, counterparts and routes with the construction of the Southern Corridor; •T o develop electricity and gas interconnections in SouthWestern Europe, notably with a view to integrate renewable energies and increase the flexibility of gas flows in the region; • To fully integrate the Baltic electricity and gas markets into the European market; • To reinforce North-South electricity and gas interconnections in Central-Eastern Europe and South-Eastern Europe; • To rapidly deploying smart grid technologies across the distribution and transmission networks in electricity; •T o reinforce the interoperability of the oil pipeline system in Central-Eastern Europe to increase security of supply and reduce environmental risks due to vessel transport in the region.

We need to start preparing today for the energy networks of tomorrow, notably by providing for: • “electricity highways” to transport renewable electricity from North to South and East and to West; • CO2 transport networks in order to enable future CCS technology.

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COVER STORY

Now, we need to get from broad priorities to concrete projects of European interest, and from plans for projects on drawing boards to consultations, permit granting, financing and construction on the ground.

First, we need a new method of identification and selection of projects of European interest, based on regional cooperation.

We have the broad priorities I just mentioned. We can count on regional fora such as BEMIP, the North Seas Countries’ Offshore Grid Initiative or the recently established NorthSouth High-Level Group. We now want transmission system operators, regulators and Member States in these regions to sit together and work out, which projects are really essential if we want to achieve our energy policy objectives and turn our infrastructure priorities into reality by 2020. These will be cross border projects of European interest. In order to identify these projects, the Commission will propose criteria. There will be transparent, measurable indicators that will make projects comparable. Each project should also provide for a broader socio-economic cost-benefit analysis, including indirect effects of new infrastructure on the energy system.

If consistent with the objectives and criteria and coherent among themselves, the projects from the regions will be labelled “projects of European interest”.

Permit granting is another essential element that we need to tackle. That is the key for a successful integrated infrastructure. We need to increase the efficiency and transparency in the planning and permit granting process. We all agree that we cannot accept anymore that some electricity overhead line projects drag on for 10, 15 or even 20 years before a final decision is taken. We have worked a lot to understand in more detail, which exact issues are leading to delays. We have also identified many examples of good practice. For instance, the Dutch authorities have pushed the duration of the procedures down from 15 years to 6 years for certain projects. I know that subsidiarity has to be accounted for, and that the problems are not the same in federal states and states that are

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more centrally organised. Yet, there can be solutions that take these elements into account while allowing to meet the common European interest.

We could act on the procedures by proposing, for instance: • That projects of European interest are also granted necessity and priority status at national level, with all procedural consequences that this entails; • That an authority responsible for the overall coordination and facilitation of permit granting for projects of European interest is designated, without undermining the decisionmaking competence of the authorities involved; • That all interested parties in a project – the promoter, the regulatory authority, the authorities involved in the permit granting and other relevant stakeholders – agree on an appropriate permit granting schedule, which will not exceed a certain duration and serve as reference, to measure progress and delivery of a given infrastructure; • And that measures are taken at the highest level possible, if this schedule is not respected with due justification.

The first thing to do is to address the much bigger issue behind the procedures themselves, which is the acceptability of the infrastructures we want to build. We need to take along our citizens and raise awareness among them, explain the benefits, but also the costs of new projects, listen to legitimate concerns and objections of stakeholders and, most of all, be transparent at every step of the process. This is why we will propose guidelines applicable to all projects of European interest to increase transparency towards and involvement of stakeholders early on in the process.

Last but definitely not least, financing is the remaining magic word: we need to create a sound and stable regulatory and financing framework for these projects of European interest.

The investment challenge ahead of us is huge: 200 billion euro until 2020 for renewal and extension of transmission networks in electricity and gas, beyond storage and smarter grids. In electricity in particular, this means more than doubling investments compared to the last decade. We believe that we can count on existing market and regulatory conditions to make most of this investment up to 2020 happen.

But the future will not be business-as-usual. Therefore existing instruments alone will not deliver.

• Let us be clear: the rule will remain that project need to be borne by the market!

Nevertheless, in a limited number of cases, regulation alone will not suffice to do the trick and the project may not be commercially interesting. This seems to be particularly true for projects serving security of supply or solidarity purposes in gas or projects addressing loop flows in electricity. The European Council recognised this. In these cases, innovative ways of financing or direct public funding will be necessary.

Our intention is to limit this public support to those projects with the biggest EU added value and to maximize the impact we can get from these projects on the entire system.

The Commission is in the final phase of preparing a legislative proposal on energy infrastructure development for the European Union, which will contain the elements outlined and which should be adopted in October.

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TRENDS

Weaknesses in Past Shell Scenarios: How they might now be put right

By Michael Jefferson*

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S

hell’s scenarios have long been considered the gold standard of corporate scenarios, and rightly so. But the pioneering work in the 1970s was accompanied by serious weaknesses not previously circulated. Here is an insider’s view of those times.

The Early Years

Increasing uncertainties and threats faced the international oil industry from the late 1960s. In 1967 Jimmy Davidson became head of Shell’s Group Planning determined to shift the organisation away from single-line forecasting (the Unified Planning Machinery system). Four years later Pierre Wack arrived in Group Planning to initiate the multiple scenario approach, intended to help cope with uncertainties and likely alternative futures.

Initially, there was heavy reliance on the Hudson Institute’s work under Herman Kahn. However, there was little knowledge of the global oil industry in the Hudson Institute, whereas Shell in common with the other “Seven Sisters” was facing the Tehran Agreement and evidence that major oil exporters were determined to change the rules of their game. From October, 1971, senior Shell executives were warning intergovernmental bodies of threats to oil prices, upstream asset control, and oil supply security. By May, 1973, Shell had moved from a multiple scenario approach to focus on “The Energy Crisis” to come. This crisis would be exemplified by “The Rapids”.

As the events of October, 1973, were to prove, this was a wise and timely shift of focus. It marked a major step forward both in how institutions might cope with uncertain times and in corporate strategic thinking. But the more detailed workings left much to be desired.

Defects in the detail

There were three areas where the weaknesses were pronounced.

First, a lack of understanding about the resilience of cartels and the ability of OPEC-Member countries to spend or otherwise absorb their increased oil export revenues. Hitherto the focus had been on short-lived US cartels. Yet history demonstrated how some cartels in Europe had lasted, on and off, for up to centuries. Evidence needed to be provided that OPEC members would be able to absorb their additional revenues much more quickly than the conventional view was prepared to concede.

Changed perspectives on both points were eventually achieved by reference to economic history and Middle East realities.

Secondly, the macro-economic implications of “The Rapids” were pusillanimous. For example, in Europe Shell’s planners were still estimating in January, 1974, that GNP would rise 5% in 1974 over 1973 and that the inflationary consequences would be limited to annual rates of 5%.

The decision to reduce forward Real GNP changes by up to six percentage points, and raise inflation expectations by ten percentage points, was taken by a new Chief Economist. There was a hostile reaction, but he was supported at the centre. He had to ward off those who, by 1975, saw in reduced stocks evidence of the resurgence of boom conditions and need to expand fixed investment. Instead, he warned that higher oil prices were likely within five years, and “the faster an incipient boom begins and the larger it seems likely to be, the greater the

TRENDS

likelihood that higher oil prices will undermine and shorten the boom.” Mahmoud El-Gamal and Amy Myers Jaffe build their recent book: “Oil, Dollars, Debt and Crises” (2010) around the same message. As late as 1978, when even Saudi Arabia was comfortably absorbing its oil export revenues, a senior Shell executive described such a view as: “Nonsense”.

The third area was the availability and price of oil, where the initial work projected an ‘upstream government take’ of a mere US$ 3.30 per barrel ± 30 cents! The assessment of availability was a particular surprise, given Hubbert’s work in Shell Oil (from 1956). There were experienced energy analysts in Group Planning whose views were not being adequately heeded. Hans DuMoulin and his colleagues in the Oil Analysis Division gave frequent presentations on “the oil mountain” to little effect. They discussed prospects for tar sands and oil shale, as well as conventional oil. They covered other possibilities in the energy field. Some senior people took the threats very seriously (Shell’s Chairman, Sir David Barran, who described the October, 1973, crisis as “A blip, dear boy, a mere blip on the trend” to the media had discussed his real fears privately with me from 1970).

Damage was also done by the propagation of some highly unlikely yet unthreatening scenarios. As Pierre Wack used to say, even a low (subjective) probability scenario should be “multiplied by its co-efficient of seriousness” for the business. Examples of such unnecessarily diverting scenarios post-1973 were: “The New Belle Epoque” and “The Carter Miracle”. These shifted attention from the greater realities of such scenarios as a “World of Internal Contradictions”, fears of a “Relapse”, concerns about a “Producer Miscalculation”, and the coming of “Hard Times”.

California Dreamin’

Further damage was caused by a diversion from 1976 onwards into societal change and individual value shifts – overly influenced by the Stanford Research Institute.

In October, 1976, two members of the scenario group pointed out that instead of all this dreaming there remained serious threats of ‘accidents’ in the Middle East which could result in supply uncertainty and miscalculation by producers of acceptable oil prices. This we termed the “Producer Miscalculation” scenario. But, led by Pierre Wack, there was a cool response to this proposal. A scenario book issued in January, 1977, claimed this scenario was “unsustainable and unsuitable for longer term development as a planning tool”. After protests the scenario books published in May, 1977 and June, 1978, respectively, incorporated economic relapse; and the possibility of a ‘Crunch’ occurring as a result of a coup d’état in Saudi Arabia or Iran - together with a desire by OPEC to push up oil prices before North Slope Alaskan and North Sea oil hit international markets.

Looking back on those years it seems clear that brilliant though Pierre Wack was in packaging scenario ‘building-blocks’ and presenting them, he often failed to listen adequately to the advice of his close colleagues. He was too keen on travelling the world seeking out ‘remarkable people’ to absorb what those closest around him were saying. In particular, failure to take the downfall of the Shah and its consequences sufficiently into account was unfortunate.

All along there was belated recognition of forces already ‘in the pipeline’, whether in the economic, political, or energy fields. These were avoidable lapses. How might these shortfalls in an otherwise brilliant period have been overcome?

In Dr. Voudouris’s article that follows, a more inter-connected approach is proposed for confronting grave uncertainties.

Instead of focussing upon a dynamic sequence of probable or possible events, more may be gleaned from a dynamic network approach – the ACEGES approach.

* Michael Jefferson is Professor of International Business and Sustainability at London Metropolitan Business School; and Visiting Professor, University of Buckingham. He was Chief Economist of The Royal Dutch/Shell Group 1974-1979;then occupied senior planning and supply posts in Shell until 1990; and spent ten years as Deputy Secretary General, World Energy Council. He is a recipient of the Intergovernmental Panel on Climate Change’s Certificate for his contributions to their award of the Nobel Peace Prize, 2007.

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TRENDS

ADVANCING ENERGY SCENARIO ANALYSIS:

Making the right strategic decisions by beating uncertainty In times of uncertainties scenarios offer a solution. Starting with Royal Dutch Shell by the late 1960s, corporate scenarios are intended to challenge managers’ “personal microcosms” and to reflect the present and the past, before structuring the uncertainties of the future. Therefore, scenarios act as ‘early warning systems’ by focusing on the driving forces that makes a difference to decision-makers.

By Vlasios Voudouris*

C

onventionally, scenarios are built upon a dynamic sequence of events or changes. However in times of unprecedented uncertainties and increasingly complex interconnections scenarios should be built upon a dynamic network of interacting events or changes. Here we put forward the proposal called Agent-based Computational Economics of the Global Energy System (mercifully shortened to ACEGES), which is based on complexity science. ACEGES-based scenario are more robust and useful for corporate strategic planning by supporting senior managers i) to think about where their organisation may be out of alignment with the emerging business megatrends; and ii) become more adept about the ways to foster their organization and its decision-making.

The ACEGES tool: Enhancing the toolbox of corporate planning

The ACEGES decision-support tool is an agent-based model for long-term strategic planning. The ACEGES builds a virtual world in a computer and populates it with artificial intelligent agents (e.g., national oil companies, international oil companies, governments) that interact with one another and with the environment (e.g., fossil-fuel endowment). The environment is composed of the most important and uncertain driving forces and the agents represent the key players who only see a subset of the environment and can partially influence it either directly or indirectly through membership to institutions (e.g., OPEC, European Commission).

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For senior decision-makers, the ACEGES tool allows them to develop, test and elaborate the consequences of their strategies before putting them into practice. The ACEGES tool can be used for thought experiments to see if there is something that has not been previously considered – think the unthinkable.

The aim is to help decision-makers design the best strategies by means of controlled computational experiments. Although the process of developing scenarios and strategies is primarily a non-mechanistic mental process, computers can facilitate the exploration of possible developments in the future and test strategies against those potential developments by drawing upon the mental abilities of decision makers. Therefore, the ACEGES tool (see figure 1) substantially enhances the toolbox of the scenario planning and strategy teams.

Figure 1 The ACEGES decision-support tool

TRENDS

From discrete scenarios to continuous scenarios

Conventionally, scenarios attempt to portray future possibilities using the concept of ‘representative country’ and conceptualise the energy systems as consisting of several identical and isolated components. This means that based on, for example, historical oil production of key producers (e.g., the US), world oil production is arbitrarily assumed to have (more or less) the same production characteristics. These conventional scenarios attempt to assess the pathways and impact of driving forces using the concept of ‘multi pathways’ (see figure 2). Selecting specific values for the most uncertain and important driving forces does this.

Although the move to ‘multi pathways’ or ‘discrete scenarios’ was a key innovation in the 1967 when Shell’s Group Planning shifted away from single-line forecasting (called a Unified Planning Machinery), a key problem (for policymaking and long-term corporate strategy) of the discrete scenarios is that it fails to emphasise the inevitable uncertainty around the outlooks, say, of oil supply. It also fails to provide an assessment of the balance of risk between the different pathways. At a more technical level, the uncertainty and risk are reduced to finite sets of certain values.

To emphasise the inherent uncertainty of the future outlook of energy supply and to avoid oversimplifying the heterogeneity of the energy system, the ACEGES suggest the use of continuous scenarios (see figure 3) that emphasise the uncertainty and give an assessment of the balance of risk. The use of continuous scenarios avoid suggesting a degree of precision that would be spurious and are appropriate when exactitude is elusive while being approximately right is still helpful for policy making and long-term corporate strategy.

Figure 2 A discrete scenario of plausible futuresii

Figure 3 A continuous scenario of plausible futuresiii

* Vlasios Voudouris is the Deputy Director of the Centre for International Business and Sustainability at London Metropolitan Business School. Dr. Voudouris provides evidence-based services to corporations, non-profit organisations and central governments by consulting regularly with executives. For example, he contributed to the House of Commons Energy and Climate Change Committee (inquiry into The UK’s Energy Supply: Security or Independence?) based upon the insights from the ACEGES decision-support tool, which he authors.

Beating Uncertainty

Because those involved in scenario development have knowledge of, say, the global energy scene, it is important to incorporate tacit knowledge or uncertainties that is not captured in databases. For example, personal interpretations of ‘forces in the pipeline’ might suggest major discontinuities as experienced by Shell in common with the other “Seven Sisters” when facing the Tehran Agreement or a forthcoming physical security of oil flows because of above-ground events such as activities by the movement for the emancipation of the Niger Delta (MEND), hurricanes in the Gulf of Mexico and political unrest in MENA (Middle East and North Africa).

The ACEGES tool is designed to enable senior decision-makers to rehearse the future by interactively exploring the uncertain space using an ‘Exploratory Console”. This human-centred exploration of the uncertain space enables the incorporation of subject-specific expertise that cannot be easily captured by a system of equations or by compressed quantitative indicators.

This emphasizes that developing energy scenarios and assessing business strategies is primarily a non-mechanistic mental process facilitated by computers by means of controlled experiments. The ACEGES-based scenarios are ‘early warning systems’ by focusing on the driving forces that makes a difference to senior energy decision-makers.

To paraphrase Mark Buchanan , we can develop computational ‘wind tunnels’ that would allow decision makers to test the resilience of their strategies against plausible futures. Therefore, if ‘wind tunnels’ and related simulation methods work in the physical world (e.g., testing the essential aerodynamic features of scale-model bridges), then controlled computational experiments can also work to help decision makers prevent, for example, another oil crunch or anticipate local patterns of supply and demand that can generate price spikes within price spikes as exemplified by the price differential between Brent crude and West Texas Intermediate (WTI) in 2011.

We’re at the early dawn of a fundamental shift in our energy system, one that also requires a fundamental shift in our personal microcosms (particularly in relation to physical and price of oil security). To close with Charles Darwin “It is not the strongest of the species [e.g., companies] that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change”.

For information please contact vls@aceges.org

Notes: i) Wack, P., (1985), “Scenarios: Uncharted Waters Ahead”, Harvard Business Review. September-October, 1985. ii) Wood, J., Long, G., Morehouse, D., (2004). “Long-Term World Oil Supply Scenarios: The Future Is Neither As Bleak Or Rosy As Some Assert”, U.S. Energy Information Administration - EIA. iii) Voudouris, V., Stasinopoulos, D., Rigby, R. and Di Mai, C., (2011), “The ACEGES laboratory for Energy Policy: Exploring the production of crude oil”, Energy Policy. Available from: http://www.sciencedirect.com/ science/article/pii/S0301421511003867 iv) Buchanan, M., (2009), “Meltdown modelling: could agent-based computer models prevent another financial crisis?”, Nature 460 (August), 680-682.

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THE WORLD

EP Support for Taiwan-EU Trade Agreement and Taiwan’s Participation in UN Agencies lacks enthusiasm for a full dressed trade agreement with Taiwan and doesn’t give any priority to it in spite of many positive statements by the European Parliaments.

The European Parliament reaffirmed its backing for Taiwan’s participation as an observer in international organisations as the UN Framework Convention on Climate Change (UNFCCC), World Health Organisation (WHO) and International Civil Aviation Organisation (ICAO).

The European Parliament unanimously passed a resolution May 11 supporting the further strengthening of Taiwan-EU trade and economic ties.

By N. Peter Kramer, EU correspondent

T

he EP strongly backs the enhancement of Taiwan-EU economic ties and the signing of a bilateral economic agreement, the resolution stated. According to the resolution the granting of visa-free entry for Taiwanese nationals to 35 European countries will help bolster Taiwan-EU trade and investment relations, as well as people-to-people contacts. In response, the Ministry of Foreign Affairs of Taiwan (Republic of China) said it welcomes the parliament’s gesture and urges EU member states to do more in making the trade pact a reality. As insiders in Brussels know, it is the European Commission that

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A week after the EP reiterated its support for Taiwan’s participation in the WHO, it has been urged to intervene in a controversy over a leaked internal memo by WHO secretarygeneral Margaret Chan, asking it recipients to refer to Taiwan as ‘the Taiwan province of China’ instead of ‘Chinese Taipei’. The Taiwanese President Dr Ma Ying-jeou has personally requested the help of the EP to demand that ‘Chinese Taipei’ be used as the name for Taiwan at the international gathering of health ministers in the World Health Assembly (WHA), the decision making body of the WHO. Ma asked UK Tory MEP Charles Tannock, who leads the EP Friendship of Taiwan Group to help ensure Taiwan is referred to properly at the WHO. He said that Taiwan had taken part in the WHA as an observer under the name ‘Chinese Taipei’ since 2009, unlike in the past when Taiwan was only invited to technical meetings.

Taiwan’s Health Minister Chiu Wen-ta, who participated in the WHA, lodged a formal complaint with the WHO over its reference to Taiwan as a province of mainland China. ‘Describing Taiwan in such a manner is disrespectful’, Chiu said, ‘we expect the WHO to take immediate action in correcting its mistake’.

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THE WORLD

Whither GlobaliSation?

The world is headed toward greater degrees of globalization - deeper integration, wider cooperation and greater sharing of responsibilities. To govern this globalized world, writes World Trade Organization Director-General Pascal Lamy, existing institutions will need to be reformed to ensure they work together optimally.

By Pascal Lamy*

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THE WORLD

W

here is globalization headed?

This is probably the central question of our time.

As globalization transforms the world - creating new wealth, new innovations, new opportunities, new dreams -it is also creating new insecurities, new risks and challenges and new nightmares. Nations and societies seem increasingly uneasy with a world on steroids that seems out of their control, where powerlessness slowly poisons democracy.

Have we adapted to the “one world” we have created? Have our cultures, approaches, institutions and imaginations caught up? Are we trying to manage the globalized world of the 21st century with a system - and a mindset - designed for a century that has faded away?

The challenges posed by globalization are far from simple.

Global policymaking has become more complex as it has become more important. World Trade Organization (WTO) negotiations, for example, focus on cutting tariffs or limiting subsidies. But these issues are increasingly impacted - even overshadowed - by dramatically shifting patterns of trade, new centers of production and competition, new social demands and volatile financial flows and exchange rates.

In the same way, climate change negotiations are not just about the global environment but global economics as well - the way that technology, costs and growth are to be distributed and shared. Can we maintain an open trading system without a more coordinated financial system?

Can we balance the need for a sustainable planet with the need to provide billions with decent living standards? Can we do that without questioning radically the Western way of life?

These may be complex questions, but they demand answers.

At the same time, globalization is blurring the line between national and world issues, redefining our notions of space, sovereignty and identity. As we saw during the recent financial crisis, economic turbulence in one country now sends shockwaves worldwide.

And finance is not the only area where domestic issues are turning into global concerns. Countries claim the right to use national resources as they see fit. But the byproduct can be greenhouse gases or disappearing fish stocks or raw material shortages - which impact the interconnected world we share.

Many countries still view human rights as an internal concern. But this distinction is becoming harder to maintain in a world where new media, the Internet and Facebook are creating a global audience, global public opinion and, increasingly, a global sense of right and wrong.

This raises another challenge. Economic, environmental, even social issues are becoming more global, but our politics remain local. Presidents, parliamentarians and bureaucrats are answerable first and foremost to national constituencies - whose interests remain largely domestic. Voters find it hard to understand, and accept, that their jobs can be displaced because of investment decisions in China. Or that local gas prices must rise because of a civil war in Libya or futures trades in London.

It is true that popular criticism of globalization can be irrational - or worse. But it is equally true that people are in-

creasingly, and legitimately, worried about unemployment, poverty and growing inequalities, about the health of the planet, about the safety of their children’s food, about the basic rights of their fellow women and men. These are complex issues - too complex to be resolved in Internet chat groups, but too important to be ignored.

How to resolve the tension between the globalization of issues and our narrow national interest? How to avoid a “democratic deficit” - a gap between the international system and the people whose interests it is meant to serve?

This raises a final challenge: How to provide global leadership? Mobilizing collective purpose is more difficult when we no longer face one common enemy, but thousands of complex problems. The Cold War was about the clash, not just of geopolitical interests, but of big ideas - democracy against totalitarianism, freedom against state control. But the Cold War “glue” has disappeared. Big ideas risk being eclipsed by technical details. Grand alliances are weakened by petty squabbles and rivalries.

The reality is that, so far, we have largely failed to articulate a clear and compelling vision of why a new global order matters - and where the world should be headed. Half a century ago, those who designed the post-war system - the United Nations, the Bretton Woods system, the General Agreement on Tariffs and Trade (GATT) - were deeply influenced by the shared lessons of history.

All had lived through the chaos of the 1930s - when turning inwards led to economic depression, nationalism and war. All, including the defeated powers, agreed that the road to peace lay with building a new international order - and an approach to international relations that questioned the Westphalian, sacrosanct principle of sovereignty - rooted in freedom, openParliaments and parties, ness, prosperity and civil society and citizens interdependence. need to ensure that But the end of the the issues debated Cold War produced no similar search for on the global stage a new approach, a are echoed and explained narrative we could all at the grassroots. share. On the contraAnd global institutions, ry, the Soviet collapse along with their tended to reinforce representatives, need the status quo. It encouraged the belief to be held accountable. that we had reached Harnessing globalization the end of our policy is not about globalizing debates, if not “the local problems, end of history,” and but about localizing that foreign policy could take a back seat global problems. to more pressing domestic concerns.

The result is a certain complacency - or, worse, paralysis - in the face globalization: an uneasy awareness that looming challenges confront us, yet an inability to marshal the collective EUROPEANBUSINESSREVIEW

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THE WORLD

vision and leadership to tackle them. I am not sure this complacency is sustainable much longer. The profound shock of the recent financial crisis, our inability to face (let alone solve) global warming, the failure to halt nuclear proliferation, even the WTO’s stalled Doha negotiations illustrate that the status quo is no longer good enough. Events are passing us by.

So what is to be done? Replacing the G8 with the G20 was a hopeful step - an acknowledgment of today’s multipolar and interconnected world, and a tangible sign that the system can reform and adapt. But the G20 is only a beginning, only one of many pieces of global governance.

To improve the way the international system works, we must “network” global governance in a better way. This should be done not by building more institutions, but by ensuring that existing ones - the WTO, the IMF, the World Bank and especially the United Nations - work together more coherently.

To improve policy coherence, we need to build consensus.

The WTO’s huge success in breaking down economic barriers was the result, not the cause, of a widening consensus about the value of open trade under shared rules painstakingly built up over the past 60 years.

In the same way, we will only find answers Can we balance the need to the other pressfor a sustainable planet ing issues on the international agenda with the need to provide financial reform, the billions with decent environment, health, living standards? taxation, migrations Can we do that without - not by trying to imquestioning radically pose solutions (which the Western way of life? is impossible), but by constructing consensus These may be complex from the bottom up. questions, but they To achieve consensus, demand answers. we need to strengthen the system’s legitimacy by better reflecting the interests and concerns of citizens.

This means integrating global governance into democracy.

Presidents and prime ministers, congressmen and parliamentarians need to be encouraged to engage more actively in global governance and debates.

Parliaments and parties, civil society and citizens need to ensure that the issues debated on the global stage are echoed and explained at the grassroots. And global institutions, along with their representatives, need to be held accountable. Harnessing globalization is not about globalizing local problems, but about localizing global problems.

So where is the world headed? Towards more globalization, not less. Towards deeper integration, wider cooperation, an even greater sharing of responsibilities and interests.

Governing this globalized world can be messy and frustrating. But the fiction that there is an alternative is naïve and dangerous. Naïve because it ignores that we are becoming more - not less - dependent on one another. Dangerous because it risks plunging us back to our divided past - with all of its conflicts and tragedies.

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WTO’s Director - General, Pascal Lamy

* This article was adapted from Pascal Lamy’s speech, “Whither Globalization,” presented at the Council for the United States and Italy conference in Venice, on June 4, 2011.

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MANAGEMENT

Beyond expats: Better managers for emerging markets 56

EUROPEANBUSINESSREVIEW

The CEO of Manpower argues that the era of the Western expatriate manager is ending. It’s time for a local approach.

By Jeffrey A. Joerres*

F

ive years ago, the independent film Outsourced won over critics with its comic portrayal of “Todd,” a manager who is transplanted from Seattle to India to improve the performance of his company’s call center. In the film, Todd survives numerous cultural misunderstandings, including being pelted with colored powders and water balloons by villagers during a religious festival—all while helping the underperforming unit boost its productivity by 50 percent.

As amusing a movie as Outsourced is, in the years ahead the joke will be on companies that think they can rely on Western expatriates such as Todd to manage and lead operations in emerging markets. Expat managers are notoriously bad at adapting to local culture. What’s more, the presence of these foreigners often fuels a belief among local employees that there is a ceiling on their own potential in the company.

These perennial challenges are becoming more and more acute: as companies in emerging markets grow in number and in strength, they become tougher competitors for multinational companies, for which a dearth of intimate local knowledge is increasingly costly. Furthermore, the war for managerial tal-

MANAGEMENT

ent is heating up in the developing world. (One data point: my company’s latest global talent survey finds that the most severe talent gap in China occurs among the ranks of senior management.1) Companies with reputations for developing local leaders are far more likely to attract the talent they need to pursue attractive growth opportunities. These opportunities, in turn, will increasingly be found outside of major cities, further heightening the talent challenge, since the practice of attracting expats to—and sourcing local talent from—the hinterlands is uncharted territory for many multinationals.

There is a better way, one which I call pursuing a “reverse expat” strategy. A reverse expat is a local manager who is placed at the helm of a Western-based company’s emerging-market business and then rotated through some of the company’s more mature operations outside of that market. Reverse expats spend a pre-determined amount of time (often a month, though it could be more, depending on their experience level and the complexity of the business challenges involved) immersed in the company’s established operations.

Typically, this involves exposure to major functional areas such as finance, HR, and marketing, as well as experience with different business units that together can provide a robust understanding of diverse customer needs. The reverse expat shadows and role-plays with the local leaders there intensely; observes and absorbs protocols, processes, and practices; and develops a plan for quickly adapting any relevant developed-market practices to the developing country. When executed effectively, this approach dramatically accelerates the development of local managers and ultimately creates a more competitive and sustainable organization. Although not yet widespread, this practice is beginning to take hold.

• One century-old manufacturer headquartered in the United States, for example, used a reverse-expat strategy to strengthen its leadership team in China and now enjoys a market position there more lucrative than that of its core US operations.

• A multinational services company recently hired a local manager to lead its business in Vietnam and then sent her on rotations to shadow the company’s managers in China, Sweden, and the United States. The experience helped her identify, and then adapt, a branch-management reporting process she could use back in Vietnam to get better and faster feedback from colleagues in other markets. Moreover, she returned to Vietnam more confident in her ability to present complex service solutions to clients and prospects—a direct result of working closely with the company’s more seasoned managers.

• And even India-based support centers, such as the one portrayed in Outsourced, are seeing fewer expats: more and more multinationals are tapping locals to run such facilities, after sending the managers to the company’s developedmarket operations for necessary training.

These early examples are just the tip of the iceberg. Any multinational that really wants to grow in emerging markets should think hard about implementing a reverse-expat strategy of its own. Here are three suggestions for maximizing the chances of success:

Clarify expectations and objectives

To achieve the full potential of a reverse-expat program, senior executives need to make sure everyone involved understands the purpose and takes it seriously. The immersion process isn’t intended to be a pleasant field trip for the participant or simply an act of good corporate citizenship on the part of the established-market coach. It’s a crucial step toward helping to prepare for a future in which emerging markets may become a company’s most important growth engine. Companies should establish clear objectives for the program, including an action plan for the emerging-market manager upon his or her return home, checklists of issues that Western managers can use to help the effort, and performance-improvement targets that seem realistic to all parties after their time together— and that can be tracked to verify progress.

Focus on coaching

The right learning environment requires a mind-set of empathy, collaboration, and dialogue. Simply imparting functional skills is not enough. Coaches need to schedule significant chunks of time for development discussions and twoway feedback—including opportunities to listen to feedback from the visitors about what they are (and aren’t) learning so that the program can be adjusted accordingly. Also, whenever possible, managers of reverse expats should spend time talking with one another; their collective coaching experiences will almost certainly help enhance everyone’s effectiveness.

Adapt, don’t transplant

Senior executives must impress upon coaches and the visiting managers they are working with that the goal isn’t simply to transplant mature-market practices into emerging markets— these practices are just as likely to fail at the hands of a local or a traditional expatriate manager. Although visiting managers will often intuitively know this, they still need the freedom and encouragement from their home office to adapt new strategies and practices that they can take back with them. The trick, of course, is to establish ground rules that balance innovation, risk taking, and the economic fundamentals of the business. The nature of those guidelines will differ by company; thinking them through in advance is the responsibility of the senior team.

* J effrey Joerres is chairman, president, and CEO of Manpower, a leading global provider of employment services.

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entrepreneurship

Europe’s Next Business Entrepreneurs: When East Meets West

27 successful European young entrepreneurs, one from each EU member state, will meet 27 of China’s most powerful entrepreneurs, including the billionaire founder of Renren (China’s answer to Facebook), at a 5 days Summit in China organised by “Power of Youth”.

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entrepreneurship

A

t the start of 2011 a team of internationally focused leaders and entrepreneurs came together in both Brussels and Beijing to look at ways of inspiring a younger generation of successful entrepreneurs to take their enterprises global. This was part of the EU - China year of Youth and it was attended by China’s Premier Wen Jiabao.

“Power of Youth” (POY) was a major result of these events, and now a Summit of the best young entrepreneurs in Europe and China will take place in China in the autumn of 2011.

With the support of the European Commission (EC), the British Council and Tianjin local government in China (which gifted a valuable portion of land to the delegates in order to encourage the creation of new businesses in the area), “Power of Youth” will gather 54 young entrepreneurs - aged under 45 years old, together in Beijing this November for the inaugural “Power of Youth” Summit where they will have the chance to explore innovative ways to build and expand entrepreneurial businesses.

The event will provide a space where all participants can explore innovative ways of generating social and environmental capital from financially dynamic models and turn these into inspiring businesses. Additionally, the event will focus on taking these entrepreneurs existing businesses to global markets, as the European and Chinese political elite, industry leaders, top investors and policy makers are expected to attend and meet the next generation of successful entrepreneurs.

The “Power of Youth” has a strong business model and its member’s aim is to roll-out the programme, reinvesting in youth focused initiatives and expanding the initiative into India, the US and Brazil over the next four years.

Candidates

The members of POY have already launched their search for 27 equally interesting young entrepreneurs from the EU, aiming to get one entrepreneur from each EU member country. The primary criteria is for the candidate to be under 45 years old and able to prove him/herself as a successful business person with a track record of generating significant financial capital from entrepreneurial activity. On top of this track record of achievement, organisers are looking for people to show integrity and ambition to help others succeed.

The deadline for all applications is 31st August. In September the board of advisers will meet and select one candidate from each of the 27 European member states that will be matched with a further 27 from China.

If you would like to nominate yourself or someone you know then please refer to POY’s website www.power-of-youth.org

About Adam Purvis - “Power of Youth” Founder & Director

A One Young World ambassador and entrepreneurial graduate Adam’s view is that there needs to be a greater international focus on young people, entrepreneurship and a bridging of relations between the East and West.

He has created POY to give the next generation of entrepreneurs the chance to encourage a more sustainable global economy. Previously Adam led the Young Icebreakers in Scotland and delivered two high profile events with young leaders from China and the UK. Adam is a Head of Business Development at Ignite Your Brand and a Board Member at Ricefield Chinese Arts and Culture Center. He is the Edinburgh Napier University, young Alumnus of the year for his China work to date.

Sponsorship Opportunities

The organisers are currently exploring additional sponsorship opportunities. To that effort, they are approaching enterprises throughout China and Europe that have an interest in raising their profile in international markets and like to take the opportunity to work with the next big names in business.

For more information you may contact: gurjit@power-of-youth.org Tel: 00447888953332

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entrepreneurship

Entrepreneurship is never easy but as long as there are great companies being made in the world, they will find the funding to build and row. There’s a lot of capital in the world looking for a place to go.

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entrepreneurship

The Next Microsoft: Here’s a partial list...

Google in decline. Humans colonising Mars.

Electric cars in your garage. Are these investment opportunities?

Or simply outrageous ideas?

By Mrinalini Reddy*

B

oth, says Adeo Ressi, a founding member of The Funded.com, an online community of about 14,000 executives and entrepreneurs who review, rate and discuss venture capital sources worldwide. It’s Ressi’s business to keep his finger on the pulse of innovation.

“Google is already in decline,” said the Silicon Valley-based Ressi, in an interview with INSEAD Knowledge on the sidelines of the Global Entropolis conference in Singapore. “Facebook’s advertising is vastly superior today to the Google advertising system. They are losing talent to the hot start-ups in Silicon Valley. And with giant networks like Facebook and Twitter coming on to the scene without any association to Google, I think you’re going to see their supremacy threatened and in fact diminished greatly over the next five years if not sooner.”

Forecasting the next innovations

There are plenty more “big things” to come. The development of tools like Facebook Connect, a universal login courtesy of the social networking behemoth, creates a host of opportunities for companies to release products and services that accept a user’s Facebook account to log in and sign up, explained Ressi. These companies can leverage a user’s social graph to generate more opportunities in other areas like retail and publishing, for instance.

“The internet provides an infrastructure that people are using in creative and new ways,” said Ressi. “You have things like social gaming which maybe delivered through a website but is not a classic website offering. It’s more of a gaming experience but it leverages the internet and the web.”

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Innovations around the grid also featured in his list of gamechangers including “major innovations” in electric generation and transmission, portable power, advancements in new models of electric cars and breakthroughs in the mundane but key functions like electric metering that enables households to intelligently cycle through appliances and thereby reduce electric bills.

Ressi, who also runs The Founder Institute, a technology preseed incubator that identifies and nurtures entrepreneurial talent and ventures, anticipates much for online education.

“Classic education has students in classrooms learning through traditional means that could already be enhanced through games and other sorts of digital interaction,” he said. “The bandwidth and access is so widespread, you don’t even need the classroom.” Of the 192 companies that have graduated from the Founder Institute, nearly 25 percent are related to either facilitating education or online education, Ressi noted.

“There’s no shortage of money to fund the companies,” he said.

“It’s just a matter of who is going to be the white knight as the venture capital asset class declines to come in and fill the void.”

As for Mars, the 38-year old Ressi predicts that humanity will colonise Mars during his lifetime through some sort of publicprivate partnership. “It’s the single most important thing that humanity can do with the current state of technology,” he said in panel remarks at Global Entropolis. Ressi sits on the board of the X PRIZE Foundation that awarded a US$10 million prize for the first private spacecraft to successfully reach 100 kilometers in space, twice within two weeks. The Foundation’s other areas of highly-incentivised prizes include genomics, automotive efficiency and private space exploration.

“Entrepreneurship is never easy but I believe that as long as there are great companies being made in the world, they will find the funding to build and grow.”

Who will fund the new ventures?

But with as much as a 75 percent decline in venture capital funding from its glory days of 2000, what does the sector’s trends mean for entrepreneurs and new business ventures?

“There’s no question that today, the money coming in to the venture firms is at a 15-year low,” commented Ressi. “What you’re going to see over the next 18 to 24 months is a massive shrinkage in the amount of venture capital being deployed, possibly half or a quarter as much as is being deployed today.

So this is the last boom period for quite some time in venture capital. And probably by late 2011, early 2012, the amount of money being invested by that group will be negligible.”

The MoneyTree Report, a quarterly study of US venture capital investments, shows US$21.8 billion in investments for 2010, the first increase in investment levels since 2007.

US venture investments reached dizzying levels of close to US$100 billion during the dot com euphoria.

However the sector’s dire predicament does not spell doom for entrepreneurial activity - there’s a lot of capital in the world looking for a place to go.

Angel investors have filled some of the void and brought funding levels back up to about 80 percent of what they were in 2008, explained Ressi, but it’s not a “zero sum game” where one asset class equally compensates for the other. Classic private equity firms have stepped in, and, in some cases governments that want to spawn innovation and entrepreneurship in a region have come in and funded new ventures.

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* Prior to INSEAD, Mrinalini worked for McKinsey and Company in New York, developing content for the McKinsey Quarterly, and providing editorial and production support for What Matters, McKinsey’s blog initiative. She holds a master’s degree in journalism from Northwestern University and a bachelor’s degree in Economics. ** This article was written based on an interview for INSEAD Knowledge.

entrepreneurship

Will Selling Your Business Make You Happy?

Cashing out of your business may provide you with time and money, but you risk losing your sense of purpose. Here are tips for evaluating the consequences.

By John Warrillow*

B

y selling your business, you’ll have the money and time to do things that you’ve always dreamed of doing. However, the loss of purpose and social connections could leave you feeling empty. So before making such a huge decision, you need to take the time to determine what’s right for you.

For some guidance on the matter, I turned to Gretchen Rubin, the author of The New York Times bestselling book The Happiness Project; Marshall Goldsmith, the author of 30 books, including his latest about getting and keeping your “mojo”; and Chris Guillebeau, the bestselling author of The Art of

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Non-Conformity. Based on my conversations with Rubin, Goldsmith, and Guillebeau and my own personal experience of having recently sold a business, here are seven ways to evaluate whether selling your business will make you happy:

1. Decide what type of business owner you are

According to Goldsmith, there are two types of entrepreneurs: “Serial entrepreneurs go in with the plan to start and sell their business. They get squirrelly if they don’t sell it,” he says. “The other type is the founder who builds something fantastic over a very long time. He or she will find it very hard

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to let go. The second group need to ask themselves if they want to manage a mature business. In many cases, the answer is no. What they really find exciting is the innovation and creativity of a start-up. Some can make the transition, and some cannot. The reality is it is a different job. The question is, will they find the same happiness and meaning in the new job as they found in the previous job of starting up a small business? The answer is sometimes yes, often no.”

2. Think back to when you were 10 years old

“One of the biggest reasons we become unhappy is that we fall out of sync with our deepest personal values,” says Rubin. “A great way to get in touch with what really makes you happy is to recall what you enjoyed doing as a kid.” Rubin explains, “Recalling your pastimes before all of the pressures of adulthood took over gives you clues as to what will make you happy now.” Rubin points to a friend who used to love playing with dollhouses as a child, and now she is incredibly happy with her career as an interior designer. Another friend of Rubin’s spent his childhood rambling through the woods every chance he could and is now very happy with his life as a park ranger.

“Sticking with a business for many years can become a lifeavoidance strategy,” says Guillebeau. “Running your business becomes something you do because you don’t know what else you would do. It’s convenient to get up in the morning and know what you’re going to do instead of thinking about what you really want to do.”

3. Read your alumni magazine

One of Rubin’s suggestions for evaluating whether or not you’re doing what you should be doing is to flip through your alumni magazine. “Read the updates from your classmates and ask yourself if you feel envious of anyone else? If so, it may be a sign you would enjoy doing something else.

Jealousy can be a helpful emotion if you use it to give you a new direction,” she says.

6. Develop a sense of purpose

“For many business owners, their business gives them a deep sense of purpose,” says Rubin. “If you sell your company, you need to replace that with something else that makes you feel like you are contributing to the world.”

Guillebeau encourages business owners to “think about what bothers you about the world. The answer can help you identify your deepest passions and a new direction.”

7. Think about your social network

If you still want to sell your business after reflecting on what excites you, Rubin recommends you get very specific with how you will spend your time after the sale. Do you have another business you want to start? Or would you prefer to volunteer or dedicate yourself to a hobby?

Instead of saying something vague like “I’ll do more traveling,” Rubin recommends you dig deeper: Where will you travel?

Who will you go with? What will you do? How long will you stay? Do you know anyone in the place you’re going? Will you learn the language? This level of detail helps you get clarity on whether or not you would enjoy post-sale life.

Social ties make us happy, according to Rubin’s research.

If you sell your business and all of your friends are still at work during the week, you will feel lost. Cultivate a group of friends and contacts who have flexible schedules to make sure you have people to spend time with after you sell.

I can say from personal experience that Guillebeau’s, Goldsmith’s and Rubin’s advice is sage. One of my deepest personal values is the need for challenge, so when my last business was becoming too predictable, I knew it was time for me to sell it, which I did in 2008. I stayed on for a while, but left in 2009. The first few weeks as a “civilian” were unnerving.

I didn’t know what to do, and all of my friends were at work during the day.

Since then, I have started to write and get a sense of purpose from the readers I hear from. I joined a triathlon and a cycling club, so I get a lot of social interaction through sports.

It took some adjustments, but I have no regrets - other than wishing I had discovered Rubin, Goldsmith and Guillebeau a year ago.

5. Confront your demons

So, will selling your business make you happy?

4. Imagine your post-sale life in detail

Many of us use the “if I had more time” excuse to avoid doing things we don’t want to do. If you sell your business, you won’t be able to use time or money as an excuse for not losing that extra weight, finishing that renovation or volunteering. Make sure you’re comfortable ditching the comfortable excuses.

* John Warrillow is a writer, speaker, and angel investor in a number of start-up companies. He writes a blog about building a sellable company at www.BuiltToSell.com/blog EUROPEANBUSINESSREVIEW

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10,000 km rail link the Port of Antwerp to China

By N. Peter Kramer

N

o government in Belgium (just a care taking one, since more than a year) but a blossoming economy for the small country that lodges the capital of the European Union, Brussels. The second Belgian city, Antwerp, now has a direct rail link to Chongqing in China, one of the world’s biggest industrial regions!

A train trip from the Port of Antwerp, the second largest European port after Rotterdam-The Netherlands, to Chongqing is 10,000 kilometres long and will take 20 to 25 days; by ship it takes 40 days to transport cargo from Belgium to one of the major Chinese ports, after which it must still travel by train or inland ship to Chongqing. Antwerp will henceforth bundle cargo destined for inland China and send it by train, irrespective of whether the cargo comes from Europe, West Africa or even the Americas. Once in Chongqing the goods can then be distributed anywhere in China. The Port of Antwerp hopes to profile itself in this manner as a worldwide transport hub with China. The harbour presently handles 250 goods trains a day.

From the other side, the railway will serve to provide Chinese companies with European ambitions an easy access route to the West. Initially the goods trains will mostly transport chemical products and high-quality electronics to Antwerp.

Although it costs more to move good by train than by ship, for these industries the time gained is worth the increased price. “A sufficient cargo moving in both directions is a crucial factor to the line’s viability,” said operator Hupac, a Swiss transport giant that has been operating in Antwerp for years and which operates the line in Germany and Poland. The Ukraine-Russia-Mongolia section is run by Russkaya Troyka, while the Chinese section of the line is covered by Eurasia Good Transport. To limit delays, Belgian customs will exchange information with the customs services of the transit nations and China when a train departs, to avoid unnecessary delays.

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The creation of a ‘green line’ – a line with a minimum of red tape to deal with - would be a first between Europe and China.

The basic Antwerp-Chongqing line can branch off in the Far East to other destinations in Russia and China and in the West to various European cities. The new line does not compete with the maritime companies in the harbour, and will actually create additional maritime traffic, says Port of Antwerp alderman Marc Van Peel (CD&V): “Antwerp has, as the second largest European port, positioned itself for a long time as the hub of Europe, as well as of West Africa and North and South America,” he said. “This initiative will only reinforce that position.”

The idea of a rail link between Antwerp and Chongqing was born last year during a mission to China by the Antwerp Provincial Development Agency and the Antwerp Port Authority.

Antwerp is not the only European city looking to maintain close contact with the Chinese industrial centre by rail, as Deutsche Bahn recently tested a cargo train link between the megacity and Duisburg in Germany.