EBR November - December 2011 by European Business Review (EBR)

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YOUNG LEADERS

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RUSSIA - EU ENERGY POLITICS

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WHY WE NEED A EUROPE OF CULTURE

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Issue Contributors

38 Special Report: Young Leaders

Thomas Klaus Javier Solana Eugene Chausovsky Domingo Cavallo Graham Bishop Volodymyr Shkurov Stephan Richter Peter Zeihan Marco Incerti Céline Rottier Stephanie Harfensteller Simone Disegni Azzurra Giorgio Leire Ariz Socratis Ploussas William Horsley W.Brian Arthur Yuval Atsmon Max Magni Gianni Skaragas Bruno S. Frey Lasse Steiner

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

Public Relations Margarita Mertiri

Financial Consultant Theodoros Vlassopoulos

Energy Markets or Energy Governance?

Greece in light of Argentinean Experience exactly ten years ago

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08 A BRUSSEL’S VIEW Editorial, by N. Peter Kramer, editor in chief

10 OPINIONS A deepening crisis requires further integration

Energy Markets or Energy Governance? Russia-EU energy politics Greece in light of Argentinean Experience exactly ten years ago

20 EUROPEAN AFFAIRS Three scenarios for the unfolding Eurozone crisis

European integration of Ukraine The New German Dialectic

28 ECONOMY The Eurozone’s last resort

30 INTERVIEW An interview with Dr Rodi Kratsa 32 THE WORLD Cross-strait peace is key

Cover Issue: What’s wrong with technocrats?

to Taiwan’s future

34 COVER ISSUE What’s wrong with technocrats?

38 SPECIAL REPORT Young Leaders

48 ENTREPRENEURSHIP Can Entrepreneurship Lead the “NEW” Europe?

50 REVIEW Clinton: we’ve got to get America back in the future business!

52 MEDIA FREEDOM AEJ finds press freedom crumbling across eastern Europe

54 TRENDS The second economy 58 BUSINESS TRENDS China’s confident consumers

Interview Dr Rodi Kratsa: ‘Using women’s potential a necessity for economic growth in the EU’

Can Entrepreneurship Lead the “NEW” Europe?

Dacia, key player for Romania’s economy

62 TRAVEL & TOURISM Selecting World Heritage sites 64 FROM EAST TO WEST 66 LAST PAGE Why we need a Europe of Culture? For previous editions archive and up-to-date information on major topics and events you may visit our website http://www.europeanbusinessreview.eu

The Eurozone’s last resort: Monetisation

The second economy

Selecting World Heritage sites: A new proposal

A BRUSSELS VIEW

Saving the euro by more ‘Brussels’ and less democracy

by N. Peter Kramer, EU correspondent

‘Brussels’ (read the European Commission and the European Parliament) has no better recipe for the crisis than more bureaucracy, more centralisation, more technocracy with intolerable downgrading or even elimination of national democratic process as effect. Therefore, it is perhaps not such a bad idea to take Henkel’s way of thought a bit more seriously. It looks better than simply create eurobonds as a bonus for countries that never really cared about their spending and counted on the more disciplined countries to pay the bill. 8

EUROPEANBUSINESSREVIEW

t looks like the more ideas are invented to rescue the euro, the deeper the crisis becomes. In Greece and Italy prime-ministers are replaced by technocrats. Six government leaders in the eurozone have lost their job, not only in Italy and Greece but also in Ireland, Portugal, Spain and Slovenia. In the meantime, even richer euro countries are getting into troubles. Look at Germany, the strongest of all. Proposals are ready to put national parliaments under the guardianship of non-elected eurocrats in the Berlaymont building who will decide whether national budgets are okay or not. Democracy is on a slippery slope. How long will it take before ‘Brussels’ dares to understand, that the core of the euro crisis is the euro itself! It is not done in the corridors of the European institutions to show any doubt about the euro or to talk about its possible end. The euro is for eurocrats and europhiles more than a currency, it is a religion. And heretics are utterly disgraced and/or ignored! Hans-Olaf Henkel, once the President of the Bundesverband der Deutschen Industrie (BDI), the Federation of German Industries, shows noteworthy courage. In his BDI period he ‘sold’ the euro to his compatriots as a necessity for Germany’s future and worthy to replace the popular German currency, the D-Mark. Gradually he discovered that the introduction of the euro was a big mistake. Recently, Henkel wrote a book Rettet unser Geld! Deutschland wird ausverkauft – Wie der Euro-Betrug unsere Wohlstand gefärdet (Save our Money! Germany in sales – How the Euro-swindle endangered our prosperity). He doesn’t want to go back to the 17 national currencies; he advocates a split of the eurozone: a northern part with Germany, Finland, Netherlands, Aus-

tria, Slovakia, Estonia and Slovenia; and the others, the weaker euro countries, under guidance of France, in a southern zone. It doesn’t look practicable, especially because of the position of France in Henkel’s idea. On the other hand, ‘Brussels’ (read the European Commission and the European Parliament) has no better recipe for the crisis than more bureaucracy, more centralisation, more technocracy with intolerable downgrading or even elimination of national democratic process as effect. Therefore, it is perhaps not such a bad idea to take Henkel’s way of thought a bit more seriously. It looks better than simply create eurobonds as a bonus for countries that never really cared about their spending and counted on the more disciplined countries to pay the bill. Or the approach of pooling excess Eurozone debt as a euro survival route, proposed in an EP Committee. A concern that countries currently financing themselves at low rates would be reluctant to participate was not a problem for the MEP’s. ‘Now it is only about the survival of the euro’. In the meantime the same euro causes recession in the eurozone, with political and social unrest as result. Not only in Greece, Spain, Ireland, Portugal and Italy, also in the UK, France and Belgium. It is not at all surprising to read in a recently published EU social issues survey, that there has been a substantial fall in the number of people who think that the EU has a positive impact on employment and social policy. Public support for EU social policy has ‘deteriorated dramatically’. A majority of European citizens no longer believe in a positive effect for them from the ’European project’. But who cares about citizens? It is the euro that counts!

5 years www.sbctv.gr

the first financial channel in Greece

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2 Agias Lavras & Sarantaporou, 141 21 Heraklio Attica Greece | 5FM ÂĽ ÂĽ 'BY

OPINION

A deepening crisis requires further integration E

With Italy losing its ability to refinance its debt, it is curtains for Europe as we know it. For decades, the Continent’s nations have walked a constitutional tightrope, refusing to make the ultimate choice between their core sovereignty and the merging of powers necessary to construct a viable European polity. By Thomas Klau*

EUROPEANBUSINESSREVIEW

urope, so we were told, was a political construction of its own kind, “sui generis” as the Brussels jargon has it – two words of Latin to back the claim that, somehow, Europe would be uniquely empowered to escape the federalist logic that has governed the history of all other successful decentralised political entities built around different levels of public authority. The financial hurricane unleashed by the dangerous combination of poor regulation, too much debt and weak leadership terminates this useful but false conceit and brings Europe’s constitutional balancing act to an end. The one choice our nations and their leaders now have left, and not for very long, is to decide on which side of history they would prefer to fall, and on what kind of political terrain they would like to land. They can take charge and assume control, initiating a bold jump forward into a federated eurozone power, involving as its main feature some shared assumption of the eurozone’s fiscal past and therefore a shared management of its fiscal future. Or they can yield to the power of the markets, accepting an economically violent disruption of monetary union – and thereby reopening the door to the dynamics of nationalism that drove Europe’s history until 1945. Understandably, the political difficulty of going for the first option is now triggering calls on EU leaders to give up on the euro and reconcile themselves with option number two. Yet attempts to paint a comparatively benign picture of the consequences of such political passivity are hardly convincing. If the eurozone were to disintegrate as the result of a wholly avoidable process driven by financial speculation and the richer countries’ refusal to act, a vicious national blame-game would dominate Europe’s politics for a decade or more. Formally, the EU would survive; secession, a legally viable

OPINION

option now that the Lisbon Treaty is in force, would probably remain an unattractive option for most if not all EU member states on a Continent exposed to massive economic disruption and extreme political uncertainty. But it is hard to imagine how, with a self-inflicted political disaster unprecedented in 60 years of western European history and a search for culprits fuelling all kinds of resentment, Europe’s remaining policy endeavours would continue to chug along nicely. Forget Europe as a globally relevant power; European credibility on the world stage would be destroyed for a very long time indeed. Whether the single market could survive in its present form should equally be doubted. It is all too often forgotten today that monetary devaluations as an instrument to restore competitiveness gave rise to substantial economic tensions and political anger in countries not resorting to such measures – and that this anger was one the main drivers of monetary union on the European Continent. By itself, a small producer such as Greece leaving the euro zone may be economically and politically manageable. But the free trading of goods within the single market might well not survive the angry political atmosphere that would follow a larger eurozone breakup. Given the dangers of bowing to the logic of disintegration, it is encouraging that the most relevant leaders in the EU today – Germany’s Angela Merkel and Nicolas Sarkozy of France – seem at last to understand that the extraordinary problems afflicting the eurozone will soon call for extraordinary measures to overcome them. The German chancellor is finally giving speeches preparing her public opinion for politically far more ambitious crisisfighting steps than those we have seen so far; and the French president will be mindful of the fact that the most assured way of losing the presidential elections in the spring of next year is to allow France and the eurozone to be overwhelmed by events in the coming weeks and months. The recent improvement of his poll numbers suggests that the French electorate wants to see a president who confronts the crisis head on and explains what he is doing. The political analysis that suggests public opinion in most euro zone countries would be hostile to a further merger of euro zone sovereignty misses out on one essential fact: most citizens are now genuinely scared and therefore prepared to sign their leaders a generous cheque for further European political integration – if that is what it takes to stop the financial markets from running amok. Ireland’s citizens have made a name for themselves in Europe for their particular reluctance to hand more powers to Brussels. But the disintegration of the euro zone is inevitable unless more powers are given to its joint political authorities – and Ireland should have a strong interest in such powers being exercised through means other than a Franco-German directoire. It is now apparent that the notorious Irish insistence on each member state retaining its own right to a European commissioner has backfired very badly: the ensuing expansion of the number of commissioners has been a main factor behind the political decline of the institution, now marginalised by a European Council largely run by Germany and France.

Here is a lesson to be learned: Irish obstreperousness gave Ireland a splendid feeling of leverage for a few months – and has lethally weakened its best ally in Brussels. It is clearly unhealthy for the eurozone to find itself under the sway of two leaders representing only two of its nations and less than half of its citizens. It is therefore excellent news that the overwhelming majority of elected German politicians understands this and is pushing for a proper treaty-based process to give the eurozone the efficient, fair and balanced leadership it so desperately needs. The irksome Franco-German condominium over eurozone affairs has emerged only because Europe’s joint institutions were too weak to manage the crisis. For Ireland, as for Italy or Spain, accepting the transfer of new sovereign powers to the eurozone is the best way to secure its place in Europe’s political future.

* Thomas Klau is Head of the Paris Office and Senior Policy Fellow at * The writer is director of The Earth the European Council on Foreign Institute at Columbia University. Relations, which he joined at its inception in July 2007. EUROPEANBUSINESSREVIEW

OPINION

ENERGY MARKETS OR ENERGY GOVERNANCE? This month, the International Energy Agency will publish its annual report, the internationally definitive World Energy Outlook, which will confirm that we are not on the right track to reduce global warming. If the current trend in energy production continues, the earthâ&#x20AC;&#x2122;s average temperature will be more than 2oC higher in 2100 than it was in 1990, irreversibly harming the planet and conditions for human life. By Javier Solana*

EUROPEANBUSINESSREVIEW

OPINION

ther, more immediate crises are occupying the world’s attention almost completely, distracting governments and citizens alike from the energy challenges that are still before us. In the United States, there has been no energy debate at the federal level for a long time; the European Union is in the eye of a financial hurricane; and the emerging countries want to maintain rapid economic growth in order to lift millions out of poverty. In this context, the next meeting of the United Nations Framework Convention on Climate Change (UNFCCC), set for the end of November in Durban, South Africa, is passing totally unnoticed. But energy is fundamental for humanity, not only because of its potentially negative externalities, but also given its economic relevance: Western countries spend 8-10% of their GDP on energy, and developing countries spend double or triple that amount. For this reason, we need a system to govern energy. Owing mainly to its environmentally negative externalities, an unregulated energy market is not a useful governing mechanism, because it is unable to internalize the environmental costs. It has been calculated that the most contaminating energy sources would have to pay a 70% tax to reflect their negative externalities. A substantial lack of information in this field is another reason why the free market doesn’t work. Often, as with the properties of a gas reserve, for example, information is technically difficult to obtain. In addition, governments consider natural resources to be strategic and don’t release information about them. Finally, time frames related to energy are usually long: centuries for environmental effects or decades for investments to pay off. Thus, energy must be governed through a system of cooperation and regulation. That will be complicated, of course. Managing energy requires taking into account technical, political, and economic dimensions simultaneously. Energy exploration and production requires many different disciplines and technologies – eolic (wind), photovoltaic, nuclear, coal, etc. Something similar exists in the political sphere, where industrial and economic sectors are organized but divided. And the need for international coordination poses an additional difficulty. The energy sector exemplifies the inadequacy of our multilateral institutions. Energy policy is national, but the sector’s externalities are global. A radioactive leak, the rupture of an undersea oil well and, above all, CO2 emissions do not threaten just one country. On the other hand, energy’s benefits adhere to specific agents, be they consumers, producers, or sellers. This imbalance creates a clear incentive for free riders: they benefit, while the rest of us pay. Moreover, global governance is necessary because energy supply and demand around the world are disconnected. Few countries have a neutral energy balance. Oil, the world’s main source of energy, is indicative in this regard. The Middle East has a 266% commercial surplus of oil, and the US a 65% deficit. This geographical imbalance requires an ordered system of trade, clear regulations, and a well-structured global market. Today, however, opaque bilateral agreements abound, and very different environmental requirements and contradictory subsidies coexist.

As a result, our global energy institutions are woefully inadequate. The International Energy Agency admits only OECD countries, which excludes China, the largest energy consumer. The intergovernmental Energy Charter Treaty, which obliges signatories to apply impartial market rules to energy products and services, has not been signed by the US, the world’s second-largest energy consumer, or ratified by Russia, the world’s largest oil producer. World Trade Organization agreements apply to energy only tangentially, because energy is considered an exhaustible natural resource, and in many cases is thus exempt from the rules. Moreover, non-Western countries – which include big consumers like China and India, and the largest producers (the Gulf states and Russia) – don’t trust the institutional system created mainly by the West. The emerging countries rightly argue that the West is responsible for today’s climate-change problem. From the Industrial Revolution until very recently, the West’s development was free of any environmental restrictions, and the emerging countries believe that they should not have to bear the adjustment cost. Likewise, producing countries oppose giving up one of the few bases of power they have. The solution must include a new institution. Perhaps, for a start, it would be a good idea for the world’s largest emitters to negotiate through the G-20, or something like it, for energy. Later, negotiations could be opened up to all states, placing them under the ambit of the UNFCCC, for example. The focus of the negotiations must be comprehensive, resulting in emission limits and financial and technological support for energy sources that are less harmful to the environment. Limiting emissions would impose costs disproportionately on oil-exporting countries, and on consumers in emerging countries, where technology is less sophisticated. At the UNFCCC’s meeting in Durban, all countries – developed, emerging, with or without natural resources – must join together to ensure that when the other crises currently roiling the world are finally resolved, the biggest crisis of all does not catch us off guard.

* Javier Solana is the former High Representative for Foreign Affairs and Common Security Policy of the European Union and former Secretary General of NATO EUROPEANBUSINESSREVIEW

OPINION

Russia-EU energy politics “R

The European Union’s plans to break up energy monopolies pose a direct threat to Russia’s own hopes to maintain and enlarge its domination of energy markets in several EU member states, says Eugene Chausovsky. By Eugene Chausovsky*

EUROPEANBUSINESSREVIEW

ussian Energy Minister Sergei Shmatko said 15 November that Russia and the EU will soon hold an energy dialogue to discuss the EU’s Third Energy Package. Given all of the recent developments related to the EU’s Third Energy Package, which seeks to unbundle the sales, production and transportation of energy in EU countries, this will be a crucial meeting to watch to gauge the implications for Europe’s energy policy. Russia has long wanted to boost its energy presence in Europe and Russia’s plans to that effect have included building relationships with key European countries like Germany and Italy in the energy and economic sphere. This is something that Russia has been working on for many years as the recent debut of the Nord Stream natural gas pipeline to Germany shows. But the financial crisis in Europe has opened a larger window of opportunity for Russia. Russia has been picking up energy assets in several Western European countries and going after their subsidiaries in Central Europe as well. But there is one major impediment to Russia’s energy manoeuvrings in Europe - and that is the EU’s Third Energy Package. While this directive is designed to promote competition and prevent the monopolisation of energy industries in EU countries, this has a direct impact on Russia. That is because in several EU countries, and particularly the Baltic states, Russia is responsible for both the production and the transportation of natural gas. So its interests would directly be threatened by this directive. There have already been several countries that have actively tried to enforce this directive on Russia, such as Lithuania, while other countries have started to implement the process legally, like Slovakia. Russia has seen the writing on the wall and has called for amendments to be made to this Third Energy Package, something that Russia hopes to address in this dialogue with the EU, which could happen in late November or early December. By calling for a dialogue Russia is hoping that it can block or at least slow down this unbundling process and continue to boost its influence throughout the region. The upcoming dialogue between the EU and Russia will therefore be a key opportunity to gauge the energy politics of wider Europe.”

* Eugene Chausovsky is an analyst covering Eurasia for Stratfor, a US-based company providing intelligence and commentary on global political and economic developments

OPINION

Greece in light of Argentinean Experience exactly ten years ago Greece has been overspending during many years and excessive increases in labor costs have significantly reduced competiveness. As a consequence two costly adjustments are inevitable, whatever the circumstances and whatever the government: Greece needs to adjust down its domestic consumption, both, public and private and labor costs in productivity units should decline to increase profitability in the production of tradable goods. By Domingo Cavallo*

EUROPEANBUSINESSREVIEW

To implement only one of the adjustments will not be enough

If you just do the first part of the adjustment, it may happen that as consumption goes down, employment and production also go down. If that happens, eliminating the current account deficit may take a very long time. That is why, some economists, particularly Americans, propose Greece to abandon the Euro, reintroduce the Drachma and let the New Drachma suffer a large devaluation. They argue that the devaluation of the New Drachma will make the cut in spending unnecessary and a subsequent boost of exports will immediately reinitiate growth. They have been using Argentina after 2001 as an example of the supposedly beneficial effects of a large devaluation.

The experience of Argentina 2001 is relevant

I have heard some people arguing that comparing Greece today with Argentina in 2001 is inappropriate because Argentina, after 10 years of a Peso â&#x20AC;&#x201C;Dollar pegging still conserved the Peso and, therefore, it was possible to devalue the local currency without having to change the outstanding financial contracts. That opinion overlooks the fact that in Argentina more than 90 % of financial transactions and contracts were denominated not in Pesos but in US dollars. In practice Argentina in 2001 had the Dollar as its main currency the same way as Greece has

OPINION

the Euro. For Argentina to devalue the Peso as a solution to the crisis it was necessary first to transform all contracts written under Argentinean law from Dollars into Pesos and, simultaneously, to default all debt contracts written under foreign law. What happened in Argentina in the New Year Eve of 2002 was exactly what the proposers of a New Drachma are suggesting Greece should do. So the comparison between Greece 2011 and Argentina 2001 is, in this sense, correct. But it is absolute incorrect to argue that the Argentinean “Pesofication” demonstrates that a “Drachmization” of the Greek economy would solve the crisis with less suffering off the people and better prospects for future growth than staying in the Euro Zone.

plete elimination of taxes that had prevented investment and technological advance in the most productive sectors of the Argentine Economy: Agriculture and Agribusiness. The recession that had started in 2009 was the result of external shocks that affected Argentine competitiveness in spite of the significant productivity increase her economy displayed in the previous years. By 2001 the Dollar had became extremely strong and commodity prices were down to their lowest levels in a century. The interest rate set by the Fed was very high (it had reached 6 % in 2000), The Brazilian Real had suffered a large devaluation in early 1999 and the Euro had depreciated during 1999 to 2001 in relation to the Dollar. From 1.17 Dollars per Euro The impact effect of exiting the Dollar peg was in January 1999, a Euro could be purchased with just 82 cents of a Dollar in the mid of 2001. As Brazil and Europe had been extremely costly In Argentina, the Devaluation of the Peso following the “Pe- the main export markets for Argentina, all this events genersofication” was 66 %: that is, 1 Peso devalued from 1 Dollar ated a recession that lasted four consecutive years. to 33 cents of a Dollar, or to put it the other way around, the There had been some fiscal excesses, particular those of the price of the Dollar jump up from 1Peso to 3 Pesos. provinces that had financed their deficits borrowing from the The impact of this devaluation was terrible: GDP declined local banks at floating rates. But, in general, Argentina had had an additional 5%, adding up to a 17 % decline for the four a relatively low fiscal deficit (2 % on average but never higher recession years, unemployment increased from 18 % in Oc- than 5 % of GDP in a single year) and Public Debt was around tober 2001 to 24 % in May 2002, Exports declined in 2002 50% of GDP. Even though Argentina had had current account in comparison with 2001 and the inflation rate went up from deficits as high as 5 % of GDP during the years of significant 0 to 40 % the year of the devaluation. Real Wages and pen- increase in foreign direct investment and large capital inflows, sions declined 30 %. by 2001 recession had produced already Of course, the devaluation produced a Actually what Greece and the a complete adjustment in the current very large fiscal adjustment, much largaccount and the current account deficit other Countries of the periphery er than the one that would have been was less than 1 % of GDP. necessary if Argentina had preserved its of the Eurozone should demand The fast growth of Argentina since monetary regime. That adjustment did is a more realistic monetary 2003 was the result of drastic changes not follow any priority setting or equity policy of the ECB and more fiscal in the external situation: by mid 2002 consideration but was simply the imposi- expansion in Germany. That the Dollar started to weaken, the intion of the jump in the prices of tradable would bring the valuation of the terest rate set by the Fed was rapidly goods that provoked a drastic reduction adjusted down and commodity prices in the real value of the salaries of public Euro closer to that of the Dollar. boomed. Just to give an example, the employees and retirees. The reduction in price of soy, the main agriculture exthe fiscal deficits, on a cash bases, came from the suspension of port of Argentina, jumped up from 120 dollars per ton to interest payments on the debt, but the interest arrears added up 600 dollars per ton. As the economy had a well capitalized and very efficient agrito the debt that would have to be renegotiated in the future. culture sector, she could take advantage very rapidly of this imBut, how is that starting in 2003 Argentina provement in the terms of trade, and in spite of the high taxes on agricultural exports imposed by the government, agriculture enjoyed rapid growth? If the devaluation had these very negative impact effects, how and agribusiness flourished in an impressive way. The additional it is that since 2003 Argentina’s GDP has grown more than income generated in the most efficient activities of the Argentine 60 % and unemployment has declined to 7 % in 2011? Economy spilled over the rest of the economy and most sectors The explanation is simple: could expand production using their unutilized capacity. Argentina, in 2001, had a very large unutilized capacity in well capitalized energy, transport, agricultural and industrial If Argentina had continued using the Dollar sectors. During the years of the convertibility (1991-2001) there would have been growth without inflation after defeating hyperinflation the Argentinean government The same would have happened if Argentina had not devalused the popular support it gained from its initial success ued the Peso in 2002, with the big advantage, in that case, that to introduce pro-growth market reforms. The economy was Inflation would have not been reintroduced in the economy opened up to foreign trade and investment, many professions and the government would not have created the big distorthat had been heavily protected by regulations were liberal- tions that have plagued the Argentine economy since 2002. ized, the state owned companies were privatized after the Just to give some examples: organization of competitive markets and there was a com- Argentina is now suffering 25 % annual inflation, The Price EUROPEANBUSINESSREVIEW

OPINION

Actually what Greece and the other Countries of the periphery of the Eurozone should demand is a more realistic monetary policy of the ECB and more fiscal expansion in Germany. That would bring the valuation of the Euro closer to that of the Dollar. In my opinion Europe is underestimating the negative consequences for her economy of the extremely Strong Euro policies of the second part of the 2000â&#x20AC;&#x2122;s, not very different from the Strong Dollar policies of the last part of the 90â&#x20AC;&#x2122;s in the US.

Greece shouldâ&#x20AC;Ś

of the Dollar in the official market is 4.2 Pesos and everybody expects a new large devaluation. During the last four years capital flight has amounted to 80 billion dollars and during the current month it has been already 5 billion dollars. Price controls on public utility rates (particularly energy and transportation) discouraged investment and obliged the government to grant very high subsidies. The subsidies have recreated a fiscal deficit in spite of the high increase in tax revenues that came from the improved terms of trade. Immediately after the recent election, the government announced very large public utility rate increases to reduce the subsidies, and, in the short run, these increases are feeding higher inflationary expectations. Many other price controls, like those applied to domestic sales of beef, accompanied by bans to export of beef, have produced a boomerang effect. Production went down and the market price of beef in Argentina is nowadays much higher than in the rest of the world.

If Greece abandoned the Eurozone would only aggravate the social and economic costs

If Greece were to abandon the Eurozone, her economy will suffer all the problems that are clearly seen in the Argentine economy since 2002 and will not get the growth that Argentina enjoyed since 2003. For the simple reasons that Greece does not have significant unutilized capacity in her economy, the introduction of the Euro was not accompanied by the king of pro growth market reforms that generated a significant increase in productivity in Argentina, and there is no reason to expect a significant increase in the foreign terms of trade will benefit her economy. Actually, the relevant currency depreciation that would bring benefits to Greece in terms of increased foreign demand for her exports is that of the Euro in relation to the Dollar but not that of the Drachma in relation to the Euro. With the recessionary policies that are being applied in Europe, including Germany, the increased demand for Greek exports will not come from the Eurozone, but from the Rest of the World.

EUROPEANBUSINESSREVIEW

Having devoted so many minutes to say what Greece should not do, I want to devote the last minutes of my speech to explain what, in my opinion, Greece should do: It is very important that Greece does produce a significant fiscal adjustment and eliminates the fiscal deficit in a period not longer than two to three years. But this fiscal adjustment should be implemented in an orderly way, with enough discussion in Parliament and civil society, as to reassure that the Greek People realizes that the needed adjustment follows reasonable priorities and pursue social justice. Expenditure should be cut whenever it generates incentives to continue feeding inefficiencies and corruption, but not when they are required to provide high quality public good and services. Tax Revenues should be increased by eliminating differential treatments and loopholes in the Value Added and Income taxes and facilitate the fight against tax evasion. Some taxes should be drastically reduced, like the social security contributions that increase the cost of labor in the formal economy without increasing the take home income of the workers. These tax reductions should be part of an integral plan of pro-growth market reforms. Of course, renewed growth will greatly increase the possibility of rising tax revenues in spite of these tax rate reductions. Deregulation of heavily protected sectors and privatization of state owned companies should be decided as ingredients of the pro-growth market reforms and not simply as a way to repay debts. The Argentine experience demonstrates that the privatizations that contribute to increase efficient investment are those that are implemented after markets have been opened to competition or, if technology does not allow competition, clear regulations are established to put caps in monopoly pricing practices. The risk of privatizing under the pressure of creditors is that they may prefer the privatization of monopolies, as to generate higher privatization proceeds. But that would be a big mistake if then the customers and users of the services provided by the privatized companies are set using monopoly power. This policy would not contribute to increase competitiveness and efficiency.

Greece should drastically reduce employers Social Security Contributions

I want to reinforce my suggestion to drastically reduce Social Security Contributions by employers. I argued strongly, already more than a year ago, on the need to drastically reduce the social security contributions and

OPINION

other payroll taxes paid by employers of the formal economy. While in Greece Social Security contributions represent 34% of total fiscal revenues (very similar to the figures of Portugal and Spain) in most countries, that proportion ranks from 0% ( in Australia ) to 21.2 % in the US. In countries of the EU like Iceland, Denmark and Ireland, the proportion of Social Security Contributions to total Tax Revenues are below 20 %. In Denmark that proportion is as low as 3.3%. Greece could get the same effect on unit labor costs in relation to the price of tradable goods that would arise from devaluation, by reducing the rate of social security contributions and increasing the effective VAT in compensation. If Greece introduces this tax reform she will be shifting the incidence of taxes from the payroll to consumption and, therefore, would be producing the same effect of currency devaluation, without abandoning the Euro. The substitution of VAT for social security contributions could be of varied dimension. In a soft movement it could try to jump to the rates of the UK, which are similar to those that prevail in the US. Or it could go to the extreme of completely eliminating the Social Security Contributions, as it is the case in Australia.

But for all these measures to produce results the Greece has to get sufficient debt relief

None of these recommendations will have a chance to be useful unless the debt and banking crisis is not solved in a very short period of time. Fortunately the long due debt relief and bank recapitalization measures have been included in the October 27 program. In this sense it is urgent that the debt relief is implemented and New Greek bonds are exchanged for the outstanding bonds. It is also urgent that Greek banks are recapitalized as to remove any risk of insolvency. Two recommendations seem to me crucial in relation to these two urgencies: The New bonds, in addition to produce a 50 % haircut in the principal, should convey initial coupons for interest not higher than 2 % per anon during a five years period, and the interest rate should be adjustable up for 50 % of annual GDP growth whenever the rate of GDP growth increases above 2 % per anon during a period of 5 years, or something equivalent in terms of a GDP extra coupon for the bonds. Similar interest rates should be applied by the ECB and the EFSF for their loans to Greece. In order to avoid a significant Net Present value devaluation of the New Bonds, the ECB should make it clear that the New Greek Bonds will be eligible for rediscount in the same condition as the triple A bonds of other Eurozone countries. If the renegotiation of the debt does not satisfy these conditions, the markets will probably consider that the debt problem has not been solved in a sustainable way, and the sense of crisis will continue impeding growth. In recapitalizing the Greek Banks, the EFSF should purchase preferred stocks as to assure that the recapitalization will not transform the banks into state owned and managed companies. If the government will be actively involved in reorganizing the public finances, it would be dangerous to make it also responsible for managing the banks that will be crucial in recreating trust in efficient financial management.

Do not give to the EU, the IMF and the ECB any formal excuse to unplug Greece from the system...

One last word on the comparison between Greece 2011 and Argentina 2001: Argentina in 2001 attempted to use the strategy I am now suggesting to Greece but she could not avoid exiting the Dollar Zone and suffering a large devaluation. You may legitimately ask why did Argentina fail and what is the key for Greece to succeed. Argentina failed because the IMF, that had granted some support (although infinitely smaller than the one the Troika is providing to Greece), decided to withdraw the support in the middle of the complex process of implementing debt restructuring. The IMF decided that it was better to push Argentina into formal default and de-dollarization, what the markets had been predicting since the mid of 2001. And the very indebted industrialists and governors were happy to have a way to inflate away their debts, even though most of the middle class people would lose their life savings. The key for Greece to succeed is to reassure the support of Europe and the IMF. If that support were withdrawn Greece will face no alternative but to do what Argentina did in the New Year Eve of 2002. And that would be a truly Greek Tragedy. Do not give Europe and the IMF any excuse to behave in relation to Greece as the IMF did in December 2001 in relation to Argentina.

* Domingo Cavallo is Chairman of DFC Associates, LLC, a consultancy firm and President of Accion por la Republica, the political party he created in Argentina in 1977. He is also a Member of the Group of Thirty. In Argentina he was Minister of Economy (1991-1996 and 2001) and Minister of Foreign Affairs (19891991). He was elected National Congressman in two opportunities (1987-1991 and1997-2001). He also served as Chairman of the Central Bank of Argentina in 1982. He was Professor of Economics in the National University of Cordoba, Visiting Professor of Economics at the Stern Business School at NYU, and Robert F. Kennedy Visiting professor of Latin American Studies at Harvard University. He has received honorary doctorates from the University of Bologne, the Université Paris 1 Panthéon-Sorbonne, the University of Turin, the Ben Gurion University and the Genoa University. He is also Correspondent Member of the Royal Academy of Moral and Political Sciences of Spain. Mr. Cavallo is the author of several books, including Economia en Tiempos de Crisis, La Argentina Que Pudo Ser, El Desafio Federal, El Peso de la Verdad , Pasion por Crear and Estanflacion. Mr. Cavallo holds a Ph.D. from Harvard University and a doctorate in Economics from Cordoba National University. ** The above text is the keynote speech by Domingo Cavallo at the CEO Summit, “Doing More on Less”, Athens, November 22, 2011 organised by the Hellenic Management Association (HMA). EUROPEANBUSINESSREVIEW

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scenarios for the unfolding Eurozone crisis

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To try and predict the twists and turns of the eurozone debt crisis is very risky, says Graham Bishop. But he outlines three possible scenarios, ranging from defaults that might cripple the EU itself to a federal eurozone that could become a model of financial probity. By Graham Bishop*

n these uncertain times, have European politicians any hope of regaining control of the eurozone crisis? Probably yes, if they are bold and visionary. Forecasting events is very risky, but scenario analysis can be a useful technique for mapping possible outcomes. The European Commission has proposed six measures to enable the eurozone states to encourage – and at worst force – “risky” states to improve their competitiveness. But the European Central Bank (ECB) has criticised these proposals as flawed because there is insufficient “automaticity” in the enforcement and sanctioning process. Nonetheless, when the European Council met in late March it endorsed the eurozone’s “Pact for the Euro”, which it was boldly stated marks a “new quality of economic policy co-ordination in the euro area”. The period up to the end of June will see these statements tested by the willingness of euro area governments to agree to the operational details of this co-ordination, and to abide by the results. The political backlash in Greece, Ireland and Portugal against the measures designed to improve their competitiveness already raises questions about the political will to stay the course. Critically, the new treaty changes that will create the European Stability Mechanism (ESM) must be agreed by all states. It’s worth briefly charting events so far in 2011. The initial issue of the European Financial Stability Facility (EFSF) was well received, as investors only want to fund risky states when they have guarantees from other eurozone members, so that there is only a minimum risk of partial defaults (haircuts).

And the emergency meeting of eurozone heads of government grudgingly agreed to increase the size of the EFSF/ESM. But after what was in effect the failure of its debt auction in early April, Portugal realised that the future costs were unsustainable. The new European Banking Authority has started the 2011 round of bank stress tests, but stated that banks do not need to make provisions against eurozone government bonds held in their ‘banking book’. However, investors seem to have suspended judgement for the moment as they have been promised full disclosure. So the question now is whether investors will be able to add back their own assumptions of losses and test the capital strength of the banking system. Will this reveal the fatal flaw in the process? Eurozone governments have committed to preparing contingency plans for the results of the formal tests, but will they be ready and able to deal with the market’s assessment of the real situation about the solvency of banks where the market has now priced in the strong probability of defaults that will impinge on “banking book” debt holdings, and thus the solvency of the banks that hold the debt? There is also the problem of banks that face a failure of a major counter-party in the inter-bank or derivatives market. All this suggests three scenarios for the future of the eurozone during the next two or three years. Looking at these may be the best mechanism to illustrate the choices that must be made, and each simply lays out the developments that flow logically after each choice: EUROPEANBUSINESSREVIEW

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given the losses on the supposedly risk-free bonds that they were obliged to purchase by regulatory requirements, as well as private sector loans that now default. Some eurozone members then leave the European Union so as to recreate their own currencies, and do so with large and overtly competitive devaluations. In the remaining eurozone states, public fury at this betrayal by their partners quickly leads to a breakdown of the single market and any sense of political unity. The EU ceases to operate as an organised political system.

Scenario 3:

A strong, federal ‘eurozone’ emerges. The European Council has its now-normal sub-meeting of eurozone members and concludes that it is indeed in their best Scenario 1: interest to avoid a collapse of the euro and that they have no Inflationary debt spiral. In this, finance ministers (ECOFIN) economic, political or historical option except to “do whatever eviscerate the Commission’s already weak economic govern- is required”. So it lays down that ECOFIN and the European ance proposals, and so make it clear to investors that collec- Parliament must move in parallel with an EFSF expansion that tively the eurozone’s governments are unwilling or unable to matches the ESM plans. They agree an economic governance enforce serious fiscal discipline. This weakness may become package that goes well beyond the Commission proposals, givall too apparent from the probable ing certainty to the ‘bond market vigistand-off with the European Parlialantes’ that this type of fiscal crisis will So the question now is whether ment and the ECB. not occur again because the eurozone Capital then flees from the eurozone investors will be able to add back is genuinely in charge. Flanking policy and short and long-term interest rates their own assumptions of losses measures on financial regulation ensure rise significantly in an attempt to prethat the banking system cannot become and test the capital strength vent the import of rising inflation as the so over-exposed again. euro weakens. Investors quickly realise of the banking system. The ‘competitiveness programmes’ that the extra interest costs will add Will this reveal the fatal flaw must be made rigorous enough to meet another 2–3 % of GDP on to already- in the process? any requirement of tough conditionalistrained budget deficits, and that a debt ty for EFSF loans, and are acceptable to spiral is now locked in. the IMF. The size of the EFSF will be increased so that under any plausible scenario it can disburse Scenario 2: €1 trillion in cash. Under the existing system of guarantees Default. In this, ECOFIN and the European Parliament and cash collateral, that could require a virtual quadrupling eventually agree an economic governance package that goes of the nominal size. (Governments had realised that the acwell beyond the Commission’s proposals, and also satisfies tual banking liabilities that could fall on them under Scenario the ECB’s demands for automaticity. Yet despite the repeated 2 might be much larger – perhaps even twice the sum they commitments by all eurozone members since May 2010, one need to be able to disburse.) of the risky states holds out against the tough proposals and Access to the EFSF/ESM is opened to any eurozone state that penal interest rates, and is then voted down and subjected to has had its economic policies approves by the Eurogroup – sanctions, which it ignores. because that implies it already meets any future “tough conAs a result, investors decline to fund new loans to it, and so it ditionality” test. This would require a further change in the declares default. Because it could be in primary surplus within treaty revision now being proposed. a couple of years, it would only need new loans to pay interest The EFSF’s own funding costs will be passed through to to the market at that stage. But the dominos start fall in other the borrowers as an act of solidarity, rather than the current risky states. Aghast, the eurozone heads of government contem- meanness. That will encourage risky states to request EFSF plate the domino effects and consider the BIS data for lending funding at an early stage rather than waiting until disaster is by their banks. The leaders of Austria, France, Germany and at hand because it will be cheaper and without stigma as the Netherlands find that their banks have made 23% (June 2010) state will already have voluntarily agreed to the terms as part of their loans to borrowers in the six “risky” states. of its programme. As it is, the reduction agreed in April for These potential losses vastly exceed their banks’ capital – as Greek interest rates suggests common-sense and solidarity are demonstrated by the June 2011 stress tests. Widespread na- beginning to appear. tionalisation of many banks in these member states ensues, The eurozone governments also mount a major education

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programme to inform their electors of the unpalatable truth of the situation, with the result that electors understand this is the best available outcome. “Risky government” bonds then begin to rally sharply as fears of imminent default dissipate. And the decisions of the Eurozone Council meeting make it clear that the EFSF/ESM have effectively become a joint and several guarantee mechanism for those eurozone members that are resolving their own fiscal and competitiveness problems, together with tough collective oversight to confirm that the ‘strong conditionality’ is being followed through. The eurozone meanwhile becomes somewhat introverted in order to concentrate on the pressing economic needs of its 330m citizens. Several non-eurozone states accept the invitation to be involved. But there isn’t time to consider the interests of nonmembers – such as 60m Britons – who still make it plain that they want to have nothing to do with the whole process. After a year or two, the effects of the drive to enhance the eurozone’s competitiveness begin to come through, and its members’ public finances improve sharply. Any bonds of the risky states still outstanding seem very attractive – to those

investors able to buy them. The potential wave of defaults is likely to have precipitated a further round of regulatory reform to ensure that financial institutions such as banks will find it difficult to buy bonds of any but the soundest states. That will be a major constraint on finance ministers ever getting into such debts again. Risk premia will dwindle steadily as public finances improve and the euro rises, reducing the risk of importing inflation. No EFSF guarantees are actually called as markets are once again willing to fund all eurozone members. But most states continue to find it cheaper to fund themselves via the EFSF as it has also built up a critical mass as one of the world’s

most liquid bond markets. The credit quality is now seen as outstanding, given the eurozone’s intrusive institutionalised oversight of competitiveness and fiscal probity. International investors recognise that this policy constraint is more effective in the eurozone than in alternative global bond markets. At this stage, the eurozone will have emerged from the financial crisis as a political federation – loose in some respects, but with tightly centralised economic governance at its heart. Its future fiscal rectitude could be enforced by adoption of three ideas for automatic sanctions: 1. Build on the emerging political union between eurozone members and modify the EFSF (and its successor) to make it the preferred borrowing route for most members. 2. That would be a huge carrot, but there must also be a stick that would be virtually automatic, and that can be achieved by inserting into the Definitions Article of the relevant European Commission economic governance proposals the following text: “Special access to financial institutions should mean special treatment for the borrowings of a member state held by any financial institution subject to EU regulations. This treatment is in respect of capital requirements, eligibility as liquid assets and absence of prohibition on concentration of asset holdings. Such special access shall only be available to member states that are permitted to borrow from the European Financial Stability Facility (and its successor), or would be so permitted if they applied.” 3. Add an Article to the sanctions sections of the relevant enforcement Regulations that reads: “Any Eurozone Member State subject to sanctions is ineligible to borrow from the European Financial Stability Facility (and its successor) and therefore loses its special access to financial institutions.”

* Graham Bishop is a London-based European financial markets analyst and author of “The EU Fiscal Crisis: Forcing Eurozone Political Union in 2011?” EUROPEANBUSINESSREVIEW

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European integration of Ukraine In the sphere of foreign policy, Ukraine has chosen strategic course towards European integration, which remains unchanged and the absolute priority of both domestic and foreign policy of Ukraine. The idea of European integration unites the Ukrainian society. A key politicians and the majority of our country support this policy. European perspective has a specific pragmatic dimension for our country. Modernization processes in Ukraine are closely related to EU integration course of the country. Ukraine performs many commitments in accordance with the provisions of the Association Agreement that actually meet the obligations of the candidate countries for EU membership and require significant financing of the relevant transformations. By Ambassador of Ukraine to the Hellenic Republic H.E. Mr. Volodymyr Shkurov

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The main priority of Ukraineâ&#x20AC;&#x2122;s Foreign policy T

herefore, in our relations with the EU we are working on the completion of the following processes: the Association Agreement, Ukraine-EU Free Trade Zone, and Action Plan for a visa free regime for short trips of citizens of Ukraine to the EU. We stand for granting Ukraine a clear membership perspective and its consolidation in the future Association Agreement. In our opinion, this corresponds with the importance of Ukraineâ&#x20AC;&#x2122;s accession to the EU for the EU itself, which will make both Ukraine and Europe more stable and will give them new opportunities for development. Ukraine has every reason to believe in it, especially taking into consideration the positive economic trends: for the period January-October 2011 the increase of GDP was equal 5,5%, although we expect that by the end of 2011 it will grow up to 6%; the unemployment rate decreased for 1/4 during 9 months of 2011 which is equivalent to 1,5% of the working age population of the country. The Association Agreement and a deep and comprehensive free trade area, as part of this Agreement will be an important step in the rapprochement with Ukraine as a country that shares common values and a European identity. Ukrainian leadership looks forward to finalizing negotiations on the Ukraine-EU Association Agreement by the end of 2011. The Association Agreement between EU and Ukraine should determine the future of our country and whole continent for at least next 10 years. We believe this agreement will serve as a base for our eventual membership in the EU, which will enable Ukraine to complete its transformation to a fully democratic, market-oriented, stable state.

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On October 25, 2011 during the plenary session in the framework of 20th round of talks between Ukraine and the EU on the Association Agreement in Kiev, the discussion of some unsettled provisions of the Agreement was continued, in particular on the preamble, political dialogue, justice, freedom and security as well as institutional, general and final provisions. As a result of negotiations a number of provisions of the Agreement were agreed, including the removal of the reference to “long term prospective” of visa-free regime for citizens of Ukraine. The talks confirmed the mutual willingness of the parties to ensure the objective of future Agreement and to complete negotiations in the shortest possible time. Implementation of the Action Plan on Visa Liberalisation, which was obtained by Ukraine in 2010, is a top priority in the Ukraine-EU relations. We have completed implementation of the majority of criteria envisaged by the first phase of the Action Plan. In general, we adopted necessary legislative framework within the first phase of the Action Plan. In regard with the realization of the EU-Ukraine Visa Liberalization Action Plan, on October 24-28, 2011 two EU expert missions visited Ukraine in order to assess compliance with EU standards of the results, achieved by our state in implementing measures within the Block 2 “Migration management” and the Block 3 “Public order and security”. As a result of the work in Ukraine, the EU experts have noted a significant progress achieved by Ukraine in implementing relevant criteria of the Action Plan. At the same time, they have pointed out a number of spheres in which the work should still be completed. Detailed recommendations on the mentioned issues will be provided by the EU experts to the Ukrainian side and the interested divisions of the European Commission. We are glad that abovementioned efforts and other measures taken by Ukraine were assessed positively in the First progress report of the implementation by our state of the first phase of the Action Plan. Till the end of this year the European Commission will prepare the second official assessment of Ukraine’s progress in implementation of the First (legislative) phase of the Visa Liberalization Action Plan. Ukraine has successfully completed almost 3 years of negotiations on a Free Trade Agreement with the EU. As a result of the negotiations which took place in Brussels on October 19-20, 2011 between First Vice Prime Minister of Ukraine - Minister of Economic Development and Trade of Ukraine Mr. Andriy Klyuev and the European Commissioner for Trade Mr. Karel De Gucht the parties agreed on all the key aspects of the deep and comprehensive Free Trade Zone Agreement. All the conceptual and most of the technical issues regarding the future agreement have been settled. In particular, it was agreed that as a part of creating a deep and comprehensive free trade area with the European Union, Ukraine will gradually abolish export duties in foreign trade with EU countries. Thus, Ukraine will gradually eliminate export tariffs on certain products (sunflower seeds, scrap ferrous and nonferrous metals, leather and hides, liberalization of trade in automobile sector as well as the settlement of disputes under the trade aspects in the sphere of energy

cooperation). According to the results achieved during the negotiation of agreements the overall level of liberalization of tariff lines and the volume of goods is more than 95%. Creating a deep and comprehensive FTA between Ukraine and the EU is beneficial for both parties not only in connection with the mutual opening of markets, but also through addressing a number of problems that now face both Ukrainian and European exporters. The establishment of free trade area between Ukraine and the EU contribute considerably to Ukraine further success on the way to European integration. It is important to stress that continuation of the EU enlargement process, in our opinion, is the key to the viability of the EU. Termination of this process will bring the loss of positive dynamics development within the European Union, and hence the historical perspective. Moreover, the EU integration of Ukraine with its resources and capabilities can help to quickly and systematically solve the problems faced by the EU and its member-states. The recent resolution of the European Parliament of 27 October 2011 on the current developments in Ukraine confirms: “European Parliament takes the view that a deepening of relations between the EU and Ukraine and the fact of offering Ukraine a European perspective are of great significance and in the interests of both parties”. Ukrainian Side taking into consideration European institution’s position is aware of the problems that exist in its internal political development, but at the same time considers inexpedient the attempts to directly link the negotiation process on the finalization of the Association Agreement with internal developments in Ukraine. Ukraine remains committed to democratic values - a key component of an irreversible course towards European integration. EUROPEANBUSINESSREVIEW

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The New German Dialectic The strength of Germany’s economy is due in large measure to the structural reforms to the country’s welfare state undertaken by former left-of-center Chancellor Gerhard Schroeder. Today, Angela Merkel faces a similar test of political courage, writes Stephan Richter, president of The Globalist Research Center. By Stephan Richter

key ingredient of Germany’s success in today’s increasingly dismal global economic environment was that a former chancellor, Gerhard Schroeder, mustered the courage to jump over his shadow. Thanks to the fact that he, a man of the center-left, was principled enough to launch structural reforms to Germany’s welfare state via the so-called (and aptly titled) Agenda 2010, Germany’s economy is now performing relatively well. Commentators such as the Financial Times’ Martin Wolf had claimed at the time that the German economy would fail due to high price and benefit levels, which the country would not be able to reduce. As a consequence, they argued, it would catapult itself out of a competitive world market. Things have turned out differently. Although controversial, Schroeder’s historic achievement was to bring German unemployment benefits down to the American level. The fact that Germany’s unemployment rate, long an albatross around the country’s neck, is now at the lowest level in two decades (and in line with U.S. levels during good economic times) proves the architects of the project right. The big beneficiary of Mr. Schroeder’s out-of-character and therefore fortunate act of political courage was Angela Merkel. She has benefited from her predecessor’s righting of the country’s economic ship not only during her first term in office, but until today. However, now she faces a similar test of political courage. Just as it was a test of character for Schroeder and his Social Democratic Party (SPD) to trim the welfare state, so it is now a test of character for Mrs. Merkel and her Christian Democratic Union (CDU) to accomplish the rightsizing of the nation state. While in a completely different domain, that is a challenge

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on par with what the SPD had to accomplish. Basically, the CDU’s voter base consists of proudly patriotic people. But rather than bask in the illusory glory of Germany doing marvelously, thank you, Mrs. Merkel has to move her base to accept that, in the end, Germany does have to provide a significant back-up mechanism for Europe. Making the case for sharing a nation’s wealth with others is certainly no easy task. But if she is up to the historical task put squarely before her, then the CDU under Merkel and Schaeuble, her powerful finance minister, must act accordingly, in the interest of Germany and the future of Europe. They, too, must be prepared to jump over their party’s shadows to accomplish history-making reforms comparable in scope to those the SPD made under Schroeder. The political outcome of Mr. Schroeder’s maneuver was tantamount to committing political harakiri. His party could not bear the internal tensions resulting from reforming the welfare state. In the end, for all his political courage, he was not re-elected. In their own minds, Merkel and Schaeuble are certainly more demanding of themselves in terms of character and personal integrity than Gerhard Schroeder ever was. That augurs well for their effort to move a quite nation-stateminded party to supporting the cause of pan-Europeanism. A more cosmopolitan Germany certainly needs for this curious pair, erstwhile bitter intra-party rivals, to succeed. Based on this analysis, an interesting secret of Germany’s competitiveness emerges, one that is not based, as is always assumed, on purely economic factors. As it turns out, the political competitiveness of the system was, and is, at least equally important. What one might call the new German dialectic describes a rather fortitudinous process where, precisely at the times when fundamental questions had to be addressed, not only were politicians in power who were prepared and able to deal with them. Ever more fortuitous was the fact that, in the two most recent, most difficult circumstances, it was precisely the party that found itself in government that, if in opposition, would had been dead-set against undertaking that specific reform measure. Just imagine the firestorm the German unions would have unleashed against the CDU had it been the one to implement the structural reform package called Agenda 2010. The beauty of the political dialectic governing Germany is that it is now the CDU that must act in the overall national interest by overcoming the overly nation-state-oriented thinking in its conservative wing. Conservatives cannot continue basking in self-satisfaction at the good things the EU delivers to Germany’s balance sheet, while refusing to accept any debits. That is why Mrs. Merkel has quite a task ahead of her. She must, and she will, make the case for a truly historical transition toward a deeper integration process. For Europe’s most powerful country economically and socially, that is no small task. But the inherent beauty and effectiveness of Germany’s cross-party dialectics greatly facilitates her making this case to her doubters.

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sustainable living* www.resources-energy.com * Sustainable living is fundamentally the application of sustainability to lifestyle choice and decisions. Sustainability itself is expressed as meeting present ecological, societal, and economical needs without compromising these factors for future generations

ECONOMY

The Eurozone’s last resort: Monetisation

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ECONOMY

According to German minds, monetising the EU’s debt via the European Central Bank would only boost inflation and eliminate pressure for Southern countries to reform their economies, says Peter Zeihan, from the Stratfor intelligence commentary website. But it seems like the only tool available right now to prevent a eurozone failure, he adds. By Peter Zeihan*

“T

he Europeans are running out of tools to combat their deepening financial crisis. The bailout fund is at best compromised, European banks are degrading by the day and borrowing costs are rising week by week. One of the very few tools that remaining is something called monetisation. In essence, the European Central Bank expanding the money supply to purchase distressed government debt, most notably for Italy. Monetisation proponents argue that such activity would melt European debt away. The reality is not so clear-cut, and the Northern Europeans are at best leery of this option. In the Northern European mind, monetisation will not solve the core European problem - competition. Southern Europe is already non-competitive with Northern Europe. The average Southern European worker is one-quarter to one-third less productive than the average Northern European worker. Throwing free money at them will only make them less competitive. And for those who can remember back a few years, it’s obvious that throwing free money at Southern Europe is in a large part what caused the current debt crisis. Instead what would be achieved is inflation. Monetisation encourages consumption, which largely explains why the United States, United Kingdom and Japan have used the tool in recent years. But in the European case, it would be encouraging consumption in only part of the currency zone - in an area that is already a substantial importer. Southern Europe needs to get their consumption production in balance. Monetisation does the opposite - deepening the existing imbalances while boosting inflation. Now inflation does eat away at the relative value of debt. But it also eats away at the relative value of assets. Since Southern Europe is more debt-driven than asset-driven economy, it is easy to see why countries in the South see monetisation as desirable option. But in Northern Europe the circumstances are reversed. Northern European economies are creditors and very high-valueadded, sporting massive industrial bases, highly educated work forces and excellent educational systems. Northern Europe is not high in debt - it is high credits and high in assets. And those assets are the key to Northern European income streams and Northern European political power within the EU. Monetisation would directly endanger all of it. The Germans are particularly nervous about this aspect of monetisation.

Monetising Southern European debt would also have no clear chance for improving the European financial crisis. Monetisation eliminates pressure upon states to reform. Case in point: the European Central Bank started buying Italian debt back in August. Italy abandoned their austerity plans in August. Unless watertight restrictions on state spending are in place before monetisation begins, there is no reason for fiscal conservatism. And if those constraints are already in place, there’s no reason for monetisation. Finally, there’s demography. There is a big bulge in late-40 -somethings in the German demographic with a very sharp drop off in younger population cohorts. These late-40-somethings know all the tricks of their trade - they are massively productive. They also have few bills and are at the height of their earning potential, so they are also massive creditors. The skills and personal wealth of this group are the foundation of the current German geopolitical strategy - trade financial and economic strength to force the rest of Europe to agree to a rewiring of the EU to German preferences. And to achieve this before the demographic advantage dissolves in about 10 or 15 years, when the population bulge retries en masse. Monetisation would upend this strategy. First it would decrease competitiveness vis-à-vis Southern Europe, weakening the German leverage in reformulating Europe. Second, it would debase the assets and savings of Germany’s most economically and politically powerful demographic in favour of Southern Europeans. It is the monetary equivalent of the American government using Social Security funds to pay for services to Mexican immigrants, and expecting retirees to be OK with it. But despite myriad disadvantages, monetisation may well be emerging as the only tool that can preserve the euro, albeit in an increasingly damaging and distorted form. As Europe’s other tools fail, Northern Europe is going to be faced with a stark and painful choice - monetise and suffer the consequences, or let the euro fail and suffer the consequences.”

* Peter Zeihan is Vice President of Analysis for Stratfor EUROPEANBUSINESSREVIEW

INTERVIEW

An interview with Dr Rodi Kratsa*

‘ Using women’s potential a necessity for economic growth in the EU’ By N. Peter Kramer

Mrs Rodi Kratsa-Tsagaropoulou, member of the European Parliament for the EPP and also Vice-President of the parliament, wrote as EP Rapporteur the report “Women and Business Leadership” aiming at increasing competent women’s access to top responsibilities. Her report was adopted by the plenary of the European Parliament by a large majority on July 6, 2011. It

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makes clear that making use of women’s potential is not only a matter of ethics and social equality; it is also a necessity for the economic growth of Europe and for the member states. European Business Review‘s Editor-in-Chief, N. Peter Kramer, had the opportunity to ask Mrs Kratsa some questions about the conclusions of her Report.

INTERVIEW

exceed those of men, are facing obstacles in their work and in their carrier evolution. Neither society nor the public authorities have realized the problem and are not seeking comprehensive, effective solutions. I read that when women are present and integrated at the highest level in companies those companies with diverse senior teams perform better turning in better results and profits. Why are shareholders and supervisory boards not asking for more women at the top? Better results and profits are after all the lifeblood of business. This is the paradox we want to face. Shareholders are not utilizing women in high level positions even though they are a great source of talented, educated and skilled workforce, in the interest of their own and the whole society.

Rodi Kratsa discusses about ‘women and leadership’ with the German Federal Minister of Employment and Affairs Mrs. Ursula von der Leynen (European Parliament, Brussels, 8 November 2011) Why does your report only concern women’s representation at board rooms in bigger companies? Even if we stick to higher level management the world is much broader: governments and their civil service, military forces, trade unions and SME’s for instance. Let alone other important and influential institutions in society. In all decision-making centers balanced participation of men and women is fair and positive regarding the way of management and the qualitative and quantitative results. I dealt particularly with enterprises because firstly they affect directly the economic recovery and job creation, and secondly because it is a field where European Union can take legislative initiatives. What is the real reason that women are so poorly represented at the top in big companies? Is it a lack of competent and qualified women? Or is it a kind of close shop organised by men which blocks the entrance of women to boardrooms? Many stereotypes persist even in our days in all countries against the role of women in all spheres of economic and social life. These difficulties are associated with the problems of harmonization of work and family life. Thus, women despite their high level of education and qualifications which in many cases

Other than legislation setting quotas do you see other ways to stimulate a higher level representation of women in board rooms? It is true that many companies are using various methods for promoting diversity and equality. Usually this is done by means of specific further courses and other forms of professional support, such as dedicated mentoring and networking in order to prepare them effectively for management duties at all levels. But unfortunately the results are not encouraging. More effective and dynamic measures are needed to be taken with quantitative targets and serious assessment. Do you have any plans to extend your investigations to women at the top of a wider range of organisations? See my first question Of course. The European Parliament through its reports and resolutions refers to the responsibility of governments, political parties, international organizations and all social partners for the utilization of women at all levels, in all fields and sectors. Thank you very much Mrs Kratsa.

* European Business Review congratulates Mrs Rodi Kratsa with her designation to ‘Doctor Honoris Causa’ of the Euro-Mediterranean University. The ceremony took place on November 24 in Lisbon, at the presence of the President of the European Commission Mr. José-Manuel Barroso, the Secretary-General of the Union for the Mediterranean Mr Youssef Amrani and the United Nations High Representative of the Alliance of Civilisations, former President of Portugal Mr. Jorge Sampaio. This honorary distinction constitutes the culmination of a long-term and systematic effort for the promotion of the euromediterranean relations in all critical areas of the economic and political cooperation. In particular, her contribution to the promotion of a common area of research, higher education and excellence in view of achieving peace and prosperity for the peoples on both sides, was highlighted. EUROPEANBUSINESSREVIEW

THE WORLD

Cross-strait peace is key to Taiwan’s future ‘Taiwan’s success hinges on cross-strait peace, so the country must spare no effort in improving relations with mainland China while boosting its competitiveness in the face of domestic and international challenges’, President Ma Ying-jeou told his audience at the Annual Global Views Business Forum. By N. Peter Kramer

year after the Economic Cooperation Framework Agreement (ECFA) between Taiwan and mainland China took effect, early results show that the trade pact is fulfilling its promises to help Taiwan access a greater part of the mainland Chinese market and consolidate the island’s position in the global economy. Exports of agricultural products to the mainland, for example, grew nearly 33% in the first half year

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2010 compared with the same period of 2010 and the pact has facilitated the financial operations of Taiwan based banks as they do business across the strait. The agreement can also be seen as a powerful message to the international community of Taiwan’s commitment to peace and stability in the Taiwan Strait. This adds to the country’s attractiveness for investment and as a gateway to the mainland Chinese market. Thanks to ECFA Taiwan can be seen as an excellent springboard for foreign businesses wishing to enter the mainland China market. Recently, Taiwan moved up one place to equal Norway as the world’s third-best destination for investment, according to USbased Business Environment Risk Intelligence. A recent World Economic Forum report ranks Taiwan 13th in the world for competitiveness. This validates Taiwan’s move to open itself up to closer economic cooperation with mainland China, while development of such ties also contributes to economic cooperation with other countries in the region. These results are encouraging but agreement with the mainland is also needed on, for example, trade in commodities and services. There seems to be good faith behind the talks that have brought the two sides of Taiwan Strait this far, but it will take more time and commitment to turn words in more action. Since President Ma took office in 2008 cross-strait relations have incontestable significantly approved. In Ma’s own words: ‘the present cross strait peace is unprecedented. What we have to do now is apply our wisdom to make the best possible use of the promising conditions and expand the peace dividends. These ‘peace dividends’ include Taiwan’s participation in the World Health Assembly; 124 countries and regions that now grant Taiwan’s citizens visa-free entry or landing visas, up from 54; and advancing economic relations with Japan, New Zealand and Singapore following signing of the ECFA. President Ma noted that Taiwan needs to step efforts to improve national competitiveness by cultivating talent through a high quality educational system, further opening up Taiwan’s market to the world and creating a rational political environment. What this all means in the eyes of the Taiwanese people will be clear in the beginning of next year. On January 14 Presidential Elections are planned. The oppositional Democratic Progressive Party has its doubts about the Economic Cooperation Framework Agreement with mainland China. The DPP fears that it endangers Taiwan’s sovereignty and democracy, because it could be a first step towards unification with mainland China by too strong economic ties and interweaving both economies. The President has been getting an earful on the issue since he raised the possibility of a cross-strait peace pact October 17. Therefore in a meeting of his party, the Kuomintang, Ma recently reiterated that his stance regarding cross-strait relations is unambiguous: to maintain the status-quo under the Taiwanese Constitution and the principle of no unification, no independence and no use of force. He said: ‘the proposal of a cross-strait peace agreement is grounded on no use of force and is irrelevant to unification or independence. It is intended to institutionalise the status quo’ and stressing that upholding Taiwan’s sovereignty is the top priority in dealing with cross-strait relations. The future of the cross-strait relations is in the hand of the Taiwanese voters. January 14 is the day!

COVER ISSUE

What’s wrong with technocrats?

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COVER ISSUE

Much has been made of the recent appointments of Lucas Papademos and Mario Monti as Prime Ministers in pectore of their respective countries. In particular, the public debate has focused on their status as unelected officials, which allegedly constitutes a break in the democratic continuum. By Marco Incerti*

t can actually be argued however that, even though they are technocrats, their democratic credentials are even stronger than those of the politicians they have been called to replace, given that they are expected to lead governments of national unity. Indeed, in these countries today, only grand coalitions can provide the necessary legitimacy to push through the tough reforms that are on the agenda. Both countries are in a very grave situation, requiring extremely determined action and hard measures, but both suffer from a highly fragmented and confrontational political system, where infighting between and within the main parties can and has led to paralysis. Beyond these basic similarities, the situation of the two countries is rather different. Economic conditions in Greece, for example, are much worse than in Italy, and few believe that it can actually avoid default. The fundamentals of Italy, although worsening, are better, and so many of the problems of the last few weeks are attributable to political uncertainty. Given these different starting points, the two governments took opposite paths: Papandreou had not actually done too badly, and was in fact in the process of implementing the reforms that he had agreed to put in place. To bolster them in the face of growing social unrest, he sought cross-party support, but the opposition refused to provide this support. In Italy, it was the Berlusconi government that actually failed to deliver on the promises it made to its European partners, and, in spite of its majority in both houses of parliament, had only very slowly started to act on some of the measures that most considered unavoidable. This irresponsible behavior on the part of Italy is of course even more worrying, since the sheer size of the country’s debt has the potential to bring down the whole eurozone. The commonality between the two countries is that, given the level of political fighting, no representative of either political front (centre-left and centre-right) would have been able to rise above the fray and be accepted by the other. Papandreou could not have led a national unity government because Néa

Dimokratia would not have supported him, and Berlusconi could certainly not have led a national unity government because the Partito Democratico would never have supported him. Hence, the need for technocrats to come to the rescue. As for the citizens, who on this occasion were denied the right to don their voters’ hat, one should not be too quick in assuming that they will take the appointments negatively. To begin with, the constant squabbling and inability to take decisive action have led in both countries to a disillusionment (if not outright disdain) with politicians, who are perceived as grossly overpaid, perks-seeking members of a privileged caste. The answer to the question about the popular support for the governments that are being formed will thus depend on relative importance one attaches to the dichotomy between input¬legitimacy/output legitimacy. That is, are citizens more interested in having a say about their government (and the actions that it should take) through elections, or are they more interested in having a government that actually delivers results (and improves the situation of their country)?

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COVER ISSUE

Seen through the latter prism, the previous experiences with technocratic governments in Italy in the 1990s are rather encouraging: in particular the Ciampi government (1993), by forging constructive cooperation between the social partners, was able to introduce important labour market reforms, and the Dini government (1994) managed to implement a radical and far-sighted reform of the pension system. And indeed empirical evidence seems to point in the direction of a positive popular reaction to the appointments: the first snap-polls indicate that 50% of the Italians favour Monti, and 58% would support his government; Papademos does even better, with an approval rating of over 70%. In the eyes of many Greeks and Italians, the two soft-spoken professors are untainted by political affiliation and are perceived as competent individuals who will be guided in their actions by their respective country’s interest, rather than that of their party.

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For all the injections of goodwill, honeymoon effects and glittery eyes that the sole mention of their two names will produce, the records of Profs Papademos and Monti will be measured by how much they will be able to deliver. It is not difficult to predict the solutions they are likely to propose; the key question is whether they will be able to put them into practice.

Moreover, the deterioration of the two countries’ economic situation has been so rapid (for Italy, a matter of two weeks), that most voters probably realise that, even though an election would have been desirable, it would have taken so long to organise that the countries would have defaulted twice over in the meantime. It takes months to organise an election, while in the current circumstances it only takes weeks (or a few days) for a country to go under. Finally, a few eyebrows are raised because the nominations of Messrs Papademos and Monti seem to “let the markets decide instead of the people” and because of their (excessive) closeness to EU leaders. With regard to the first argument, it is useful to bear in mind that the citizens and their elected representatives would have had more options to choose from had they started from a better socio¬economic position. Greece and Italy must now accede to the dictates of their creditors because they have too large a debt in the first

COVER ISSUE

place. Had they respected (or adhered more closely to) the Maastricht criteria (that they voluntarily ratified), their position would not have been so close to the edge today. It was the Greeks and the Italians who rubberstamped, through their behaviour at the polls, the policies and practices that led them to the brink. The fact that Monti and Papademos are close to EU circles is not of course a surprise or a coincidence; nevertheless, it is a sad reflection of the populist drift in these countries that some would think of holding this fact against them. Officials who have high-level European careers are normally the best of their

crop: they typically are the ones that transcend the national borders to get involved in policy-making at the continental level. So it is only natural that their countries should turn to their talents, making the best use of the human capital represented by these highly qualified civil servants in a time of duress. European technocrats are also an appropriate choice for these jobs because this is a European crisis that affects the entire eurozone, whose future rests on the re-establishment of a certain level of mutual trust. In the European economy as a whole, there is unquestionably enough money to survive the crisis, but the northern investors no longer believe that they can trust the potential borrowers from the south. Altering these perceptions requires appointing interlocutors who are credible in the eyes of their European partners, a credibility that to some extent depends on past records. Familiarity with fellow decision-makers is a definite plus. The choice of these personalities is thus in itself part of the measures, together with the reforms that they are called to implement. And here we come to the heart of the problem. For all the injections of goodwill, honeymoon effects and glittery eyes that the sole mention of their two names will produce, the records of Profs Papademos and Monti will be measured by how much they will be able to deliver. It is not difficult to predict the solutions they are likely to propose; the key question is whether they will be able to put them into practice. This in turn will depend to a large extent on the room for manoeuvre that the political actors underpinning their legitimacy will extend to them. While this is further evidence that the developments in Greece and Italy are well within the boundaries of democracy, one only has to hope that the main parties in the two countries have learnt their lesson and are prepared to put aside their mutual acrimony and rally behind the technocrats’ flag to help put their states back on track. Restoring a sense of civic purpose (based on a core set of shared values), and shedding some of the more extreme political fringes along the way, would in itself be a huge achievement with momentous long-term consequences.

* Marco Incerti is Head of Communications and Research Fellow at CEPS. CEPS Commentaries offer concise, policy-oriented insights into topical issues in European affairs. The views expressed are attributable only to the author in a personal capacity and not to any institution with which she is associated. Available for free downloading from the CEPS website (www.ceps.eu) y © CEPS 2011 Place du Congrès 1 • B-1000 Brussels • Tel: (32.2) 229.39.11 • Fax: (32.2) 219.41.51 • http://www.ceps.eu EUROPEANBUSINESSREVIEW

Special Report: YOUNG LEADERS

EUROPEANBUSINESSREVIEW

Special Report: YOUNG LEADERS

Special Report:

Young Leaders N. Peter Kramer Editor-in-chief

In this European Business Review Special Report we put the spotlight on Think Young, an interesting think-tank: recent graduates and engaged students lobbying to make Europe a better place for young people; conducting research, surveys, conferences, documentaries on and about young people. The goal of this sympathic and dynamic think-tank is to

provide young Europeans with a platform where their voices can be heard, no matter what they say. An interview with one of the founders, Andrea Gerosa, makes clear the background, the way of working (paperless!) and the impact of Think Young. Five articles written by young authors related to the think tank offer you a view of different subjects. Although opinions stated

in these articles are those of the authors and do not represent the think tank, it is interesting, reading these articles, to find out they are inter-related. It gives a hint about the youth’s situation in Europe. ThinkYoung’s philosophy is, the more opinions we hear the better the picture we will get of youth’s views. European Business Review hopes that our readers appreciate this approach as much as we do. EUROPEANBUSINESSREVIEW

Special Report: YOUNG LEADERS

‘ aTunique hinkYoung’: success story in times of crisis Being welcomed in the headquarters of ThinkYoung is a great experience. Young people concentrated on their laptops, in an office that faces the megalomane megalith buildings of the European Parliament, Place Luxembourg Brussels; among them one of the three founders of the think-tank, Andrea Gerosa, as usual dynamic and relaxed. An interview and due espressi. By N. Peter Kramer

Andrea, why did you start ThinkYoung in 2007? There existed already so many think tanks. The three founders of ThinkYoung, Stefano Benini, Azzurra Giorgio and I observed that there was a lack of representation of young people within the European institutions and we wanted to make a concrete change over that. We invested 25 euro to register our website and started doing research and surveys on and about young people. At that time all three of us had another job, so we had to do the ThinkYoung work during evenings and weekends. What is your background? We have the same background, we studied at Bocconi University in Milan and were members of JADE, the network of student-entrepreneurs. But we have different personalities and interests. So our first steps were in various professional fields. At the beginning Azzurra was in charge of research, Stefano of the website and I was in charge of cooperation and networking.

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What is Think Young doing exactly and who is doing that work for whom? ThinkYoung is a nonprofit organisation that runs projects which make Europe a better place for young people. We do research and surveys; organise conferences and produce documentaries on and about young people. As a think-tank we lobby for young people. The team exists of only young people, mainly recent graduates or engaged students. What is the response and feedback on ThinkYoung’s work? Whenever we talk about ThinkYoung people tend to be very enthusiastic about the idea. In general we work with the same partners since four years, what means that they are happy and satisfied with our results and share our mission through the years. What are your standards and how do you keep these up? We have learnt “knowledge management” by doing it. At the very begin-

Special Report: YOUNG LEADERS

make plans until December 2012. We started with one laptop and a desk in a shared office. Today we have an office right in front of the European Parliament, a staff of six full time and twenty people around Europe part time. Not bad... in these times of crisis!

ning the team had only part-time collaborators based in four different countries. Internet and other related innovative tools supported our work. New hired colleagues are young and it is not always easy to channel their creativity, enthusiasm and motivation. But once that is done, they learn much faster and in a larger scale than older generations. We use software for project management and all our knowledge is online, making it easy for new comers to have access to documents. In fact we are a “paperless” organisation; there is absolutely no paper in the office. How did ThinkYoung grow so fast? God bless the crisis. Thanks to it we had the chance to rent cheap offices and institutions started looking for outof-the-box ideas. We managed to be at the right place at the right time.

Both the European institutions and well established think-tanks liked our work and invited us more and more to present our results during conferences and seminars. Later on we started to organise our own conferences and since two years we also produce documentaries to present the visions and opinions of young people. Nowadays young people are everywhere on the news. The fact that we started four years ago gave us credibility and quite a strong competitive advantage. Are the founders happy with the developments? We can always do better. But yes, we are very happy. In February 2007 we had just enough money, people and resources to plan until April 2007. In 2009 we had a four months plan. Today (November 2011) we are in the situation that we can

Are the developments in line with the original expectations? And what are the expectations for the future? We have done much more than expected in terms of “in the field” projects, together with young people all around Europe. As well we have involved a much higher number of young opinion makers than we expected. Looking at what we could do better? We think we need more presence within the European Commission and in the media debate. And what is the future role of the founders, when they grow too old to be a young thinker? The three founders have always said that ThinkYoung has to be run by young people for young people. Today the founders are not involved in field projects but only in project acquisition and management. In the near future we will act as an advisory board and young staff members will take over the daily and midterm strategic management. Thank you Andrea. It is really a great story. Congratulations for the founders and all their young co-operators! EUROPEANBUSINESSREVIEW

Special Report: YOUNG LEADERS

Young Energy Leaders Where have you seen young people take the lead in the organization of major conferences with over 900 attendees from all over the world? How often do you see young people sharing their ideas and debating with their peers on stage at international events? This has become a daily reality in the oil and gas sector, driven by the complex challenges facing the industry. By Céline Rottier *

bout 50% of the oil & gas industry’s skilled professionals will retire within the next 5 years, with this figure growing significantly by 2018. The oil and gas industry refers to this as “the big crew change”, as it mainly seeks to replace these future losses with young people; that is, if the industry can attract them. The oil and gas sector has suffered from negative publicity over the last few years and few young people know about the attractive career opportunities in the field. Young people also tend to give a lot of importance to the integration of green energy sources in the future energy supply. Although in first instance

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attracting young talent to the oil & gas industry seems to be a communication issue, the outcomes of a youth session at the World Petroleum Council’s Canadian division indicate that it is more about gaining young people’s trust. In other words, to recruit the best young talent the industry needs to act, as it says. Attracting young talent, however, is not enough: these young people also need to be prepared to face the challenges of the oil and gas industry. This is especially true at a time where recovering hydrocarbons has become more difficult than ever before, as companies move into deeper waters and arctic regions. Hence, companies have to avoid a massive drain of knowledge and make sure it is passed on to the next generation. As this young talent is likely to come from different countries and regions than in the past, the industry should also prepare for an important cultural shift and support this diversity. The expected geopolitical developments pose some additional challenges to the energy sector. China and India, for example, are growing at a swift pace and are looking for energy resources to support the explosive development of their economies, converting them into some of the main energy consumers in the world. It is uncertain, however, if the energy sector will be able to provide sufficient energy to support the projected energy consumption for 2030. Therefore, in reality the different energy sources are not in competition, but are all complementary. It will be the new generation’s responsibility to define what this future energy mix should look like. In order to prepare the youth to take up these complex challenges, senior persons of the industry have taken several

initiatives. The most striking examples are those that encourage young people to take an active role in shaping their futures, such as the European Youth Energy and Environment Platform of the European Parliament, the Harvard College Global Energy Summit and the Youth Committee of the World Petroleum Council. Thanks to these initiatives, young people working in the oil & gas industry from all over the world can form a true global youth platform. These young leaders select the key discussion points, choose the speakers and interact with their seniors on stage at youth events. This means that the brightest minds in the oil & gas industry get the chance to exchange and discuss their views and concerns on the topics of their interest. I kindly invite everyone to attend and support these initiatives. The atmosphere at the youth events is absolutely unique, fresh and energizing. They are great experiences for young people who are, after all, our energy leaders of tomorrow.

* Céline Rottier is an Offshore Engineer at Repsol and contributor to ThinkYoung’s pan-European writing team.

Special Report: YOUNG LEADERS

Youth challenging the systems of the world The year 2011 is a year full of motivated youth movements across the world. The recent Wall Street occupiers, the indignados in Spain or the Arab spring revolutions are carried out by the motivation of many young people who want to raise awareness about the failure of their respective systems. But is there anything these movements can do to join forces in their common goals, if they have any? By Stephanie Harfensteller*

n North Africa, particularly in Tunisia and Egypt, uprisings caused the fall of authoritarian regimes that had been in place for decades. One step ahead than their peers in Europe, these young people now face the challenge to make their claims come true. The idea of democracy and what it means has to find its way into the heads of societies that have previously been oppressed for their entire lives. However, no one builds a democratic system from one day to another. It took countries in Europe one hundred years to develop the system we have now. And even today, it is an ongoing process shifting constantly from liberal to conservative, from left to right, from europeanisation to euroscepticism, and from nationalistic to europeanisitic. The current financial crisis, the ongoing debate about the future of the PIGS countries and the way politicians act to save them from bankruptcy seem to move Europe away from democracy. Since the fall of the Berlin wall, the marriage between capitalism and democracy reigned over the western civilization. However,

one has to question if there is a balance between the two, or did capitalism took power over democracy? That is what youngsters in Europe fear and what they are upset about in a way they do not even know how to articulate. It is the inequality for job opportunities, corruption, undemocratic electoral systems and ignoring the demands of the people, what brings young people on the streets and what makes them get angry, which sadly sometimes results in violence. This does not sound so unfamiliar looking back to the broadcasting news from the Arab spring. Northern African states reacted violently towards their protesters, but what is the European Union doing regarding it’s youth protests? It mainly seems to be ignoring them, while they supported the protests in the Arab countries. But even more interesting than this apparent contradiction is the one that the EU has had with the Governments of those protesters they supported. The European Union has had long lasting relationships with the governments of Northern African states, beginning from the European Mediterranean Partnership towards the European Neighborhood Policy and the Mediterranean Union. The EU also provided funds for the European Neighborhood instruments to strengthen democracy, stability and economic growth in the Maghreb region, with the Tunisian State being one of the role models for economic growth and development. Nevertheless, the union had a Janus-faced position towards the Maghreb region. On the one hand, the goal was to strengthen democratic developments by supporting NGOs and reinforce democracy in the existing governments. On the other hand, the need for stability and keeping the status quo of the states was also important in order to suppress radical Islamic groups and terrorism. Furthermore, the help granted by Europe, particularly concerning democratic development, was not asked for by the authoritarian regimes in place. Europe appeared to behave condescending and arrogant and perceived itself as “more developed” and

“something better”. Instead of listening and understanding the social and cultural differences, Europe tried to implement European values, shaped by Christianity on a society which has a completely different history, religion and culture. Blinded by the enlargement policy which successfully integrated the new member states in the European Union, EU officials tried to use the same method in the European Neighborhood policy. Tunisia seemed to be the country best developing according to the action plan designed by the European Union to gain a free trade area with the EU by the end of 2010. However, instead of stabilizing the country, its government was the first to fall. Tunisia first started the Arab uprisings, even though the society is one of the wealthiest and best educated in the region. Maybe, this was exactly the reason why it started there, since a lot of young, educated people were frustrated about the suppression and youth unemployment. The impressing speed of these developments, from the fall of the Tunisian President Ben Ali in January 2011, until the first free elections in late October 2011, is provoking curiosity regarding where this country will go to in the next few years. Enhancing the dialogue between young people from the North African countries and Europe is probably the first step into the right direction in order to ensure mutual understanding in the future between the future leaders of both continents, efficient cooperation and building new forms of democracy together while respecting each other’s cultures, societies, histories and religions better without one looking down on the other.

* Stephanie Harfensteller is a Project Manager and writer at ThinkYoung, the first think tank concerned with young Europeans. EUROPEANBUSINESSREVIEW

Special Report: YOUNG LEADERS

Europe’s salvation lies within itself Red alert, passengers. We are not joking anymore. We are not talking about the possible “restructuring” of the sovereign debt of a single peripheral country: in question is the very survival of the Euro as our common currency, perhaps of the EU itself, most importantly of the livelihood of the continent’s economies. By Simone Disegni*

hat is the sense of the signals that top-level EU leaders have resolved to communicate to the public opinion in the last few months, with particular clearness since last September. Never before had they met twice in a matter of three days to discuss an urgent issue within the highest EU organ, the European Council. If the summits were ostensibly convened in order to reassure the markets with regard to the solvability of Greece and Italy’s public debts, the extraordinarily tight agenda made clear to everybody to what extent top leaders were frightened of a wide-scale attack to the credibility of European economic governance. Let the protocol wait outside, therefore, and formal relationships be somewhat re-

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vised for the time being - EU institutions have taken decisively the lead in order to pressure the weakest governments to adopt extraordinary measures through all possible means: public letters, private messages, intensified meetings, visits in the capitals, etc. Some have even claimed that the ECB and the European Commission - undoubtedly supported by the strongest Eurozone member, Germany - have de facto gained control of national economic policy-making in those countries. Besides formal aspects, however, what is really the substance of the suggested “emergency package” to tackle such critical situation throughout the continent? If we look at the first set of measures approved by Athens’ Parliament as well as those requested from other countries in danger, the key target in order to redress troubled public finances seems to be bold cutting of the heaviest chapters of State expenditure. That can include - depending on the “danger level” of concerned countries - the extension of the age or working period required to retire, the dismissal of exceeding servants working within the public administration or a generalized salary cut, measures facilitating the firing power of companies and institutions, and so on. Indeed it is no news for attentive observers that most Southern European economies suffer from deep structural weaknesses that have been partly responsible for their weak growth rate in recent decades: an oversized and inefficient public sector, often due to the effects of political patronage and the absence of efficiency mechanisms; a poorly competitive productivity rate; an obstructed labor market and a generalized rejection of merit-based selection mechanisms, which seriously hinders social mobility, and so on. It is a broader, widely accepted fact, moreover, that European pension systems need to be revised in order to account for the longer living age and to prepare for the retirement of the substantial “baby-boom” generation. Yet the dominating approach to solve Europe’s crisis hides two serious dangers. On the one side, a stubborn insistence on austerity and collective sacrifices, while easing public budgets in the short-term, exposes at the same time the EU to the gloomy risk of a long and painful stagnation, by depressing the economy and hindering

any prospect of growth and relaunch. On the other side, perhaps even more importantly, on the altar of budgetary sustainability Europe risks sacrificing the very essence of its socio-economic model: if governments and parliaments choose to tackle the crisis by targeting social services, labor protection standards or the salaries of low-income public servants, they do not only risk facing growing anger and social tensions. Most importantly, they attempt at one of the core features of the EU’s identity itself, perhaps the one that has most contributed to make European societies the healthiest and most attractive in the world. As President Barroso has himself recently highlighted, in sum, « in no other place on earth has it been possible to put together this combination of civic, political and economic freedoms. Equality of rights between men and women. Respect for the environment. The ambition for higher levels of social cohesion and social protection. The solidarity with other parts of the world less fortunate than ourselves. In other words (...) the social market economy we have consolidated through the process of integration»1. Despite not bearing the main responsibility for the current crisis, European citizens - in Southern EU countries, but not only - will probably have to undertake new efforts and submit to some sacrifices in order to overcome the critical conjuncture. Yet EU leaders need to explore other avenues than the ones mentioned to respond to that challenge in order to ensure a powerful relaunch on the medium term as well as the safeguard of the very essence of Europe’s social model. At stake is nothing less than the right for future generations to enjoy the opportunities they deserve.

* Simone Disegni is a member of the Writing Team at ThinkYoung, the first think tank concerned with young Europeans. simone@ thinkyoung.eu 1. J. M. Durao Barroso, President of the European Commission, “ The state of Europe”, Berlin, 9 November 2011

Special Report: YOUNG LEADERS

Young Female Entrepreneurship in southern Europe: a proof of the obstacles In July 2008 the Promotion of Women Innovators and Entrepreneurship Final Report said that in Italy, my home country, the overall rate of business owners was 4.78% for women compared to 8.19% for men. Instead, there was almost no gender difference in the early stages of entrepreneurial activity (3.06% for women compare to 3.87% for men). By Azzurra Giorgio*

n 2008 I was still employed as a business analyst in a multinational consultancy firm, willing to increase my knowledge on a wide range of industries and slightly worried for the credit crunch echoes coming from the United States. Again in 2008, the same Report defined what were the main barriers faced by

women entrepreneurs in science and technology in Italy: difficult access to finance, lack of credibility, difficult access to international markets, lack of entrepreneurial skills and culture, lack of soft skills, more family responsibilities. I would have never read any part of this report until 2011… Then, in 2009, I decided to give hear to my entrepreneurial passion, abandoned the safe employment in consulting and, in the middle of the hardest economical crisis since 1929, I started up an ICT business with a bunch of university colleagues. My team and I were (at least) a little crazy and not aware of those barriers cited above; we could have heard about them somewhere, but we had not faced them yet. And, moreover, I was the only woman in the team. Today, I am still the only woman and I am a front woman in my company. This means that, if those barriers and obstacles are real, I should face them directly. And I do. But just like my male colleagues do, just like any other startup entrepreneur, man or woman that I met during these last few years of networking among startups and investors. Of course, I have mainly experience of first time entrepreneurs and under 35 years’ entrepreneurs, but I can confirm the following statements: • We all, men and women, have difficulties in access to credit with banks as well as with VC funds and business

angels, as well as we have difficulties on the international markets for high competition levels. • We all, men and women, sometimes have to fight the lack of credibility, just because we are young people in a world of aged business bosses. • Lack of entrepreneurial culture in education affects girls as well as boys since their teen ages. • It is true that young women lack of soft skills such as the attitude to show gender solidarity and networking, but worldwide female role models are raising and female business networks phenomenon is a reality nowadays. • Modern families share duties and remote working is not an ideal anymore; this helps young mothers and fathers, even if social supports to children is not sufficient yet. So, do I really believe that gender inequalities are affecting my professional life as a young entrepreneur? Well, not really... But why? Maybe because I am 27-years-old and I am crafting my business in a highly innovative industry? Yes, this can be true, because gender inequality IS actually a reality in the general labor market and in the normal business world, in my country as well as in others laying on the Mediterranean Sea. In fact, whilst male and female unemployment rates in the European Union have converged in recent years and by the second quarter of 2009 male unemEUROPEANBUSINESSREVIEW

Special Report: YOUNG LEADERS

ployment rate was higher; still Spain, Portugal, Greece, Malta, Cyprus and Italy show some of the most worrying female unemployment rates of the Union. In 2011 (I quarter), Italy showed a female unemployment rate of 9.6% compared to a 7.9% male unemployment rate. Malta, Italy and Spain (among others) have also registered a female employment rate below 60% in 2009 (much lower than the threshold of 70% indicated by the Lisbon European Council to be reached in 2010). It is a matter of culture in history, especially a matter of the culture that has affected education systems and made female stand up in the labor market in a slightly slower manner. All this is true, but it is definitely not what I am staring at in the young entrepreneurial environment where I am living. Does this mean that young entrepreneurial experiences are the way to face employment gender inequality? Is innovative entrepreneurship the road to an equal participation of genders in the productivity engines of our countries? Will it be possible, through that, to make the change real and reach northern and younger EU countries that are now more “equal” than we are? I believe it is. It is, at least, one of the solutions; one of the roads we should follow on the map towards a European Union that is based on sustainable innovation and prosperity, where the whole active population give a contribution. So, come on, girls… Stand up for a brighter future where young brilliant women and men shape their jobs and lives with their hands and intelligence! Latins used to say that men are crafter of their destiny and, never as in these hard times of uncertainty, we can state that young women and men are the best ones that EU can rely upon for building a stronger and brighter European future.

*A zzurra Giorgio is one of the founders of ThinkYoung and a member of the Writing Team. azzurra.giorgio@ intervieweb.it EUROPEANBUSINESSREVIEW

What if Steve Jobs had been European? When I was younger, my Ethics teacher in high school used to write this question on the blackboard: “What if Einstein had been born in Africa?”. We would then passionately argue about poverty, inequality and the lack of opportunities in the Southern hemisphere. By Leire Ariz*

ut some weeks ago, when Steve Jobs died just the day after I attended the Lisbon Council’s Digital Agenda Summit about innovation, I didn’t ask myself what our fate would be if Jobs had been born in poor Ethiopia. Instead, I wondered: What if he had just been raised in Europe? Just the fact that the question popped up in my mind is meaningful enough. Some years ago, Europeans used to be the lucky avant-gardes who made the

world jealous. Now, we are pitied. And we pity ourselves with our attitude towards the financial crisis. One would argue that this recession is the cause of Europe’s lack of innovation. But above the economic situation, the laws and the measures being debated these days, the problem is this self pity attitude that the crisis has infected into us. Just as a depressed person who does not break with the past, our depressed Europe seems to take pleasure on keeping the wound open. Austerity, being as necessary as it is to lower the debt and keep the markets calmed, only makes the depression grow. At least in the behavioral aspect that is key for innovation. How are we supposed to be innovative if all we keep in mind is to cut expenses? And how are we supposed to grow and help come out of this crisis if we are not innovative? Catch 22 right in front of us. This problem would be less serious if our self pity was only circumstancial and due to the crisis, but it might have also been one of the causes of the crisis itself. Because going further, there is also something intrinsecal to the European identity that explains our current status. Former Spanish prime minister Felipe Gonzalez described it pretty well on one of his quotes about the European Union: “The problem is that we

Special Report: YOUNG LEADERS

are a think tank, and we should become an action tank”. He was referring to the way decisions are made in the EU institutions, but the characteristic it reflects is also representative of some aspects of the European identity. Because, after all, you are what you eat... And also what your Government does. And no matter how far Europeans generally are from their institutions, we are influenced by their workstyle. And viceversa. Just like them, we are too bureaucratic and too academical to be as innovative as other parts of the world. If Steve Jobs had been European, he might have been a young member of the lost generation too worried about finding a job to focus on his creativity. He might have been too exploited in an unpaid internship to have time to develop his idea. Or he might have actually managed to make it true, but then failed to find financing. Or someone

who would trust him and give him an opportunity to make it happen. Maybe he would have had the opportunity to get scholarships, but have found too many bureaucratic obstacles to be effective. And considering the critical circumstances in the continent, it is also possible that he would have ran into someone who would steal his idea. But even earlier than all this, maybe Steve Jobs would have never had the big innovative idea. Just because maybe, he would have been raised in the world of theories, too far from practice. If he had been born in the 90s instead of the 50s, he might actually have been lucky enough to have some sort of exchange program or internship, which would mean he would have gotten some international and practical knowledge. But even in this case, once after graduating, he might have been thinking what many young Europeans are thinking right now. “There are three ways out to the

labour market: through land, sea and air”. He would probably choose Silicon Valley, like other Europeans who now run 60% of the companies there, Sao Paulo or Tel Aviv, but Europe is unlikely to have been on his list. And this is something the European Union can’t afford to let happen. Who knows how many young Europeans have the potential to become the next Steve Jobs. We all need to give them the right education, the right opportunities and the right atmosphere to make their ideas happen. They are the future. And the way out of the crisis.

* Leire Ariz is the Media Officer at ThinkYoung, the first think tank concerned with young Europeans. EUROPEANBUSINESSREVIEW

ENTREPRENEURSHIP

Can Entrepreneurship Lead the “NEW” Europe? The German magazine “DER SPIEGEL” in its main article on the 18th of November, started with the comment: “The old European Union did not work”. Except the statement itself, an even more important point is that it comes from a German magazine and it comes now, that Germany is the only country in Europe that actually skips the debt crisis. By Socratis Ploussas*

EUROPEANBUSINESSREVIEW

ENTREPRENEURSHIP

t is long ago around a decade - since Donald Rumshfeld claimed that Europe is turning to an “Old” continent. In all these years very few things were improved towards the opposite direction. Systems changed, people changed but eventually just some days ago the German magazine claimed Europe as “old”. So, can we say that we lost a whole decade? Even more, what about the next decade? Finally, where does Old refer to? If it is a demographic problem then we have ways to deal with it. Still if it is a mentality and processes issue, what is next? The writer believes that YES we lost one decade. Also we are very close to losing the next one as well. I would not be justified to say that if we were looking at Europe only. Still, we have to look at a global market economy society. Thus, it is very easy to understand that YES it is a systemic issue and NO, we cannot solve it just by addressing one part here and one part there. EUROPE has to deal with the whole package and at the same time be competitive versus a lot more countries and regions. The last decade of the 20th century there was more wealth produced than the whole 90years. The first decade of the 21st century there was an uncontrollable rally with a new global market, where everybody was connected markets and people-, with new global players (the BRICs that became the main part of G-20). In that decade, the Euro was introduced to rule the monetary markets but instead it ended up begging China and Brazil to save it. Two major issues: • EURO was just a currency, not enough attention on infra was put. So this was just a bankers’ effort with no economic or public policies to support it. • Also Europe did not adopt to the new global reality. We have the mentality that does not fit the globalization, cope with changes and even more with high growth. It is now that we try to figure out the role of Asia or Africa in global environment. All of Asia and even sub-saharian Africa...

What is next? Nothing less than a completely new approach.

The fact that Germany is now a winner, does not mean that in the next 5-10 years it will remain a winner. It does not mean that this market model will be winning, especially if the main approach is to keep people at a strict environment. 95% of German workers work for big companies. How can innovation develop? How can growth come? On the other part, Europe cannot adopt to the Anglosaxon approach. That would be very risky since first it is not as well unquestionably successful nowadays US has equally big problems as Europe, they deal with them on a short-term basis and even more, it does not fit the norms of the European societies. What the BRICs are doing again, is completely opposite to the European ideas and values. We cannot imagine Europeans with 100€ monthly salaries and living in blocks we passed that with the fall of communism at 1989. Competitiveness cannot come from cost reduction but from quality and innovation. EUROPE needs to DISCOVER a new system without questioning the historical background: political, monetary, economic but even more wealth creating and development-oriented.

A systematic approach of a federal Europe is needed. Not just a federation, but a holistic systematic approach that will address some key issues: 1. Entrepreneurship: 22mio SMEs in Europe. They have to become from the backbone of the economy, its frontier. Small business can drive innovation, systems re-engineering and talent 2. Innovation: R&D investment shall be significant. Companies must invest, EU centrally must invest, SMEs must invest. EU must develop institutions like EIT (European Institution of Innovation and Technology), Patent and IP mechanisms (fast and effective) and mainly 3. Education and even more, liaison between Higher Education R&D Business. University spin-offs shall be a target not a simple result. 4. EU central support. Subsidies cannot be the answer. Other tools must be used, more concrete and long-term like taxation facilitation, Opening and closing of companies rules, institutions that protect failure. All these shall be done on a targeted and focused way, that leverage on the strengths of each and every country-member. 5. Smart money: a new financing approach. Banking system cannot be the only or even the main source of financing. We need more smart money put into the system that create wealth. Alternative stock exchange, Venture Capitals, Accredited Angel investors, Smaller investment banks, funds etc. 6. A central administration that will focus on supporting the everyday life of the European citizen and not only the “politically high exposure” issues social security, health, defense, clean cities etc. 7. New governance with less bureaucracy and more democracy. All the institutions members having long-term policy making orientation, consistency on their management and more citizens’ involvement (election of all the heads from the European people). 8. Finally, political commitment to the change The change as a whole package will contain new economic rules and inter-relations that the writer cannot be knowledgeable of. Still the new focus shall be on entrepreneurship and wealth creation and not on conservatism and remain of political and social status-quo. It is a matter of flexibility in a new environment that is global, with many uncertainties and many more interconnections.

* Co-founder of NEOVENT - Business Acceleration (www.neovent.co.uk) and Vice-President of the Hellenic Start-Ups Association. EUROPEANBUSINESSREVIEW

REVIEW

Clinton: we’ve got to get America back in the future business! In the very beginning of 2001, after 8 years, President Bill Clinton left the White House with a budget surplus, higher employment, fewer people on welfare, lower taxes for much of the population and having scrapped lots of government red tapes. Americans haven’t forgotten this and growing criticism of President Barack Obama has been accompanied by warmer feelings for the Clintons. More and more Democrats now wonder if they should have chosen Hillary in his place. It is increasingly common for Obama’s weak handling of the economy to be contrasted with the surer leadership and better economic times when Clinton ruled. By N. Peter Kramer

EUROPEANBUSINESSREVIEW

ill Clinton has now written a book with ideas and suggestions. He said that he was prompted to write it by the success in the 2010 mid-term elections of the Republicans, the ‘anti-government movement’ as he calls them. At no point in Back to Work does the author criticise President Obama by name. But it is hard not to see the book as an implied rebuke from America’s 42nd President to its 44th. But if the book has a vision, it is a retrospective one. It is Clinton’s proud defence of his own two-term presidency (1993-2001). At no time just before or since Clinton hold office middle-class standards have improved; median household income grew by almost twenty percent; more than 22 million jobs were created during the Clinton years. Much of the boom in the nineties was generated by the IT revolution and by the end of the cold war (‘peace dividend’). Clinton made a lot of his luck, but to be honest: most probably it would have happened anyway and recreating the conditions of the nineties is not possible. Bill Clinton understands politics and economics. But nobody is perfect. His critics will point at the deregulatory policies promoted by his administration. Didn’t these contribute to conditions that led to the Wall Street melt down of 2008 and the recession that followed? Or Clinton’s signing of the Gramm-Leach-Bliley Act, repealing part of the Glass-Steagall Act that prohibited commercial banks from engaging in the investment business? His response is that ‘it is not evident the mortgage crisis was enlarged and hastened by the end of the division between commercial and investment banks’. The book is full of ideas about how to revive the American economy and get millions of unemployed back to work. Bill Clinton is keen on the idea of modernising the infrastructure and creating environmentally friendly ‘green jobs’. In his view this requires ‘smart government’. Clinton’s optimistic conclusion is that America’s problems are fixable and that America will rise again. We are waiting for President Obama. Didn’t he say: Yes we can?

* Bill Clinton - Back to Work: Why We Need Smart Government for a Strong Economy. Published by Hutchinson-London; 208 pages; ISBN 978 0 091 944131

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MEDIA FREEDOM

AEJ finds press freedom crumbling across eastern Europe Romania’s foreign minister, Teodor Baconschi, told journalists who gathered in Bucharest from all over Europe on November 11-13, 2011 at the annual Congress of the Association of European Journalists that “there is a lot of corruption in politics and the press” in Romania. By William Horsley*

he remark reinforced the analysis of Freedom House, an international media monitoring organisation, that the Romanian media are dominated by “a handful of owners with both political and business interests”. Mr Baconschi blamed what he called the “dark side” of collusion between certain businesses and professional journalists for a general trend in Romania, in which, he said, journalists act like mercenaries, peddling propaganda and stirring up mistrust instead of reporting on matters of public interests in ways that strengthen democracy. The minister’s comments echo recent findings of the European Commission, which last July said in a review of corruption in Romania and Bulgaria that failures to convict former ministers and others charged in high-level corruption cases meant that the rule of law was still not working as it should in either country.

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Mediasind, the main Romanian journalists’ union, handed a petition to Mr Baconschi at the AEJ Congress, which asked the government to drop plans to change the legal status of journalists by placing them in the same category as workers in advertising, museums and libraries. In Bucharest the AEJ conducted its own audit of the squeeze on press freedom in five other countries in the region, which exposed a pattern of the erosion of journalistic independence, and a corresponding decline in press standards, in Bulgaria, Turkey, Moldova, Ukraine and Belarus. AEJ members from those countries made presentations to the Congress which amounted to a dismal overall picture of crumbling press freedoms, the stifling of legitimate criticism and debate, and frustration among journalists that safeguards for media freedom are being progressively undermined. Bulgaria: The AEJ in Bulgaria conducted a survey of 113

MEDIA FREEDOM

journalists which highlighted serious concerns about the increase in unethical practises such as journalists being asked to write articles paid for by business or other interests. More than half the journalists surveyed said they had experienced political pressure over what they wrote. Most also indicated that advertisers were able to influence media outlets not to report in a critical way about their business activities. Turkey: The AEJ’s Turkish vice-president, Dogan Tilic, said that 64 journalists were now imprisoned in Turkey and thousands had in recent years faced investigations that could lead to fines or prison terms. The Congress passed a Resolution calling on the Turkish government to stop abusing its laws to prosecute journalists, and asking member states of the European Union to press Turkey to repeal the restrictive laws under which journalists are forced to live in fear of being charged with offences under laws related to terrorism, state security and insulting state institutions. Moldova: Aneta Grosu, the head of the AEJ’s Moldova Section, who is also a senior editor of an independent newspaper Ziarul de Garda, was obliged to miss the Bucharest meeting because she had to appear in a court in Chisinau to answer defamation charges against the paper brought by two prosecutors and a former member of parliament. Many formerly independent media organisations in Moldova have succumbed to pressures from various political interests to stop investigating and reporting on issues of corruption and influence-peddling in the country.

against alleged fraud in the presidential election last December. Journalists in Belarus are deeply concerned about government plans to further restrict the activities of civil society organisations, and draft legislation which, they fear, would deny citizens the right to legal redress in cases when the police use excessive force while making arrests. The AEJ Congress welcomed recent expressions of concern by the European Commission and members of the European Parliament about the state of press freedom in some EU member states and in many European countries which are not in the European Union but which belong to the Council of Europe and the OSCE (Organisation for Security And Cooperation in Europe). The Congress confirmed the AEJ’s intention to continue raising concerns about attacks on legitimate media freedom to European institutions. The AEJ is an Observer member of the Council of Europe’s standard-setting body, the Steering Committee on Media (CDMC).

In Bucharest the AEJ conducted its own audit of the squeeze on press freedom in five other countries in the region, which exposed a pattern of the erosion of journalistic independence, and a corresponding decline in press standards, in Bulgaria,Turkey, Moldova, Ukraine and Belarus.

Ukraine: The AEJ Ukrainian section gave details of the ownership of the major media entities by oligarchs with political interests, including a 24 percent share of the TV market in the hands of persons close to Valeriy Khoroshkovsky, who is currently one of the heads of the country’s security service. As in Bulgaria, the Ukrainian media landscape is marred by the substantial number of paid-for materials - in effect advertisements - shown on TV as if they were genuine news stories. The AEJ Ukrainian Section has partnered the Telekritika website and published English-language versions of Telekritika’s data monitoring Ukrainian TV channels. It shows a high and growing rate of self-censorship and of clearly partisan news stories. Belarus: Andrei Aliaksandrau of the Belarus Association of Journalists reported that conditions for independent journalism there had deteriorated further in the past year. Dozens of journalists were harassed or arrested during the large-scale protests

More than sixty journalists from seventeen countries took part in the AEJ’s 2011 General Assembly and Congress in Bucharest on 12 and 13 November.

* AEJ’s Media Freedom Representative EUROPEANBUSINESSREVIEW

TRENDS

The second economy Digitization is creating a second economy that’s vast, automatic, and invisiblethereby bringing the biggest change since the Industrial Revolution. By W. Brian Arthur*

Jacques Delors

EUROPEANBUSINESSREVIEW

n 1850, a decade before the Civil War, the United States’ economy was smallit wasn’t much bigger than Italy’s. Forty years later, it was the largest economy in the world. What happened in-between was the railroads. They linked the east of the country to the west, and the interior to both. They gave access to the east’s industrial goods; they made possible economies of scale; they stimulated steel and manufacturingand the economy was never the same. Deep changes like this are not unusual. Every so oftenevery 60 years or soa body of technology comes along and over several decades, quietly, almost unnoticeably, transforms the economy: it brings new social classes to the fore and creates a different world for business. Can such a transformationdeep and slow and silentbe happening today? We could look for one in the genetic technologies, or in nanotech, but their time hasn’t fully come. But I want to argue that something deep is going on with information technology, something that goes well beyond the use of computers, social media, and commerce on the Internet. Business processes that once took place among human beings are now being executed electronically. They are taking place in an unseen domain that is strictly digital. On the surface, this shift doesn’t seem particularly consequentialit’s almost something we take for granted. But I believe it is causing a revolution no less important and dramatic than that of the railroads. It is quietly creating a second economy, a digital one. Let me begin with two examples. Twenty years ago, if you went into an airport you would walk up to a counter and present paper tickets to a human being. That person would register you on a computer, notify the flight you’d arrived, and check your luggage in. All this was done by humans. Today, you walk into an airport and look for a machine. You put in a frequent-flier card or credit card, and it takes just three or four seconds to get back a boarding pass, receipt, and luggage tag. What interests me is what happens in those three or four seconds. The moment the card goes in, you are starting a huge conversation conducted entirely among machines. Once your name is recognized, computers are checking your flight status with the airlines, your past travel history, your name with the TSA1 (and possibly also with the National Security Agency). They are checking your seat choice, your frequent-flier status, and your access to lounges. This unseen, underground conversation is happening among multiple servers talking to other servers, talking to satellites that are talking to computers (possibly in London, where you’re going), and checking with passport control, with foreign immigration, with ongoing connecting flights. And to make sure the aircraft’s weight distribution is fine, the machines are also starting to adjust the passenger count and seating according to whether the fuselage is loaded more heavily at the front or back.

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These large and fairly complicated conversations that you’ve triggered occur entirely among things remotely talking to other things: servers, switches, routers, and other Internet and telecommunications devices, updating and shuttling information back and forth. All of this occurs in the few seconds it takes to get your boarding pass back. And even after that happens, if you could see these conversations as flashing lights, they’d still be flashing all over the country for some time, perhaps talking to the flight controllersstarting to say that the flight’s getting ready for departure and to prepare for that. Now consider a second example, from supply chain management. Twenty years ago, if you were shipping freight through Rotterdam into the center of Europe, people with clipboards would be registering arrival, checking manifests, filling out paperwork, and telephoning forward destinations to let other people know. Now such shipments go through an RFID2 portal where they are scanned, digitally captured, and automatically dispatched. The RFID portal is in conversation digitally with the originating shipper, other depots, other suppliers, and destinations along the route, all keeping track, keeping control, and reconfiguring routing if necessary to optimize things along the way. What used to be done by humans is now executed as a series of conversations among remotely located servers. In both these examples, and all across economies in the devel- The metaphor isn’t perfect: this emerging second-economy oped world, processes in the physical economy are being en- root system is more complicated than any aspen system, since tered into the digital economy, where they are “speaking to” it’s also making new connections and new configurations on other processes in the digital economy, in a constant conver- the fly. But the aspen metaphor is useful for capturing the realsation among multiple servers and multiple semi-intelligent ity that the observable physical world of aspen trees hides an nodes that are updating things, querying things, checking unseen underground root system just as large or even larger. things off, readjusting things, and eventually connecting back How large is the unseen second economy? By a rough backwith processes and humans in the physical economy. of-the-envelope calculation (see sidebar, “How fast is the secSo we can say that another economya second economy growing?”), in about two ond economyof all of these digitized busidecades the digital economy will reach ness processes conversing, executing, and Business processes that the same size as the physical economy. triggering further actions is silently form- once took place among human It’s as if there will be another American ing alongside the physical economy. economy anchored off San Francisco beings are now being executed (or, more in keeping with my metaphor, electronically. This shift is Aspen root systems slipped in underneath the original econcausing a revolution no less If I were to look for adjectives to describe omy) and growing all the while. this second economy, I’d say it is vast, important and dramatic Now this second, digital economy isn’t silent, connected, unseen, and autono- than that of the railroads. producing anything tangible. It’s not mous (meaning that human beings may It is quietly creating a second making my bed in a hotel, or bringing design it but are not directly involved in economy, a digital one. me orange juice in the morning. But it is running it). It is remotely executing and running an awful lot of the economy. It’s global, always on, and endlessly confighelping architects design buildings, it’s urable. It is concurrenta great computer expressionwhich means tracking sales and inventory, getting goods from here to there, that everything happens in parallel. It is self-configuring, mean- executing trades and banking operations, controlling manufacing it constantly reconfigures itself on the fly, and increasingly it turing equipment, making design calculations, billing clients, is also self-organizing, self-architecting, and self-healing. navigating aircraft, helping diagnose patients, and guiding These last descriptors sound biologicaland they are. In fact, laparoscopic surgeries. Such operations grow slowly and take I’m beginning to think of this second economy, which is un- time to form. In any deep transformation, industries do not so der the surface of the physical economy, as a huge intercon- much adopt the new body of technology as encounter it, and as nected root system, very much like the root system for aspen they do so they create new ways to profit from its possibilities. trees. For every acre of aspen trees above the ground, there’s The deep transformation I am describing is happening not just in about ten miles of roots underneath, all interconnected with the United States but in all advanced economies, especially in Europe and Japan. And its revolutionary scale can only be grasped if one another, “communicating” with each other. EUROPEANBUSINESSREVIEW

TRENDS

we go beyond my aspen metaphor to another analogy.

A neural system for the economy

Recall that in the digital conversations I was describing, something that occurs in the physical economy is sensed by the second economywhich then gives back an appropriate response. A truck passes its load through an RFID sensor or you check in at the airport, a lot of recomputation takes place, and appropriate physical actions are triggered. There’s a parallel in this with how biologists think of intelligence. I’m not talking about human intelligence or anything that would qualify as conscious intelligence. Biologists tell us that an organism is intelligent if it senses something, changes its internal state, and reacts appropriately. If you put an E. coli bacterium into an uneven concentration of glucose, it does the appropriate thing by swimming toward where the glucose is more concentrated. Biologists would call this intelligent behavior. The bacterium senses something, “computes” something (although we may not know exactly how), and returns an appropriate response. No brain need be involved. A primitive jellyfish doesn’t have a central nervous system or brain. What it has is a kind of neural

EUROPEANBUSINESSREVIEW

layer or nerve net that lets it sense and react appropriately. I’m arguing that all these aspen rootsthis vast global digital network that is sensing, “computing,” and reacting appropriatelyis starting to constitute a neural layer for the economy. The second economy constitutes a neural layer for the physical economy. Just what sort of change is this qualitatively? Think of it this way. With the coming of the Industrial Revolutionroughly from the 1760s, when Watt’s steam engine appeared, through around 1850 and beyondthe economy developed a muscular system in the form of machine power. Now it is developing a neural system. This may sound grandiose, but actually I think the metaphor is valid. Around 1990, computers started seriously to talk to each other, and all these connections started to happen. The individual machinesserversare like neurons, and the axons and synapses are the communication pathways and linkages that enable them to be in conversation with each other and to take appropriate action. Is this the biggest change since the Industrial Revolution? Well, without sticking my neck out too much, I believe so. In fact, I think it may well be the biggest change ever in the economy. It is a deep qualitative change that is bringing intel-

TRENDS

ligent, automatic response to the economy. There’s no upper limit to this, no place where it has to end. Now, I’m not interested in science fiction, or predicting the singularity, or talking about cyborgs. None of that interests me. What I am saying is that it would be easy to underestimate the degree to which this is going to make a difference. I think that for the rest of this century, barring wars and pestilence, a lot of the story will be the building out of this second economy, an unseen underground economy that basically is giving us intelligent reactions to what we do above the ground. For example, if I’m driving in Los Angeles in 15 years’ time, likely it’ll be a driverless car in a flow of traffic where my car’s in a conversation with the cars around it that are in conversation with general traffic and with my car. The second economy is creating for usslowly, quietly, and steadilya different world.

A downside

Of course, as with most changes, there is a downside. I am concerned that there is an adverse impact on jobs. Productivity increasing, say, at 2.4 percent in a given year means either that the same number of people can produce 2.4 percent more output or that we can get the same output with 2.4 percent fewer people. Both of these are happening. We are getting more output for each person in the economy, but overall output, nationally, requires fewer people to produce it. Nowadays, fewer people are required behind the desk of an airline. Much of the work is still physicalsomeone still has to take your luggage and put it on the beltbut much has vanished into the digital world of sensing, digital communication, and intelligent response. Physical jobs are disappearing into the second economy, and I believe this effect is dwarfing the much more publicized effect of jobs disappearing to places like India and China. There are parallels with what has happened before. In the early 20th century, farm jobs became mechanized and there was less need for farm labor, and some decades later manufacturing jobs became mechanized and there was less need for factory labor. Now business processesmany in the service sectorare becoming “mechanized” and fewer people are needed, and this is exerting systematic downward pressure on jobs. We don’t have paralegals in the numbers we used to. Or draftsmen, telephone operators, typists, or bookkeeping people. A lot of that work is now done digitally. We do have police and teachers and doctors; where there’s a need for human judgment and human interaction, we still have that. But the primary cause of all of the downsizing we’ve had since the mid-1990s is that a lot of human jobs are disappearing into the second economy. Not to reappear. Seeing things this way, it’s not surprising we are still working our way out of the bad 2008–09 recession with a great deal of joblessness. There’s a larger lesson to be drawn from this. The second economy will certainly be the engine of growth and the provider of prosperity for the rest of this century and beyond, but it may not provide jobs, so there may be prosperity without full access for many. This suggests to me that the main challenge

of the economy is shifting from producing prosperity to distributing prosperity. The second economy will produce wealth no matter what we do; distributing that wealth has become the main problem. For centuries, wealth has traditionally been apportioned in the West through jobs, and jobs have always been forthcoming. When farm jobs disappeared, we still had manufacturing jobs, and when these disappeared we migrated to service jobs. With this digital transformation, this last repository of jobs is shrinkingfewer of us in the future may have white-collar business process jobsand we face a problem. The system will adjust of course, though I can’t yet say exactly how. Perhaps some new part of the economy will come forward and generate a whole new set of jobs. Perhaps we will have short workweeks and long vacations so there will be more jobs to go around. Perhaps we will have to subsidize job creation. Perhaps the very idea of a job and of being productive will change over the next two or three decades. The problem is by no means insoluble. The good news is that if we do solve it we may at last have the freedom to invest our energies in creative acts.

Economic possibilities for our grandchildren

In 1930, Keynes wrote a famous essay, “Economic possibilities for our grandchildren.” Reading it now, in the era of those grandchildren, I am surprised just how accurate it is. Keynes predicts that “the standard of life in progressive countries one hundred years hence will be between four and eight times as high as it is to-day.” He rightly warns of “technological unemployment,” but dares to surmise that “the economic problem [of producing enough goods] may be solved.” If we had asked him and his contemporaries how all this might come about, they might have imagined lots of factories with lots of machines, possibly even with robots, with the workers in these factories gradually being replaced by machines and by individual robots. That is not quite how things have developed. We do have sophisticated machines, but in the place of personal automation (robots) we have a collective automation. Underneath the physical economy, with its physical people and physical tasks, lies a second economy that is automatic and neurally intelligent, with no upper limit to its buildout. The prosperity we enjoy and the difficulties with jobs would not have surprised Keynes, but the means of achieving that prosperity would have. This second economy that is silently formingvast, interconnected, and extraordinarily productiveis creating for us a new economic world. How we will fare in this world, how we will adapt to it, how we will profit from it and share its benefits, is very much up to us.

* W. Brian Arthur is a visiting researcher with the Intelligent System Lab at the Palo Alto Research Center (PARC) and an external professor at the Santa Fe Institute. He is an economist and technology thinker and a pioneer in the science of complexity. EUROPEANBUSINESSREVIEW

BUSINESS TRENDS

China’s confident consumers A McKinsey survey highlights how fast the market is changing. The Chinese have taken to consumerism with ease, embracing thousands of new products, services, and brands. But the flipside is that the Chinese market changes at a speed capable of leaving all but the nimblest of companies breathless, as McKinsey’s 2011 survey of Chinese consumers highlights. Three findings stood out. Even in the face of rising inflation, Chinese consumers are more confident this year than in 2010 about their financial prospects. Among urban consumers, the number of first-time buyers-a group that has been a major driver of category growth in Chinais declining. Finally, although brand awareness is rising, we see little sign that brand loyalty is following suit. In fact, more and more consumers choose among a growing number of favorite brands. By Yuval Atsmon and Max Magni*

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hese and other findings from this year’s survey have clear implications for companies seeking to capture the next wave of consumer-spending growth in China. Any broad-brush approach to winning consumers’ rising spending power will miss the mark.

Consumers and inflation

At the end of 2010, annual inflation in China was 4.6 percent. By this August, it had reached 6.2 percent—close to its highest level in three years. This development is inevitably affecting real growth in consumption, which fell to 8.5 percent in 2010, from 9.4 percent in 2009. Still, our survey found that consumers are more confident about their financial future than they were last year, and this will probably affect their buying behavior. Fifty-eight percent of respondents said they expected their incomes to rise next year, compared with 39 percent in 2010. No doubt reflecting this confidence, the survey shows that the number of respondents who choose to spend more—buying in greater quantities, more frequently, or more expensive items in a given category—is holding firm. Whereas last year’s survey showed that consumers offset higher spending in some categories by spending less in others, this year there appears to be much less rebalancing. Also noteworthy is how consumers who spent more in 2010 than in 2009 account for their higher spending. On average across categories, some 50 percent of the survey participants identified inflation as the main reason. But of the remainder, 35 percent said they were trading up (buying more expensive goods in a given category), an increase from 26 percent in last year’s survey. Sixty percent said that buying in larger quantities or more frequently was the main reason for their higher spending, compared with 54 percent in last year’s survey. But only 5 percent of consumers said they were spending more because they were first-time buyers in certain product categories—down from 20 percent in last year’s survey—an indication of the growing maturity of many such categories.

BUSINESS TRENDS

Consumers and category growth

A decade ago, most category growth came from first-time buyers. But this is changing, as so many products are now both available and within the financial reach of large numbers of consumers. Big variations in the importance of first-time buyers have opened up, depending on the category and geographic region. Take large personal-care categories such as skin care and hair care, for example. In personal care, only 3 percent of respondents who said they spent more on the category in the past year were first-time buyers. In less mature niche categories (deodorants, for example), first-time buyers remain more important, as they are for several big-ticket items. In personal digital gadgets, for example, 23 percent of respondents said they had bought such goods for the first time. At the geographic level, the penetration of certain goods may be high in China’s more economically developed regions, but plenty of consumer-conversion opportunities remain in less developed ones, which the government has targeted for higher economic growth. Again in personal care, the survey showed that 15 percent of consumers in the Chengdu cluster—the region that encompasses the western city of Chengdu, as well as the less developed surrounding cities of Mianyang and Neijiang—said they had started to use products in these categories only in the past year. Just 1 percent of consumers in the more developed Hangzhou cluster, which includes the cities of Hangzhou, Jinhua, and Linhai, gave that answer.2

Consumers and brands

Our survey detects no letup in the influence of brands on Chinese consumers’ buying decisions. But neither does it indicate strong signs of increasing loyalty to any single brand. The survey shows the extent to which consumers value brands more than price or channel, largely because they believe that branded products are safer, of higher quality, and more reliable than nonbranded ones. But faith in brands still does not translate into brand loyalty. In fact, both the number of consumers who always choose from among a relatively small set of brands—whom we refer to as “repertoire loyalists”— and the number of brands in their repertoire continue to rise. The average Chinese consumer now chooses among three to five brands in any given category, compared with two to three brands two years ago. In some categories, such as apparel, where luxury brands have grown hugely popular, the contrast is sharper still. To succeed in this environment, executives will need to understand where the growth prospects lie, both at the category level and in different geographic regions. Only then will companies be able to prioritize resources and tailor strategies appropriately, to strike a balance between building mass appeal and meeting the needs of specific consumer groups, to focus on perceived value rather than absolute price, to modernize marketing tools for the Internet age, and to embrace rapidly growing online sales channels quickly. Companies must have both the flexibility to adapt and the skills to innovate to keep in step with the Chinese market’s exciting development.

* Yuval Atsmon and Max Magni are principals in McKinsey’s Shanghai and Hong Kong offices, respectively. This article is adapted from the McKinsey report 2011 Annual Chinese Consumer Study-The New Frontiers of Growth (October 2011), available on mckinsey.com EUROPEANBUSINESSREVIEW

BUSINESS TRENDS

DACIA, key player for Romania’s economy Sightseeing inside the huge factory, going slow forwards in a little train; watching hundreds of people, most men but also many women, putting parts together on a long assembly line, till at the end where you see new cars (all types of Dacia, Logan, Sandero and Duster cars), it is fascinating. No robots in the DACIA industrial site in Mioveni (Romania) but over 15.000 employees; more than 30% of them are women, not only with tasks on the ‘working floor’, you find them on every level in the organisation. By N. Peter Kramer*

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acia, the first Romanian car manufacturer was established in 1966. In 1999 Renault France purchased 51% of the company capital in the privatisation process of state owned companies. Renault currently holds 99,45% of Dacia stocks. In the meantime Dacia in Mioveni is the biggest car assembly plant in the Renault Group and Romania is the second country of the Renault world, after France.

Dacia, an international brand

Dacia’s objective is to manufacture a robust, reliable and accessible car range which is to meet Renault’s high quality standards. Dacia is the second brand of the Renault Group, contributing significantly to the improvement of Romania’s image worldwide. The Logan project was a national Romanian challenge, but Dacia proved that it had the potential of an international brand. Recognition came with Sandero and Duster models which hit the jackpot as soon as they were launched. Dacia’s sales increased from 52.500 units in 2000 to nearly 350.000 in 2010. France and Germany are the two main export destinations with 110.000 and respectively 40.500 cars, followed by Italy, Spain and Turkey.

BUSINESS TRENDS

Dacia key player for Romania’s economy

Dacia represented 2.7% of Romania’s GDP in 2010. On the Mioveni industrial site there are 3 important entities. • The car assembly plant manufactures Dacia, Logan, Sandero and Duster cars. 90% of the plant production is exported. This plant is also manufacturing parts for other Renault’s plants which assemble Dacia cars. • The mechanical and chassis plant manufactures engines, gearboxes, transfer modules, front and rear axles and powertrain frames. These products are delivered to Dacia assembly plant and to other plants within the Renault-Nissan Alliance. There is also an aluminium smelting unit, the biggest in the Renault group. • The logistics direction is in charge with the transport of cars and parts. The direction exports sets of parts to plants within the Renault Group where Dacia, Logan, Sandero and Duster cars are assembled, in Russia, Morocco, Columbia, India, Iran, Brazil and South Africa.

The system, based on standardisation of the work benches, of methods and operations, essentially contributed to the increase of the productivity of Dacia factory, to improvement of the quality level, and of the working conditions. Ergonomics of the work benches and environmental parameters were ameliorated.

Dacia’s mission on safety, quality and environment

Health and safety for all employees, risk prevention and improvement of ergonomics are priorities for Dacia. Dacia’s health and safety policy follows the line set by the policies of the Renault Group. Quality policy is generated by Renault’s positioning as the most cost effective car maker in Europe. The main objective is to satisfy clients via irreproachable product and service quality. Dacia’s impact on the environment is similar to that of the Renault plants in Western Europe. During the last ten years Dacia invested €22 million for environmental protection.

Renault manufacturing system

Renault invested in the Mioveni plant more than €1.5 billion in the period 2000-2010. But these investments made to enlarge and modernise the industrial system would not have been enough without a new and modern production system. Improvement in the industrial performance of the Dacia site was possible only after the introduction of the Renault Manufacturing System (SPR), a very modern one in the car industry worldwide. The Dacia plant in Mioveni is a success in many perspectives and it is keeping the EU standards up. The French – Romanian carmakers cooperation is a very good example of what is possible when you have a common language...

* EBR’s Editor-in-Chief, N. Peter Kramer, visited the Dacia plant in Mioveni, Romania when attending the 49th Annual Congress of the Association of European Journalists (AEJ) in Bucharest (November 10-13, 2011). Dacia sponsored generously the AEJ Congress. EUROPEANBUSINESSREVIEW

TRAVEL & TOURISM

Selecting World Heritage sites: A new proposal There are nearly 1,000 UNESCO World Heritage sites. These sites benefit hugely from tourism, so suspicions of fixing the judges’ verdicts are rife. This column suggests a novel way to get rid of the politicisation: random selection. By Bruno S Frey and Lasse Steiner*

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he UNESCO World Heritage sites have become major attractions for cultural tourism and are icons of national identity. Being put on the UNESCO World Heritage List comes with considerable media coverage – and naturally governments invest substantial time and effort in order to gain an entry. At present, the list comprises 936 sites – 725 of them cultural, 183 natural, and 28 mixed properties in 153 of the 186 State Parties who ratified the Convention Concerning the Protection of World Cultural and Natural Heritage.

TRAVEL & TOURISM

Defining beauty

There is a precisely structured process to become a World Heritage site. A country must compile an inventory of its significant cultural and natural sites for a ‘tentative list’. It must then select a property from this list into a ‘nomination file’ evaluated by experts from the International Council on Monuments and Sites and the International Union for Conservation of Nature, under the guidance of the World Heritage Centre in Paris. They submit a recommendation to the World Heritage Committee composed of 21 countries. The experts classify the applications into four groups and recommend acceptance, to revise and resubmit the application, to correct significant shortcomings (with the possibility for resubmission after several years) and outright rejection. Those nominations that are accepted by the committee are included in the World Heritage List. They have to be of “outstanding universal value” and meet at least one of ten criteria such as, for instance that it “represents a masterpiece of human creative genius”, or “bears a unique and exceptional testimony to a cultural tradition or a civilization which is living or has disappeared”. While the first properties on the List were evaluated in a somewhat ad hoc fashion, it has been claimed that “(t)he scrutiny of these systems by the two Advisory Boards is now rigorous” (Cleere 2006: xxii).

Turning ugly

The World Heritage List is generally considered to be an excellent effort to save the globe’s common history in the form of cultural monuments and landscapes worth preserving. The achievements of list have been well recognised and we need not repeat them here (see for example Frey and Steiner 2011). There are, however, serious criticisms, most of them referring to the selection of sites. It has been argued that there are too many properties on the list, reducing their exclusivity. Another striking aspect is the highly unequal distribution of sites according to countries and continents, with almost 50% of the sites located in Europe. It has been claimed that the selection is not based on objective considerations but strongly depends on political influence. Our recent econometric study (Frey et al 2011) is consistent with this claim. For the year 2006 and at that time 182 countries, a large number of determinants, such as historical GDP, area in square kilometres of a country, and number of years of high civilization, are significantly correlated with the number of sites. In addition, it turns out that various factors unrelated to the value of heritage, such as rent-seeking by bureaucrats and politicians and membership in the UN Security Council, significantly influence the composition of the list. Other studies have previously shown that there is a direct correlation between participating in the Committee and representation in the list. The 21 member countries of the Committee nominated more than 30% of the listed sites between 1978 and 2004 (Van der Aa 2005). One extreme example occurred in 1997 when ten Italian sites where included in the List at one point in time during which the Committee was chaired by a compatriot. Even the director of the World Heritage Centre, Francesco Bandarin, concluded, “Inscription has become a political issue. It is about prestige, publicity, and economic development” (Henley 2001).

Random selection

In order to reduce such unwarranted political influence we propose to apply random selection. It is fair in the sense that every item has the same probability of being selected, which ensures a broad representation and reduces unwanted political interventions. In the form of demarchy (or lottocracy) this procedure has been extensively used in classical Greek and Italian city states such as Venice. Today it is still used for instance for jury services. Applied to the selection of World Heritage sites, two random mechanisms are possible. The sites to be put on the World Heritage List can be chosen by lot from among all sites considered ‘acceptable’ by the experts – that is, all those that are not rejected. Alternatively, all acceptable sites can be weighted by the classifications of the experts. Weight 3 could be given to those with recommended acceptance, weight 2 to the ones which have to be revised, and weight 1 to the ones with significant shortcomings. While this procedure would ensure representation of all acceptable sites, it makes it less attractive for governments to invest money and effort to propagate a property because the final selection is beyond their influence. A possible disadvantage may be that a random selection does not provide the same prestige as (what is claimed to be) a serious choice by a World Heritage Committee. To circumvent this problem we suggest a second random mechanism. The selection is applied one step ahead at the composition of the World Heritage Committee which today takes the allegedly politicised decisions. The members of the committee are selected by lot from the 186 member countries of the convention. Random selection of the Committee members makes ex ante bargaining, strategic voting, and logrolling more difficult. Undesired political influences can then to a large extent be excluded which should give more weight to an objective selection of sites based on the ten criteria agreed. Random selection has been used rarely in such a context, partly because the more politically influential countries object to its use. Moreover, many people object to random decisions because they are not used to them. Nevertheless, the World Heritage List seems to be an excellent object to use this social-decision mechanism.

* Bruno S Frey is a Professor of Economics at the University of Zurich and Lasse Steiner a PhD student, Department of Economics, University of Zurich ** Source: VoxEU.org EUROPEANBUSINESSREVIEW

FROM EAST TO WEST

From East to West

By Gianni Skaragas

With the U.S. presidential election date on the horizon, this column will focus on the GOP frontrunners. Some of them were reluctant to declare their intention to run, while others hurried to cement their roles as bastions of conservatism or party gadflies, representing too many diverse interests. What presidential hopefuls say or don’t say in debates can change the public’s perception that they are the strongest candidates and have an impact on their fundraising potential, but don’t rely on surveys to tell you anything about the likeability factor-it changes from debate to debate. Foreign policy seems to be the hardest subject for the GOP candidates-Israel is super good, Iran is super evil, China is, uh, bad-and the biggest bogeyman for them remains President Obama.

Rick Perry’s Clenched Fists The four-term Governor of Texas (longest-serving governor in Texas history) proved with his August entrance and $17 million in his first six weeks in the race that a late entry could have an advantage. In September 72% of Republicans said Perry had the right personal qualities to be president. You may love him or hate him, but he’s another great American story: Governor “Goodhair” served as a tactical airlift pilot in the U.S. Air Force flying the C-130 for four years. He is commander of the Texas National Guard, which in recent years was deployed in Iraq, Afghanistan and to border security operations. It seems easy to trust him. His hardscrabble, humble childhood on a cotton farm, his evangelical, conservative credentials and rightwing rhetoric in recent years installed him as a durable contender in the fight for the nomination. In the opening week of his campaign, Perry lashed out at the American President. He suggested that Obama does not love America, calling him the greatest threat to the country. “I think you want a president who is passionate about America - that’s in love with America,” he said during a visit to the Iowa State Fair, where he declared his determination to campaign “like his life depends on it”. Perry was suitable on paper. His trump card was the job creation record in Texas under his leadership from January 2001 through September 2011. According to the Bureau of Labor Statistics and the Dallas Federal Reserve, Texas accounts for 37 percent of new U.S. jobs, which is a disproportionately large number (1.2 million)-even as the rest of the country has lost more than 1 million jobs.

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Still, most critics remark that on closer inspection there is nothing really wondrous about the “Texas miracle”, attributing the job growth in the Lone Star state to low taxes, tort reform, minimal regulations and oil industry. The number of Texans making at or below the federal minimum wage has almost doubled, climbing from a little less than 5 percent in 2008 to 9.5 percent in 2010. It is also interesting that almost half of the state’s employment growth came in government sectors, as Perry took full advantage of public spending to create jobs through government employment. Regardless of whether Perry can tout his “Texas miracle”, he is right about one thing: He knows how to sign balanced budgets. The state’s economy is growing at twice the national rate, and, since the 2008 crash, Texas has created a disproportionately larger number of minimum paying, without insurance jobs than any other state in the country. If miracles and God’s messages to Republicans are integral to U.S. politics, so are sex scandals. In late September, with the media hyper-focused on the Texas governor and his redblooded conservatism, Perry became Larry Flynt’s target. “Have you had a gay or straight sexual encounter with Governor Rick Perry?” Pornographic magazine publisher ran full-page advertisements in the weekly editions of the U.S. satirical tabloid The Onion and the Austin Chronicle, offering $1 million to anyone with documented evidence of illicit sexual or intimate relations with the Texas governor. This was not the first time Larry Flynt put hard-lined Re-

FROM EAST TO WEST

publicans in his crosshairs offering money for evidence of their sexual dalliances, and trying to force them to resign from office. In 1999, newly minted Speaker of the House Robert Livingston stepped down after Flynt claimed to have proof of an extra-marital affair by the married Louisiana Republican. But Flynt’s effort to troll for dirt didn’t threaten Perry, who continued to rank high as the leading contender for the Republican presidential nomination, according to a USA Today/Gallup poll released that week. Rick Perry knows how to make news. He uses unhelpful rhetoric just to make an inflammatory speech and mask a debate. The Texas governor is the kind of bible-thumping Republican we love to hate. He opposes same-sex marriage. He is not fan of Social Security, debating such options to reform it as hiking the retirement age and privatizing the program. He believes that individuals would have done better if allowed to invest savings on their own, rather than entrusting the money to the government. The Republican presidential candidates regard global warming as a hoax, and Perry is sprinting a few steps ahead saying that climate change is an unproven theory created by “a substantial number of scientists who have manipulated data so that they will have dollars rolling into their projects.” But he is also the kind of Republican who wants to cut Congressional pay and office budgets in half. He wants to get the Transportation Safety Administration under control and criminalize insider trading by Congressmen. He advocates giving in-state tuition to certain illegal immigrants, and his tolerant position on immigration puts him at odds with Tea Party members. Not all Republican voters liked him, but many of them believed he could beat Obama in 2012. Everything was going great, and then something changed in Rochester, Michigan. It was something that could happen to anybody, but having it happen to him evoked pity: a lapse of memory, labeled one of the worst debate blunders.

The Texas governor headed into a GOP candidate debate, railing against “cocktail circuit” Republicans and disqualifying his rivals. And then, he just forgot the name of the third cabinet agency he plans to eliminate to reduce the size of the federal government if he is elected into office. “The third agency of government I would, I would do away with, the Education, uh, the... Commerce and, let’s see, I can’t. The third one, I can’t, sorry,” Perry stammered. “Oops.” He tried to laugh off his embarrassment. He even appeared on The Late Show with David Letterman and tried to convince Americans he was in on the joke. But Rick Perry didn’t just forget an agency. He set the bar so low that he seemed to forget how to run for President. Rugged good looks, clenched fists, booming voice, assertiveness skills: Rick Perry can certainly portray the American President in a film. He may not be the best debater, but he seems to know how to advance conservative causes, create jobs and bring antiWashington messages. Then again... Is «Oops» the future of the American Presidency?

EUROPEANBUSINESSREVIEW

LAST PAGE

Why we need a Europe of Culture? Since the moment the European Union (EU) was sketched out, in 1957, people have contently stressed the economic and political need for it. Goes without saying that these needs are important and it is very easy to understand why efforts in those two difficult directions are strained. By Athanase Papandropoulos

owever, according to Professor Tihomir J. Markovitch, from Beograd, the striking thing is that very little is said about a third aspect of this essential union, which seems just as important, if not the most important, element of all. This is the matter of culture. Without the â&#x20AC;&#x153;Europe of Cultureâ&#x20AC;?, economic and political union could easily run aground. We should understand the Europe of Culture to mean the deeprooted sense of belonging to a common intellectual and spiritual tradition, the possession of a common well of respect for the same values, feeling united in a common desire to defend and spread the ideals of freedom and democracy. In the first place, the Europe of Culture is the Europe of freedom and democracy. Perhaps so little is said about this Europe of Culture because it is viewed as something which has already been attained? To take such a view would be to commit a grave error. Europe is a long way off from spiritual unity. Europe is still, alas, in a state of pronounced spiritual disarray, irrespective of the fact that it

EUROPEANBUSINESSREVIEW

is possible to speak of a genuine European civilization, which essentially means our way of life, the manner in which we behave, our eating habits, and the entire organization of our daily lives. North, South, East and West, this particular European civilization is to be found from one corner of Europe to next. Under Europe` s present situation, this is very urgent. Because what this European civilization lacks is a people truly breathing as one and characterized by a deep-seated urge to erase the bad memories of the past and an unshakable desire to free themselves of prejudice and the evil propensities which often simmer beneath the surface of human nature. In the final analysis, the Europe of Culture is the cement that holds together the bricks and mortar of European unity, strong enough to withstand the most violent storm in an uncertain future. The essence of this cultural Europe is the realization by all Europeans, whether from west, east, north, south, or even the center, that they are the founding fathers and standard-bearers of one of the fundamental values of civilization and culture, namely that the freedom of individuals is the democracy of societies. Indeed, it was from Europe that the idea went forth some 25 centuries ago to institute a social order in which citizens would be masters of their own decisions and which would depend on no authority other than their freely expressed common well. This was the greatest revolution in the history of mankind. The Greeks of ancient times were the first to break the chains of oppression, removing the shackles of both physical and spiritual oppression. At the same time, the ancient Greeks were the first to produce an outline of Europe. These two factors were virtually concomitant. Europe was born at the same time as democracy. Now there is a crucial observation; something often forgotten, if not unbeknown to one and all. Democracy was born in a Balkan peninsula that is itself the peninsula of Europe, which is in turn the peninsula of Asia. It was in this corner of our ancient world that the idea was born of the right of men to self-determination. This idea reached maturity parallel to the creation of the Greek community that was the distant blueprint for our European Community. It is good to remind ourselves of these things again, especially today, at a time when an important page in history is apparently being turned and when Europe can see its rebuilt unity taking shape on the horizon. This rebuilding process is essential after the enlargement and the EU of 27 countries in the coming years.