EBR September - October 2011 by European Business Review (EBR)

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Small Country The Global The Warren Big Ambitions Governance Deficit Buffett Debate

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The Opening of Southern Corridor:

The Key Players

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Publisher Christos K. Trikoukis

Editorial Consultants Athanassios Papandropoulos Anthi Louka Trikouki

Editor in Chief N. Peter Kramer

Issue Contributors Jeffrey Sachs, Paavo Väyrynen, William G. Gale, Jeffrey A. Miron, Elisabeth Guigou, Vicenc Navarro, Jean-Pierre Lehmann, Hugh O’Shaughnessy, Niels Schreuder, Martin Ehl, Anthony Robinson, Joseph Grenny, Georgia Everse, Gianni Skaragas, Agnès Quatrevaux

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Public Relations Margarita Mertiri

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

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The Buffett debate

EU leaders face crossroads in European integration

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08 A BRUSSEL’S VIEW

Editorial, by N. Peter Kramer, editor in chief

10 OPINIONS

Tripped up by Globalisation Doha is dead, Europe must define its bi-lateral trade deals strategy The Buffett debate

18 EUROPEAN AFFAIRS

EU leaders face crossroads in European integration A genuine Euro-Med region could be the EU’s bridge to Africa

24 ECONOMIC OUTLOOK

The Crisis and fiscal policies in the peripheral countries of the Eurozone The Global Governance deficit: The theater of the absurd

Estonia: Small Country, Big Ambitions

30 TRENDS

To centralize or not to centralize?

34 SPECIAL REPORT

The key players in Europe’s energy policy

48 ESTONIA

Small country, big ambitions

56 LEADERSHIP

Influence: It’s about math, not motivation What makes an ideal crisis manager?

Influence: It’s about math, not motivation

To centralize or not to centralize?

60 BUSINESS TIPS

In marketing, a few bad words can be a good thing 8 ways to communicate your strategy more effectively

64 FROM EAST TO WEST 66 LAST PAGE

Happy birthday Italy, a multicultural youth event For previous editions archive and up-to-date information on major topics and events you may visit our website http://www.europeanbusinessreview.eu

The Global Governance deficit

What makes an ideal crisis manager?

Happy birthday Italy, a multicultural youth event

A BRUSSELS VIEW

Robin Hood tax, a U-turn and a pirouette by the Commission

by N. Peter Kramer, EU correspondent

Until now the annual Barroso show was a bleak event and stayed rather unremarked. This year he used the magic words financial transaction tax - already strongly supported by the two biggest EU economies Germany and France and bingo. Never before has Barroso received so much applause in the European Parliament. In the last three years he said, member states have granted aid and provided guarantees of 4.6 trillion to the financial sector. It is time for the financial sector to make a contribution back to society. A remarkable moment. 8

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he State of the Union everybody knows is the annual speech of the President of the Unites States. He (so far we haven’t had a she) explains the situation, shows his views and unfolds his plans. The world holds his breath, watches him and listens to his message. An important moment for the world and especially for the American people who on 6 November next year will have the choice to re-elect President Barack Obama or to elect a Republican opponent. For some years now the top public servant of the EU, European Commission President José Manuel Barroso, has also given a State of the Union address at the occasion of the opening of the European Parliamentary year. Until now the annual Barroso show was a bleak event and stayed rather unremarked. This year he used the magic words financial transaction tax -already strongly supported by the two biggest EU economies Germany and France - and bingo.

The Commission has even put numbers to its plan. The rate will be 0.1 per cent on stocks and bonds, and 0.01 percent on derivatives. Experts can tell you that this kind of tax has never happened because no one has ever found a way to make them work. The reason? Unless all jurisdictions set a unified tax, a financial transaction tax becomes an invitation for financial engineering and a marketing tool for offshore centres. The UK is likely to veto the plan amid fears of the damage it will cause to London s financial district. The British Treasury let it be known that it has no objection to the proposed tax but any financial transaction tax would have to apply globally . Also Sweden and the Netherlands (a member of the Eurozone) are opposed to the tax. They would back the idea only if it is agreed at global level. And that seems unlikely, given the opposition from the United States.

Never before has Barroso received so much applause in the European Parliament. In the last three years he said, member states have granted aid and provided guarantees of 4.6 trillion to the financial sector. It is time for the financial sector to make a contribution back to society . A remarkable moment. Taxes on financial transactions were long relegated to the rallies of anti-globalisation activists and less than a year ago the European Commission declared officially that this kind of taxation would be not very useful. But now the financial transaction tax also known as Tobin* tax and Robin Hood (steal from the rich and give it to the poor) tax has the backing from the Commission and from the two most powerful governments in the EU. The Commission hopes the tax will raise some 57 billion a year in revenues.

A new institutional set-up for the Eurozone’s economic governance will take centre stage at the next EU summit mid October. The European Commission is against such a ‘economic government’ organised by the Eurozone memberstates. And the Commission is even more against the idea that Herman van Rompuy, President of the European Council, will chair that new ‘government’. But see, not a U-turn but a pirouette this time! The Commission is thinking about to candidate one of their colleagues, Commissioner, Oli Rehn, for the new function. Wasn’t it: if you can’t beat them, join (read: chair) them?

* The Tobin tax is named after the US economist who first proposed it in the seventies.

OPINION

Tripped up by globalisation A failure of economic strategy and leadership lies behind the near simultaneous collapse of market confidence in the eurozone and US economies. No need to blame the rating agencies: governments in Europe and America have been unable to cope with the realities of global capital markets and competition from Asia â&#x20AC;&#x201C; and deserve the lionâ&#x20AC;&#x2122;s share of the blame. By Jeffrey Sachs*

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OPINION

’ve watched dozens of financial crises up close, and know that success means showing the public a way out that is bold, technically sound and built on social values. Transatlantic leadership is falling short on all counts. Neither the US nor Europe has even properly diagnosed the core problem, namely that both regions are being whipsawed by globalisation. Jobs for low-skilled workers in manufacturing, and new investments in large swaths of industry, have been lost to international competition. Employment in the US and Europe during the 2000s was held up only by housing construction stoked by low interest rates and reckless deregulation – until the construction bubble collapsed. The path to recovery now lies not in a new housing bubble, but in upgraded skills, increased exports and public investments in infrastructure and low-carbon energy. Instead, the US and Europe have veered between dead-end, consumption-oriented stimulus packages and austerity without a vision for investment. Macroeconomic policy has not only failed to create jobs, but also to respond to basic social values too. Let me be clear: good social policy does not mean running big deficits. Public debts are already too large in both Europe and the US. But it does mean a completely different balance between cuts to social services and tax increases on the rich. The simple fact is that globalisation has not only hit the unskilled hard but has also proved a bonanza for the global super-rich. They have been able to invest in new and highly profitable projects in emerging economies. Meanwhile, as Warren Buffett argued, they have been able to convince their home governments to cut tax rates on profits and high incomes in the name of global tax competition. Tax havens have proliferated even as the politicians have occasionally railed against them. In the end the poor are doubly hit, first by global market forces, then by the ability of the rich to park money at low taxes in hideaways around the world. An improved fiscal policy in the transatlantic economies would therefore be based on three realities. First, it would expand investments in human and infrastructure capital. Second, it would cut wasteful spending, for instance in misguided military engagements in places such as Iraq, Afghanistan, and Yemen. Third, it would balance budgets in the medium term, in no small part through tax increases on high personal incomes and international corporate profits that are shielded by loopholes and overseas tax havens. Infrastructure investment also need not increase deficits if any new projects pay their own way. Even if they require upfront borrowing, projects will not add to net financial liabilities if they are repaid through future revenues. Currently, budget accounting in the US and Europe generally fails to distinguish between these self-financing capital projects – such as bridges, which earn revenue through future tolls – and those financed by general revenues. Export-led growth is the other under-explored channel of recovery. Part of this must be earned through better skills and technologies – another reason not to cut education. But another part can be earned through better financial policies. China, realising this, has sold Africa many billions of dollars per year of infrastructure export projects, financed by long-term Chinese loans. Yet the US

and Europe have virtually ceded that market to China by the lack of financing to African and other fast-growing economies. The last missing piece for any recovery, however, is clarity of purpose from the political class. In Europe, a coherent response led by the European Union has been sidelined to policymaking by national governments – the pact between France and Germany being only the latest example. For months, Europe’s fate has been decided by German state elections and small Finnish parties. The European Central Bank has been so divided that it too has neglected core functions of stabilising panicked markets. There is no way the euro can survive if European-wide institutions continue to be so weak, slow and divided. The US has similarly devolved into a mélange of sector, class, and regional interests. President Barack Obama is the incredibly shrinking leader, waiting to see whether Congressional power barons will call. More generally, the US cannot prosper while its politicians go hat in hand to the vested interests that finance their nonstop campaigning. The recent swoon in financial markets and the stalled recovery in the US and Europe reflect these fundamental shortcomings. There is no growth strategy, only the hope that scared and debt-burdened consumers will return to buying houses they don’t need and can’t afford. Sadly, these global economic currents will continue to claim jobs and drain capital until there is a revival of bold, concerted leadership. In the meantime, the markets will gyrate in pangs of uncertainty.

* The writer is director of The Earth Institute at Columbia University.

EUROPEANBUSINESSREVIEW

OPINION

Doha is dead, Europe must define its bi-lateral trade deals strategy It’s 10 years since the WTO ’s ambitious Doha Development Round of international trade talks was launched. Paavo Väyrynen, Finland’s trade minister, looks at the EU’s interim policy of negotiating a plethora of bi-lateral free trade agreements. By Paavo Väyrynen*

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hen the Doha Development Round (DDR) of multi-lateral trade negotiations was launched in 2001, its ambitious target was to conclude by January 2005. Still unfinished, of course, it now approaches its 10-year milestone. A good few deadlines have been missed along the way and prospects for wrapping everything up by the end of this year – the most recent target – are far from certain. In spite of painfully slow progress, the EU’s own message to the outside world has been crystal clear; its successful conclusion is still our key priority. The many well known reasons for concluding the Doha Round include those that are both systemic and economic. Doha aims at yielding pro-development results and integrating developing countries into the world trading system. This means it has to bring tangible benefits to vulnerable developing economies and the least-developed countries. The world trading environment has changed since the launch of the round. The global economy has been hit hard, and the international trading system has not been spared. The WTO system has stood like a rock against the protectionist waves caused by the crisis, but these pressures remain and require vigilance until recovery is sustainable. The WTO must continue to be one of the central institutions for global economic governance. But now there is an urgent need to update the WTO agenda. Issues of access to raw materials demand multi-lateral disciplines for export taxes and duties, competition policy and investment. Ironically, investment and competition were removed from the Doha Round’s agenda after the 2003 Cancun ministerials, illustrating perhaps the old warning that “what you leave behind you, you will find in front of you”. Another issue lurking just around the corner is the idea of reviewing the WTO’s activities. This doesn’t have to mean radical changes to its fundamental principles or structures. The monitoring of restrictive or protectionist trade measures caused by the recent economic crisis is a good example of how the WTO is able to adapt and respond to the current needs of the trading environment. But there may be a need to look into the working methods of the WTO, given that satisfactory results for all 153 of its members are becoming more and more difficult. It is not a debate for before the DDR is concluded, but it is certainly another good reason to accomplish the round.

OPINION

The dire straits of the DDR have understandably raised questions not just about its own future but that of the multi-lateral trading system itself. The consequences of Doha’s unfinished negotiations have been the rapid proliferation of bi-lateral or regional free trade agreements. Very few WTO member states are not involved in bi-lateral arrangements. After the serious setback and the suspension of DDR negotiations in July 2006, the EU re-calibrated its trade policy to secure market access and improve the business climate in its major trading partners. This paved the way for an ambitious new generation of FTA negotiations with Korea, India and the whole ASEAN bloc. In the context of the Global Europe communication adopted in 2006 during the Finnish EU presidency, the EU strongly declared that Doha was its top priority, but emphasised too that bi-lateral arrangements should not be seen as the enemy of a multi-lateral deal as “liberalisation fuels liberalisation”. Even since the launch of Global Europe, the EU has been engaging in FTA negotiations on a broad front. Once all these negotiations are completed a vast majority of the WTO countries will be covered by preferential arrangements, even though major partners like Russia, the U.S., Japan, Australia, China and Pakistan will remain outside the FTA network. And if completion of the DDR is a hard nut to crack, much the same goes for these FTA negotiations. Getting a Korea deal was a tough undertaking, and showed there are no easy victories and little low-hanging fruit. Global Europe-type negotiations have proven to be no different from the rest of FTA negotiations: they consume time and resources. The FTA track has seen the EU run into the same differences of interest that have made the DDR so complex, yet the EU’s target still is to complete negotiations this year with India, Ukraine, Singapore, Canada and Mercosur. As some of these negotiations are now at a critical juncture, it’s a tall order that has raised doubts among some member states. Is the timetable more important than the content, they ask? The EU appears ready to make farreaching concessions, so it is argued that the price to be offered by these partners must be high as well. The Mercosur negotiations were to have restarted in May of 2010 after being suspended for several years. But it is still too early to tell whether the decisive moves needed to conclude this saga have been taken. The stakes are high because the GDP of these Latin American countries is vast and the EU’s direct investments there are bigger than those in Russia, China and India combined. The levels of protectionism are still relatively high in Mercosur, so the gains for European business could be big. From an agricultural point of view, the negotiations will be extremely difficult as Mercosur is the world’s agricultural powerhouse and a significant exporter to EU markets. A glance at the rest of the FTA front reveals both pain and gain. On the pain side there are the Economic Partnership Agreement (EPA) negotiations with the African, Caribbean and Pacific countries. Negotiations with six of the ACP country groups were to have been concluded by the end of 2007, but so far the only full-scale deal has been with the Caribbean states grouped in Cariforum. Since then, there have been few positive developments, which is unfortunate as EPAs are not only about trade. The fundamental idea is to promote sustain-

able development and to integrate ACP countries into the global economy and its trading system. Trade creates opportunities and is a powerful tool for development and poverty eradication. The decade-long Gulf Cooperation Council (GCC) negotiations also belong in the pain category, whereas with the Korea deal we have Peru, Colombia and Central America on the gain side. These “gains” are an important encouragement for pursuing the FTA avenue, but it’s equally important to realise how serious are the many difficulties. Now that it is negotiating on such a wide front, the EU is right with its new trade strategy to see completing the current agenda as still its top priority. Yet there are some important trade partners still outside the FTA arrangements. The big question is what to do with developed countries and Europe’s strategic Paavo Väyrynen partners? Global Europe touched on this issue, but at that time the main focus was on those largely emerging economies where market potential was seen as the most promising. Since then, a further step has been taken with the CETA negotiations that started with Canada in 2009. The importance of partners like the U.S., China, Russia, Japan, Brazil and India is fully recognised within the EU. India and Brazil are already covered by FTA negotiations, but the pain and gain equation is particularly relevant when considering the launch of an FTA with the U.S. or Japan. An immediate question is whether Europe would resolve longstanding trade irritants like non-tariff or regulatory barriers by an FTA if these problems cannot be solved within existing mechanisms? Would the EU be able to liberalise agriculture with the U.S. through the FTA process, or would such negotiations be even more difficult than the ongoing ones? The idea of launching FTA negotiations with other major trading partners raises lots of questions. How should such initiatives be interpreted in light of the EU’s commitment to the WTO and the Doha Round? With the round’s future more at stake than ever, how would this be seen among developing countries? If Doha is dead, the proliferation of FTAs may well see dwindling interest in multi-lateral trade liberalisation. That means the EU’s trade strategy has to make it clear that Doha is its top priority.

* Paavo Väyrynen is Finland’s Minister for Foreign Trade and Development EUROPEANBUSINESSREVIEW

OPINION

In a recent New York Times op-ed article, Warren Buffett asserts that the super-rich do not pay enough taxes. He suggests that any new budget deal should raise rates on the super-rich, especially on their â&#x20AC;&#x153;unearnedâ&#x20AC;? income from interest, dividends and capital gains.

Is he right or wrong? 14

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The BUFFETT debate

OPINION

EUROPEANBUSINESSREVIEW

OPINION

Buffett is right: Raise taxes on the wealthy.

In Sunday’s New York Times, Warren Buffett discussed the need to raise taxes on the wealthy. He’s absolutely right. Tax increases, in general - as well as tax increases on the wealthiest households, in particular - need to be a part of the solution. Past major budget agreements, such as the 1983 Social Security reforms and the 1990 and 1993 budget deals, ultimately included both revenue increases and spending cuts. It’s not hard to see why: Cutting deficits from both sides of the budget provides a sense of fairness, shared sacrifice and political equilibrium. Also, raising taxes to pay for current spending has proved more effective at restraining spending than allowing the government to finance its outlays with deficits. Every time we have tried to cut spending by restraining taxes, we have failed. In the 1980s under President Ronald Reagan and in the past decade under President George W. Bush, taxes fell, but spending rose. The only time in the past 30 years when spending fell was in the 1990s, under President Bill Clinton, when taxes were also raised. Even the massive tax increases during and after World War II amounting to a permanent rise of 10% to 15% of gross domestic product - and the much smaller tax increases in 1990 and 1993 did no discernible damage to U.S. economic growth. If we are going to raise taxes as part of the fiscal solution, the tax burden on high-income, high-wealth households needs to rise. The recently enacted debt deal contains only spending cuts and has little or no impact on high-income households. Rather, it puts the entire burden of closing the fiscal gap on low- and middle-income households. High-income households should not be exempted from helping resolve the nation’s fiscal problem. Households in the top 1% of the distribution can afford to contribute. They have done enormously well during the past 30-plus years. In 1979, their income accounted for 10% of total income. According to the most recent data (from 2008), their share of total household income more than doubled to 21%. In contrast, real income for middle-class workers has remained roughly constant over the same time frame. There are, of course, better and worse ways to raise taxes. A general goal would be to broaden the tax base - reduce the use of specialized credits, deductions, loopholes and so on - and minimize the extent to which tax rates need to rise. One good place to start? High-income households: Limit the rate at which itemized deductions can occur to 28%. This would affect only households in the highest income ranges, it would not raise their official marginal tax rate, and it would raise $293 billion over the next decade, relative to how much money would be raised according to current law, according to the Congressional Budget Office. This would be a small move in the right direction. Of course, sticking to current law revenues - that is, either not extending the Bush tax cuts after their scheduled expiration date of 2012 or paying for any extension with a reduction in various tax expenditures - is even more important. Extending the Bush tax cuts would reduce revenues by about $2.5 trillion over the next decade, relative to current law. Counting net interest savings, it would cost $3 trillion. Letting the cuts expire could actually help economic growth since the lower deficits would more than offset

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Why Warren Buffett is right By William G. Gale*

the effect of slightly lower marginal tax rates, and it would be progressive. That would be a big move in the right direction. Eventually, the nation will need to deal with the ballooning costs of Medicare, Medicaid and Social Security for an aging population. Even if substantial cuts are made to these programs, the combination of a greatly expanded elderly population and higher federal net interest payments than in the past (because of the higher public debt/GDP ratio) will create a need for additional revenues. There are good options there as well, including a value-added tax - the equivalent of a national consumption tax and a feature of the tax system of every industrialized country except the U.S. - and higher energy taxes, to promote a cleaner environment as well as raise revenues. None of this means that the U.S. needs to move to European taxation levels. But between the depleted tax revenues we raise now - the lowest share of the economy in six decades - and the high taxes experienced in European countries, there is plenty of room to raise revenues in an economically sound manner to support a reasonable level of government.

* William G. Gale is a senior fellow at the Brookings Institution and co-director of the Urban-Brookings Tax Policy Center.

OPINION

Why Warren Buffett is wrong By Jeffrey A. Miron*

Buffett is wrong. Bad government policies play a major role in generating inappropriately high incomes, but singling out the super-rich is misguided. And the policy Buffett criticizes most - low tax rates on capital income - should be expanded, not eliminated. The first problem with Buffett’s view is that the number of super-rich is too small for higher rates to make much difference to our budget problems. In 2009, the income earned by the 236,833 taxpayers with more than $1 million in adjusted gross income was about $727 billion. Imposing a 10% surcharge on this income would generate at most $73 billion in new revenue - only about 2% of federal spending. And $73 billion is optimistic; the super-rich will avoid or evade much of the surcharge, significantly lowering its yield. Focusing on the super-rich also fosters a counterproductive attitude toward material success. The way to promote a hardworking, entrepreneurial and innovative society is to celebrate great wealth so long as it has been earned by legitimate means. When this is not the case, policy should target the wrongdoing directly, not demonize everyone who hits it big. Most importantly, singling out the super-rich distracts from the real problem: the myriad policies that make no sense in the first place because they inhibit economic growth and that simultaneously redistribute from low-income households to the middle and upper classes. The deductibility of home mortgage interest encourages excess investment in housing. High-income taxpayers get the benefits, since low-income taxpayers own little or no housing and do not itemize deductions in any case. The favorable tax treatment of employer-paid health insurance generates overconsumption of health care and contributes to rising health care costs. The benefits go mainly to middle- and upper-income households, since those without jobs get no employer-provided benefits. Numerous loopholes for favored industries in the corporate tax code distort the market’s investment decisions and reward the well-funded and politically connected. And it is not just the tax code that harms the economy while favoring the better off.

Excessive licensing requirements, permitting fees, restrictive examinations and other barriers to entry into medicine, law, plumbing, hair styling and many other professions are bad for economic productivity because they artificially restrict the supply of these services. And these barriers redistribute income perversely by raising incomes for those protected and raising prices for everyone. Crony capitalism - the special treatment of favored industries like autos - runs counter to economic efficiency because it protects businesses that would otherwise fail, and it maintains high incomes for executives and shareholders. The too-big-to-fail doctrine, exhibited most recently in the TARP bailout of Wall Street banks, distorts efficiency by encouraging excess risk-taking. Meanwhile, bailouts generate huge incomes for the lucky few who keep gains in good times and pass losses to taxpayers in bad times. In contrast to these and other policies, the one Buffett criticizes - low tax rates on capital income - is beneficial for the economy, including lower-income households. Economists agree broadly that an efficient tax system should avoid taxing income, dividends and capital gains to promote savings, investment and growth. Tax rates on capital income should therefore be low or even zero. The U.S. is far from this ideal, especially given the high tax rate on corporate income and the additional taxation at the personal level. Buffet asserts that taxing capital income has never deterred anyone from investing. Well, then he has never discussed the issue with me or many of my friends. More importantly, taxing investment returns plays a huge role in what kinds of investments occur, and where, even if it has minor effects on the amounts. These tax-induced distortions in investment choices then reduce economic growth. High U.S. taxation on capital income drives investment overseas. So raising capital tax rates will not make the super-rich pay their “fair” share; it will encourage capital flight, driving factories and innovation abroad. The rich will still get their high returns, but U.S. workers will have fewer jobs and lower wages. Buffett errs, most fundamentally, by focusing on outcomes rather than policies. The right question is which policies promote differences in incomes that reflect hard work, energy, innovation and creativity, rather than reward the unethical, the politically connected and the tax-savvy. In economics, as in sports, we should adopt good rules and insist that everyone play by them. Then we should stand back and applaud the winners.

* Jeffrey Miron is senior lecturer and director of undergraduate studies at Harvard University and Senior Fellow at the Cato Institute. He is the author of Libertarianism, from A to Z EUROPEANBUSINESSREVIEW

EUROPEAN AFFAIRS

Why would Europe’s top leaders choose to introduce measures that will require a new treaty, while the European project is already struggling so badly on its current terms?

EU leaders face crossroads in European integration Why would Europe’s top leaders choose to introduce measures that will require a new treaty, while the European project is already struggling so badly on its current terms? Global intelligence company Stratfor attempts to answer that question, arguing that EU leaders have no alternative but to keep the EU alive despite citizens’ disenchantment. This commentary was authored by global intelligence company Stratfor

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EUROPEAN AFFAIRS

“G

erman Chancellor Angela Merkel and French President Nicolas Sarkozy met in Paris to prepare for the next meeting of European Union heads of government. At the conclusion of their summit, the pair announced a series of measures meant to push European integration forward. Instead of addressing Europe’s short-term financial crisis, the two leaders focused on longer-term fiscal and political issues. Specifically, they announced that France and Germany would unify their corporate tax systems within five years and that the countries would together push for debt limits to be written into eurozone-member constitutions. They also agreed to advocate for governance measures to reinforce Europe’s economy. Markets were left puzzled. The European financial crisis is now in its twentieth month. As recently as a few days ago, many observers were expecting bailouts for Spain, defaults in Italy and downgrades in France. Why would Europe’s top leaders choose to introduce measures that will require a new Of the three main benefits that drew states into the Eurotreaty, while the European project is already struggling so pean Union, two - that European states are more important badly on its current terms? collectively, and that other states can become rich thanks to What the markets often lose sight of is that this situation is German wealth - are no longer in play. not only - or even primarily - a financial and economic crisis. The European Union’s efforts at political and military unifiFrance originally intended European integration as a means to cation can best be described as stillborn. bolster its international position. Germany was shattered after Economically, the current crisis has robbed the European the conclusion of World War II. The French picked up the Union of much of its shine. Data released put collective EU pieces and, by initiating the process that eventually led to the growth at an unenviable 0.2% compared to the previous creation of the European Union, Paris refashioned Germany quarter. French growth came in at a flat zero. into a platform from which France could project power. If the European Union cannot guarantee importance or wealth, This system used German strength to entice other states to join then its remaining raison d’etre comes down to keeping the the growing union. France promised three things: that Euro- Germans in line. Considering that the Germans are in the pean states would be more important collectively; that mem- process of rewiring the union to suit their own national preferbers would become rich by relying on German wealth; and ences, the entire premise behind EU membership for many that Germany would never again be in a states rests on precarious ground. position to hurt other European states. Against this backdrop sits a massive The European economy is hardly By the middle part of the last decade, a zero-sum game. However, in disconnect between what the European though, Germans had outgrown sixty elites - especially in the financial sector years of policymaking shaped by what can the modern European system, - desire and what the general populabe best described as an extended national economics is the glue that has held tion prefers. apology. Germany began acting like a real together the unstable political The elites have invested seventy years and country again. Real countries have many alignments of the post-World tens of trillions of euros (once financial characteristics in common. They obvi- War II order. And that glue is not assistance, bond purchases and crossously like to speak for themselves, and collateralisation of debt are all added up) sticking like it once did. they don’t like to be taken advantage of to make European institutions work. The by their neighbours. European Union is the key to their politiGermany started using its superior economic position to re- cal and economic positions. They have already made it clear that work EU institutions to its liking. Until now, France has co- they will pay any price to keep the European Union alive. operated, driven by a mix of inertia, opportunity and fear. However, the average German, Frenchman or Latvian feels Inertia because it takes more than a few years to admit that after somewhat differently. With the benefits of the European two generations, the ability to feed off the strengths of another system losing their luster, questions are starting to be asked economy without paying any price is gone. Nevertheless, oppor- about not just the EU institutions, but about whether Eurotunity still motivates because Paris may yet prove able to manage pean leaders are still fit to lead. Germany and ride on its coattails. Fear of what might happen Polls regularly indicate that half of Germans want the deutshould Germany outgrow France also fuels Parisian cooperation. schmark back, and more than half think the Greeks should be The European economy is hardly a zero-sum game. However, unceremoniously ejected from the euro zone. So far these atin the modern European system, economics is the glue that has titudes have not translated into a rejection of any major state’s held together the unstable political alignments of the post-World political mainstream - but the Germans’ general disgust with the War II order. And that glue is not sticking like it once did. bailout programmes is hardly an enthusiastic endorsement.” EUROPEANBUSINESSREVIEW

EUROPEAN AFFAIRS

A genuine Euro-Med region could be the EU’s bridge to Africa The Arab world’s upheavals and Europe’s persistent economic crisis are making European-Mediterranean Union more crucial than ever, argues Elisabeth Guigou. France’s former EU minister sees a genuine partnership with the Arab countries as paving the way for an eventual Euro-African framework able to exert global influence. By Elisabeth Guigou*

Jacques Delors

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he Arab world is in the process of delivering a stinging rebuke to those who believed that its only choice was between dictatorship and Islamic fundamentalism. Those calling for change have united around the principle of freedom, and the 21st century will belong to them. Europe, and particularly France, enjoys strong historic, cultural, geographical and human ties with Africa – five million of whose people now live in Europe – and these should be valued much more highly in Europe than they are. Europe has long benefitted from these ties, but how much longer will that last? Africa is beginning to attract the interest of major powers like the United States and China because of the energy resources and raw materials that they, like Europe, lack. Yet, Europe’s formal political ties with its southern neighbours have been languishing. Ever since the summit held in Paris in July 2008 to launch the Union for the Mediterranean, the whole political process has stalled to the point where the summit planned by Spain last June as EU president has been postponed indefinitely. This political stalemate must be broken. We owe to the initiators of the Barcelona Process – Jacques Delors and Felipe Gonzales – and to the people of Europe and African the creation of a Euro-Mediterranean community, and following on that a Euro-African one, that together with it would constitute a political project on a global scale. The current economic crisis has now reached out to touch both shores of the Mediterranean, and the risk of a lasting depression has become very real. Austerity policies in Europe threaten to cause enduring harm to growth, and also to backfire and so stoke deficits and unemployment. The southern Mediterranean countries can’t hope to make up in America and Asia the opportunities and investments they are losing in Europe, certainly not in the short term. The political upheavals in the southern Mediterranean and the effects of the global crisis mean that joint European-Mediterranean development is the only solution for the future. In short, the Euro-Mediterranean process must be relaunched, and put on a new footing.

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The Barcelona Process that Jacques Delors initiated in 1995 when still head of the European Commission, had its merits, but it didn’t meet the high expectations created. In 2005, on the 10th anniversary of its launch, I joined political leaders from both sides of the Mediterranean in calling for a re-formulation of the partnership through the creation of a EuroMediterranean community. Such a Euro-Mediterranean community has now become an urgent necessity. Europe has technology and patents and provides a secure framework for investment, but it is the southern Mediterranean that can point increasingly to strong economic growth. Europe is ageing and will be 20m people fewer by 2030, while the southern Mediterranean has a forceful young population that desperately needs job opportunities. The EU currently imports half of its energy needs – which 20 years from now will rise to 70% – yet in the south, energy resources and raw materials are plentiful. All that is missing in the north is to be found south of the Mediterranean, and vice versa. These are complementarities that offer great development potential for both sides. It is crucial for Europe that it returns to economic growth. For this to happen, Europe needs secure new investment flows; those from north to south are already dramatically low as the southern and eastern Mediterranean countries receive only its own labour shortages, while African countries will be able 3% of global foreign direct investment. To boost investment to provide employment for their young people. A Euro-Medin both directions, a zone of monetary stability should be cre- iterranean and Euro-African version of the Erasmus student ated; a Euro-Mediterranean monetary system would avoid the exchange programme would also attract African students to discrepancy between trade that is paid in euros and that in Europe and interest European students more in the developdollars, and an eventual expansion of the eurozone shouldn’t ment of both the southern Mediterranean and Africa. be excluded. A system for guaranteeing exports and invest- Europe and the southern Mediterranean countries face the ments within a stable legal framework is also needed, and a common challenges of shared security concerns, global warm“targeted development bank” would be an important step in ing, migration and food security. So agriculture has to be increating a financial framework favourable for investment. cluded in a more ambitious project. A Euro-Mediterranean Industrial re-deployment might also be the answer to out- Union would meet not only these challenges but the wider sourcing by European companies, so we need to build an pressures of globalisation as power shifts eastwards. China integrated Euro-Mediterranean structure that encourages in- will soon become the leading global power, and its presence is dustrial, agricultural, energy and job mobility. Central and already being felt throughout Africa. In this changing world, eastern Europe should be the example, because in tandem the new order of magnitude has become a billion people. with Germany they strengthened and developed industrial Adding Europe’s 500m population to that of the southern sectors with high added-value. This model industrial re-de- Mediterranean and the Middle East makes a total of 900m, ployment created new industrial jobs for Germany, too, so and if we then add the population of Africa we reach 1.7bn. it’s worth studying closely. By 2050, Europe and Africa will toA European energy community should gether comprise 2.5bn people, a quarter also be considered as a way of acceler- A Euro-Mediterranean of the global population. With so much ating Europe’s energy transition and Union leading to a Euro-African human potential, it will be possible to further developing renewable energies. Union could open the way build on shared economic, social and This could eventually lead to a Euro- to mutual development with ecological strengths and so carry greater Mediterranean energy community, and a balanced win-win partnership weight in international organisations indeed it’s one of the proposals made and when dealing with other major by the European Commission in the on both sides. world powers. A great north-south reSpring of this year. gional grouping of this sort could neThe greater mobility of people must become a strength of gotiate in international institutions from a stronger position, all our countries. Jobs mobility should replace unwanted most notably the WTO, and so preserve its own developmigration – so there would be the mobility of students and ment model based on the three principles of proximity, comprofessors on the one hand, and improved occupational mo- plementarity and north-south solidarity. bility for both European and African workers on the other. Fair trade and the sharing of added-value should replace free Europe could finance more and better training to help meet trade imbalances and the exporting of unprocessed raw mateEUROPEANBUSINESSREVIEW

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houses in order, of course, so Europe must strengthen its economic and political integration and Africa must improve its governance of states by fighting corruption and establishing more firmly the rule of law. Asia revolves around ASEAN and the Americas around NAFTA and Mercosur, so clearly Europe needs to help organise a large hemispheric region in order to counter-balance globalisation. Building together a joint future for Europe and Africa, starting with the Mediterranean, will be difficult, but that’s more reason than ever not to delay. Globalisation is moving very fast, a European-Mediterranean and then EuroAfrican union may well be the only political project that can ensure the world won’t be ruled by a “G2” of the United States and China.

Felipe Gonzales

rials. International trade must bring about a rise in social and environmental standards, so it is becoming urgent that we should leave behind us the traditional bilateral frameworks and promote a multilateral Euro-Mediterranean system. Although it is probably not enough on its own, a North African “common market “ is going to be essential. But this requires first – rapid resolution of the conflict between Algeria and Morocco that has been holding back the development of both countries, and also of Tunisia and Mauritania. Also needed will be a common market between Turkey, Syria, Jordan, Lebanon and soon, Iraq. A Euro-Mediterranean Union leading to a Euro-African Union could open the way to mutual development with a balanced win-win partnership on both sides. Constructing an economically and socially integrated zone offers the best chance of resolving conflicts and overcoming political and cultural problems. The partners all need to get their own

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* Elisabeth Guigou is Vice-president of the French National Assembly’s and member of the Foreign Affairs Committee and its delegation to the EU. She is a former Minister for EU Affairs.

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The Crisis and Fiscal Policies in the Peripheral Countries of the Eurozone Before the financial crisis there was an economic crisis, largely the result of the decline in labor income as percentage of total national income. The neoliberal policies developed since the 1980s (accentuated over the past 15 years, and carried out by governments of various political persuasions, including social democratic, in Spain, Greece, and Portugal) have had a strong impact on income distribution, accelerating the concentration of income in the high income brackets. The decline of labor-derived income diminished the purchasing power of the popular classes, forcing them into debt in order to maintain their standard of living. 24

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To understand the situation in the countries at the periphery of the European Union, four countries within the Eurozone, Portugal, Ireland, Greece and Spain, we have to understand the political context they have in common. All of them were governed by fascist or fascist-like dictatorships (Spain, Portugal, and Greece) or by authoritarian right-wing regimes (Ireland) for most of the period from the late 1930s or early 1940s until the late 1970s. This history is usually ignored in analyses of these countries. By Vicenc Navarro*

ECONOMIC OUTLOOK

his shared history, however, has determined the nature of their states, a critical variable for understanding countries’ economic behavior. Their states have been very repressive. Even today, these countries have the largest number of policemen per 10,000 individuals in the EU-15. Another shared characteristic is their very low level of state revenues and their highly regressive fiscal policies. The revenues to the state are much lower than the EU-15 average: approximately 34% of GNP in Spain, 37% in Greece, 39% in Portugal, and 34% in Ireland, compared with the EU-15 average of 44%, and compared with 54% in Sweden – the EU-15 country where the left has governed for the longest period. The low state revenues result from extremely regressive policies. The super-rich, rich, and high-income upper middle classes do not pay taxes at the same level and intensity as those in most of the central and northern EU-15 countries – a consequence of a history of government by ultra-right-wing parties. Of course, progress has been made since the dictatorships ended. But the dominance of conservative forces in the political and civil lives of these countries explains why their state revenues are still so low. As a result, the public sectors in Portugal, Ireland, Greece, and Spain are extremely underdeveloped. And their welfare states are poorly funded and very limited, including their public transfers (pensions) and public services (medical care, education, childcare services, homecare services, social services, and others). Indicators of this are many. One example is public social spending as percentage of GNP, which is lower in these countries than the EU-15 average (27%): Spain, 22.1%; Greece, 25.9%; Portugal, 24.3%; and Ireland, 22.1% (compared with Sweden, 29.3%). Another example is the percentage of the adult population working in public services of the welfare state – again, lower than the EU-15 average (15%): Spain, 9%; Greece, 11%; Portugal, 7%; and Ireland, 12% (compared with Sweden, 25%). In fact, Greece’s percentage is three points higher, 14%, because it includes services for the military, (which represents approximately 30% of public employees).

The specificity of the political regimes

Thus, for these four countries, not enough attention has been paid in the economic literature to the consequences of being governed by ultra-conservative forces. The influence of such forces has been enormous. It is also important to emphasize that the conservative forces in these peripheral countries are different from those in northern and central EU-15 countries. They do not belong to democratic traditions since they are the inheritors of either fascist or authoritarian regimes. Even today, after almost 30 years of democracy, such forces continue to be very influential in the four states, even when the states are governed by social democratic parties. As just one example, Spain’s Supreme Court has taken Judge Baltasar Garzon, who himself used to be a member of the Court, to trial for daring to inquire about crimes committed by General Franco’s fascist regime. It is not fully comprehended outside Spain just how influential the ultraright-wing forces still are within the Spanish state. They dominate political culture in many different ways, including control of the major media. There are no major left or left-of-center media in Spain, or in the other countries in this group.

The domination of the state by ultra-conservative forces has many consequences besides their low level of state revenues, their regressive fiscal policies, and their underdevelopment of the welfare state. Labor income, as percentage of national income, has declined since 1992, when policies were implemented (including by social democratic governments) in preparation for entering the Eurozone. This income decline has occurred more rapidly in Portugal, Ireland, Greece, and Spain than the EU-15 average, and is particularly accentuated in Spain, with a decrease from 70% to 61% of national income – despite an increase in the percentage of working adult population. As noted, a consequence of domination by conservative forces, considerably limiting the public reforms approved and implemented by social democratic governments from the early 1980s onward, are regressive fiscal policies. As a result of these policies, the impact of state interventions on income redistribution has been very limited. For example, in Spain, as late as 2009, the level of poverty (60% of median income) declined only 4 points after implementation of state interventions (public social transfers): from 24% before to 20% after transfers. The EU-15 average decreased from 25% to 16%. Sweden’s poverty rate fell from 27% to 13%. The decline in poverty rate resulting from public social transfers in Spain is the lowest in the EU-15. Another indicator of the limited redistributional impact of state interventions is that the Gini coefficients in all four countries are higher than the EU-15 average (29.2). Spain’s Gini coefficient is 31.3, the same as Ireland’s; Greece’s is 34.3; and Portugal’s is the highest at 36.8.

How the crisis has been building up

Another characteristic of this group of countries is the acceptance by the governing social democratic parties of most of the neoliberal policies pushed by the EU establishment. This acceptance has been generalized among the social democratic parties of the European Union. Actually, these parties were part of the consensus in developing neoliberal policies (usually referred to as the “Brussels consensus,” the European version of the “Washington consensus”). As part of this consensus, both conservative-liberal and social democratic governing parties have been reducing taxes, particularly for the top income brackets. It was none other than Spain’s socialist candidate in the 2004 election (and later prime minister), Jose Luis Rodriguez Zapatero, who promised to reduce taxes if elected, saying that lowering taxes was a cause to be promoted by the left. The major economic thinker of Spain’s socialist party at that time was Jordi Sevilla, an economist who wrote in his book The Future of Socialism that “the left had to stop raising taxes and increasing public expenditures” – this said in the EU-15 country with the lowest state revenues and poorest welfare state. The tax reductions over the past 15 years have led to a structural public deficit that was disguised by the fast economic growth created by the housing bubble, responsible for the banking–real estate–construction industry complex at the center of the bubble. When the bubble burst, and the economy came to a halt, the structural public deficit appeared in all its intensity. The public deficits in Portugal, Ireland, EUROPEANBUSINESSREVIEW

ECONOMIC OUTLOOK

Greece, and Spain were the result of declining state revenues, not expanding public expenditures. This is why the public policies of these governments are profoundly wrong. They have been cutting public spending, assuming, incorrectly, that the cause of public deficits was an exaggerated growth of public expenditures.

Arguments used to justify cuts in public expenditures

The slogan now being used to justify these cuts is: “The country has been living beyond its means.” Major political figures in the four countries claim that their welfare states are larger than they can pay for. But the data show otherwise. In Spain, for example, the GNP per capita is 94% of the EU15 average, but public social expenditure per capita is only 72% of the EU-15 average. If it were 94%, the Spanish state would have 66,000 million more euros than it does today. So, Spain has the resources. The problem is that the state does not collect them, because its fiscal policies are so regressive and fiscal fraud is widespread among high-income groups and economic and financial corporations. Actually, banking in Spain is the primary entity responsible for fiscal fraud. Mr. Botin, the country’s major banker (president of Santander Bank, the third most profitable bank in the world, after two Chinese banks), was discovered this year to have 2,000 million euros in a Swiss bank account – not declared until two whistleblowers at the bank went to the press. Such tax avoidance is general practice. The tax inspectors of Spain’s Ministry of Economy estimate there are 88,600 million euros that the state does not collect because of tax avoidance and fraud.

How and why the crisis arose

Before the financial crisis there was an economic crisis, largely the result of the decline in labor income as percentage of total national income. The neoliberal policies developed since the 1980s (accentuated over the past 15 years, and carried out by governments of various political persuasions, including social democratic, in Spain, Greece, and Portugal) have had a strong impact on income distribution, accelerating the concentration of income in the high income brackets. The decline of labor-derived income diminished the purchasing power of the popular classes, forcing them into debt in order to maintain their standard of living. And credit was relatively easy to obtain, because house values were rising and provided

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a means of borrowing from banks by putting up homes as security. The growth of the credit sector (and of finance) was based on the decline of labor income. But the decline of labor income was creating a major problem for demand and limited profitability in the economy. With this limited profitability in the productive economy, the super-rich, rich, and upper-income middle class invested in sectors with higher returns, especially in real estate. The deregulation of banking (and deregulation of zoning laws) during the 1990s led to a real estate bubble, based on the complex of banking, real estate, and construction industries. In Spain, this complex was the main motor of economic growth and was supported by both central and local authorities, since local authorities were primarily funded by property taxes. Stimulating the growth of housing construction was the influx of immigrants, with the immigrant population increasing from 4% to 10% of the population in only 10 years. House construction reached 10% of GNP, and this sector produced the most (but very low-paid) jobs. The Spanish “miracle” of job creation was based on large investments in a speculative sector of the economy. And it was funded with debt. This is the cause of the enormous private debt in Spain, which was facilitated by the introduction of the euro – much more stable in the economy than the national currency it replaced. Introduction of the euro dramatically increased the size of the financial sector in the four peripheral Eurozone countries. When the bubble burst, the whole credit economy came to a stop.

The political origins of the public debt

In the four countries, there has been an alliance between the upper income brackets (the super-rich, rich, and upper middle class, whose taxes have been reduced in the past 15 years) and the banks, on the one hand, and the state, on the other. A fruit of this alliance was the reduction in taxes that created the structural public deficit, masked by the economic growth within the bubble. The decline of revenues to the states (the consequence of tax cuts) forced states to borrow from the banks, where the rich deposited the money saved due to reduced taxes. The indebtedness of states and the need to borrow were clearly related to the reduction of taxes. When the economy came to a stop as the bubble burst, the structural public deficit became apparent. Public deficits as percentage of GNP, increased substantially in all four countries from 2007 to 2009 as a consequence. Spain went from a surplus of 1.9% of GNP in 2005 to a public deficit of 11.1% in 2009. Greece went from a deficit of 6.4% in 2007 to 15.4% in 2009, with Ireland moving from 0% to 14% in the same period. In all of them, rapid growth of the public deficit was based on the extremely regressive nature of state revenues. With most taxes based on labor income and consumption, when employment declined, unemployment grew, and consumption declined, the public deficit escalated dramatically.

Solutions that are never considered

The neoliberal response to this situation, which entails cuts in public expenditures, is making the situation worse because it

ECONOMIC OUTLOOK

reduces demand. The trade unions have accurately described neoliberalism as the ideology of banks and large employers. The major media support this doctrine, based more on faith than on evidence. At the root of the problem is class power and its realization through the state. If Spain implemented the same fiscal policy as Sweden, the Spanish state would take in 200,000 million more euros than it now does. With those millions of euros, it could create 5 million new jobs (particularly in the underdeveloped welfare state services, such as the national health service, educational system, childcare services, and other social services). If one in every four adults worked in such services (as is the case in Sweden), instead of one in every ten adults (as is the case now in Spain), Spain would create 5 million more jobs, eliminating unemployment: 5 million is more or less the number of people currently unemployed in Spain. A second point is that the fiscal stimulus applied by most of the governments in this group of countries in 2008 was basically tax cuts and transfers. Only a miniscule part of the stimulus went to creating jobs (through investment by local authorities). Stimulating the economy through the creation of jobs has not occurred in any of these countries. Moreover, reduction of the deficit is achieved by cutting public expenditures, not by increasing taxes. The European Federation of Trade Unions has proposed alternative ways of reducing the deficit, primarily by increasing taxes (reversing the tax reductions of the past 15 years). Class power, however, is the most potent opposition to these alternative policies. A manufacturing worker in Spain pays taxes estimated at 74% of the taxes paid by a manufacturing worker in Sweden. The top 1% of income earners in Spain, however, pay only 20% of the taxes paid by the top 1% in Sweden. This is what explains the enormously regressive fiscal policy in the four peripheral EU-15 countries and the enormous resistance to change by their dominant classes. The problem of the public debt is thus basically a political, not an economic or financial one. The current situation is untenable because Europe’s dominant classes and their allies, the EU leadership (“the troika”: the European Council,

European Commission, and European Central Bank), are trying to reduce the power of labor using the argument of “pressure from the financial markets” – the aim being to get labor to accept the huge sacrifices that the dominant classes have wanted for many years. In Spain, for example, the socialist government is cutting public social expenditures, which, besides adversely affecting economic growth and reducing demand, is hurting the popular classes. The parties to the left of the governing socialists have clearly shown that for each cut in public social expenditures, the government could obtain even larger revenues by selectively increasing taxes, which would not affect taxes for the majority of the population. Moreover, they have shown that the revenues obtained with those taxes could create jobs in the underdeveloped public sector, especially in the welfare state. Another issue is that, at this time, no major force on the left has called for exit from the euro. An explanation for this is that Europe has always been a point of reference for progressive democratic forces. In Spain, for example, under the fascist dictatorship, Europe meant liberty, democracy, and the welfare state. The attraction of Europe is now waning, though not very rapidly. Because of this, most of the debate centers on correction of the fiscal As noted, a consequence regressiveness of the state and of domination by development of expansionary conservative forces, policies as a way of stimulating considerably limiting economic growth and job production. Sectors of the left in the public reforms approved Spain believe this is not possi- and implemented by social ble, pointing to the Mitterrand democratic governments case as an example of how one from the early 1980s onward, country cannot follow expan- are regressive fiscal policies sionary policies. This needs to be shown as wrong, although expansionary policies at the European level would help a lot. This is unlikely to occur at this time, however, given the control of the major EU institutions by neoliberal dogma.

*V icenc Navarro is a professor of Public and Social Policy at Johns Hopkins University and professor of Political Science at Pompeu Fabra University.

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The Global Governance Deficit: The Theater of the Absurd Global governance in the 21st century is reminiscent of famous playwright Luigi Pirandello’s “Six Characters in Search of an Author.” As Jean-Pierre Lehmann explains, the actors continue to roam about the stage with no purpose - and the play may end up being a tragedy. He argues we must bring this theater of the absurd to an end. By Jean-Pierre Lehmann*

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he most famous play by Luigi Pirandello, the late 19th/early 20th century Italian surrealist author and 1934 Nobel Prize Laureate, is entitled “Six Characters in Search of an Author.” I read it many decades ago and do not remember the plot in detail. However, I do remember well the ambiance the play conveyed. There are six actors, they are on a stage, they know they are supposed to be there - but they have no author and hence no script. They walk about and exchange improvised words, but they keep looking for a plot, which ultimately they never find - and the play ends pretty much as it began. The genre this play emanated from was what was known in Europe at the time as the “Theater of the Absurd.” In watching successive G20 summits, with their pantomimes and invariable smiling and waving photo-ops, I have had a strong sense of déjà-vu. In fact, the G20 summits - and perhaps all forums of global governance today - are reminiscent of Pirandello’s play. In the case of the G20, of course, it is 20 characters (plus the hangers-on) in search of a script.

Great Global Transformation

The Great Global Transformation got underway in the period from the launch of China’s radical reform program in the late 1970s to the early/mid-1990s, when countries around the world adopted market liberalization policies. These years are essentially a prelude to the first decade of the 21st century, when the rise of the so-called emerging economies erupted as a symphony in full force. Then in 2008/09, the world economy was turned upside down as it never had been since the Great Depression. In the postwar era, financial crises were considered a common condition of developing countries, and the world had seen just recently the crashes in Mexico, Thailand, Indonesia, Korea, Russia, Argentina, Brazil and Turkey. In 2008/09, however, the huge U.S. financial crisis occurred. Since then, the three major established economies - Europe, the United States and Japan (those that had held power and wealth for over a century) - have been in a very perilous state. Emerging economies have had to lend to established economies to help them meet their debts and obligations. As things stand now, in the summer of 2011, Japan, Europe and the United States are the “sick men” of the global economy. The paralysis in policymaking and governance that has afflicted all three illustrates vividly what the Singaporean scholar and diplomat Kishore Mahbubani refers to as “the great Western incompetence.” (In terms of economic geography, he includes Japan, even if physically in the East, in the West.) They all suffer from what the Japanese call “advanced-country disease” (Senshin-koku-byo). With these countries in such a perilous state, it is clear that the G7/8 has become obsolete. The small grouping of advanced nations was the opposite of a Pirandello setting. The show had been running since the mid-1970s, the actors all knew each other well, they all knew their script - and they knew when they were acting and when they were not. The first G20 summit in November 2008 was something of a success, mainly because of its novelty and because of the appearance of the new actors - Australia, China, India, Indone-

sia, Saudi Arabia, Turkey, Korea, Argentina, Brazil, Mexico and South Africa. Once the novelty effect and improvisation acts were over, however, it became clear that the G20 summits were turning into a Theater of the Absurd. The theater consists partially of the old actors, who by the time of the next G20 summit meeting in November 2011, in Cannes, France, will certainly not have recovered from their bad bout of paralysis. The U.S. debt deal is a temporary fix with more trouble to come. For its part, Europe is hardly out of the danger zone, while Japan can be counted on to continue muddling through. On the other hand, the G20 is also partially comprised of dynamic, fast-growing emerging actors full of zest and energy. They look upon their former overlords with dismay and a degree of contempt. They strut onto the stage brimming with confidence. Yet while the new actors may have individual scripts, there is no collective script. They do not know each other, and they have not been much accustomed to playing together on the same stage. There was an opportunity when the head of one of the major global governance “scriptwriters” (the IMF) emanating from among the old actors (France) had to resign in disgrace. The new actors might have nominated one of their own to replace former IMF managing director Dominique Strauss-Kahn. But lacking a collective script, they watched helplessly from behind the curtain as the old actors grabbed the limelight - and elected one of their own prima donnas: Christine Lagarde, a French lawyer. So from the sick came an actress with a key role. In the meantime, the global governance play continues to be in suspended animation. There is no action on the trade script, nor on the climate change script, nor on the food and water scripts. There is famine in East Africa, but the actors are so confused they fail to get their act together. The difference between Pirandello and what is happening now is that Pirandello was writing fiction, while we are witnessing reality. If the actors continue to roam about the stage with no purpose, the play may end up being a tragedy. We must try to bring this absurdity to an end.

* Jean-Pierre Lehmann was appointed Professor of International Political Economy at IMD (Institute for Management Development), Lausanne, Switzerland, in 1997, and is concurrently Founding Director of The Evian Group, Senior Fellow at the Fung Global Institute in Hong Kong, and Visiting Professor, Faculty of Business and Economics at the University of Hong Kong. EUROPEANBUSINESSREVIEW

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To centralize or not to centralize? It’s a hard call made harder by power struggles. CEOs can force a more thoughtful debate by asking three critical questions. By Andrew Campbell, Sven Kunisch, and Günter Müller-Stewens*

he chief executive of a European equipment manufacturer recently faced a tough centralization decision: should he combine product management for the company’s two business units -cutting and welding- which operated largely independently of each other but shared the same brand? His technical leader believed that an integrated product range would make the company’s offerings more appealing to businesses that bought both types of equipment. These customers accounted for more than 70 percent of the market but less than 40 percent of the company’s sales. “You cut before you weld,” he explained. “You get a better weld at lower cost if the cutting is done with the welding in mind.” Managers in both divisions, though, resisted fiercely: product management, they believed, was central to their business, and they could not imagine losing control of it. The CEO’s dilemma-were the gains of centralization worth the pain it could cause?-is a perennial one. Business leaders

dating back at least to Alfred Sloan, who laid out GM’s influential philosophy of decentralization in a series of memos during the 1920s, have recognized that badly judged centralization can stifle initiative, constrain the ability to tailor products and services locally, and burden business divisions with high costs and poor service.1 Insufficient centralization can deny business units the economies of scale or coordinated strategies needed to win global customers or outperform rivals. Timeless as the tug-of-war between centralization and decentralization is, it remains a dilemma for most companies. We heard that point loud and clear in some 50 interviews we conducted recently with heads of group functions at more than 30 global companies. These managers had found that the normal financial and strategic analyses used for making most business decisions do not resolve disagreements about, for example, whether to impose a group-wide performancemanagement system. What’s more, none of the executives volunteered an orderly, analytical approach for resolving centralization decisions. In its absence, many managers fall back on benchmarks, politics, fashion-sometimes centralization is in vogue and sometimes decentralization is-or instinct. One head of IT, for example, explained that in his experience the lowest-cost solution was always decentralization. Another argued the opposite. To help senior managers make better choices about what to centralize and what to decentralize, we have been refining a decision-making framework based on our research and experiences in the corporate trenches. It is embodied in three questions that can help stimulate new proposals, keep emerging ones practical, and turn political turf battles into productive conversations.

Three questions

Each question defines a hurdle that a centralization proposal must meet. A decision to centralize requires a yes to at least one of them. While the questions set a high bar for centralization, they do not produce formulaic answers; considerable judgment is still required. They benefit companies by allowing advocates and opponents of centralization to conduct a debate in a way that helps CEOs and their senior teams make wiser choices. The questions can be asked in any order, but the one presented here is often natural to follow.

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TRENDS

1. Is centralization mandated? The first step is to ask whether the company has a choice. A corporation’s annual report and consolidated accounts, for example, are required by law and must be signed by the CEO, so it is impossible to delegate this task to the business divisions. In this case, the answer is yes to centralization. By contrast, centralization is not essential for compliance with health and safety laws; each division can manage its own compliance. So a proposal to appoint a head of group health and safety would get a no for this question and would need a yes from question two or three. 2. D oes centralization add significant value - 10 percent? If centralization is not mandated, it should be adopted only if it adds significant value. The problem, however, as illustrated by the product-management example, is how to judge whether it will do so. This point is particularly difficult because corporate strategies rarely provide clarity about the major sources of additional value that underpin the argument for bringing different business activities together in a group. The solution, we find, is to set a hurdle high enough so that the benefits of centralization will probably far outweigh the disadvantages, making the risks worth taking. Specifically, we suggest asking: “Does the proposed initiative add 10 percent to the market capitalization or profits of the corporation?” This hurdle is sufficiently high to make it difficult for advocates of centralization to “game” the analysis, and thus saves the top team’s time by quickly eliminating small opportunities from discussion. Start by considering whether the activity meets the 10 percent hurdle on its own. If not, which is most often the case, you should assess whether it is a necessary part of some larger initiative that will meet the 10 percent hurdle. In practice, the answer to the 10 percent question does not require fine-grained calculations. What is required are judgments about the significance of the activity, either on its own or as part of a larger initiative. 3. Are the risks low? Most centralization proposals will not pass either of the two previous hurdles: they will not be mandated and will not represent major sources of additional value. More often, the prize will be smaller improvements in costs or quality. In these cases, the risks associated with centralization -business rigidity, reduced motivation, bureaucracy, and distractionare often greater than the value created. Hence, the proposals should go forward only if the risks of these negative side effects are low. An initiative to centralize payroll is likely to get a yes on this hurdle. Costs can clearly be saved through economies of scale, and the risks of negative side effects are low. Payroll operations are not important to the commercial flexibility of individual business units, nor are their managers likely to feel less motivated by losing control of payroll. Moreover, the risks of bureaucratic inefficiency and distraction can be reduced to a minimum if the payroll unit is led by a competent expert who reports to the head of shared services and doesn’t take up the time of finance or HR leaders.

Any centralization proposal that does not survive at least one of our three questions should be abandoned or redesigned. To see how our approach works in practice, let’s look at two companies that recently applied it -starting with the automated cutting- and welding-equipment manufacturer, which we’ll call European Automation.

European Automation’s product-management problem

Since centralized product management was clearly not mandated, the centralization proposal failed the first test. The CEO then skipped to the third test -is the risk of negative side effects low?- and quickly concluded that it wasn’t. Centralization would reduce commercial flexibility. Moreover, it could make managers in the businesses less motivated, since they would lose authority over an activity they considered important. And if done badly, centralized product management could lead to delays, additional costs, and uncompetitive products. So the proposal would succeed or fail on the second question -the 10 percent hurdle. The CEO sat down with the heads of the technical function and the two businesses (cutting and welding) to assess whether centralized product management could reasonably deliver an additional 10 percent in value through increased sales, higher prices, or some combination of both. (It was unlikely, in anyone’s estimation, to yield major cost savings.) After considerable discussion based on estimates of likely profit margins and on additional sales volumes from customers who might be influenced by an integrated product range, the group judged that if the centralized product-management function was properly managed it could add 10 percent to the company’s performance. In other words, the opportunity was big enough to surmount the 10 percent hurdle. Yet the business heads still resisted. The downside of getting it wrong, they argued, could make things worse rather than better. But the CEO, emboldened because the proposal passed EUROPEANBUSINESSREVIEW

TRENDS

the 10 percent hurdle, responded: “Well, all the more reason for us to work together to get it right. At our next meeting, let’s have a plan for how you are going to do this.” Nearly two years later, European Automation’s centralization of product management has been largely successful: market share is up, and the product offerings of the cutting and welding units are better aligned. But this example also illustrates the hard work and real risks involved. The company had to replace some of its original product managers because they did not have the skills to understand both cutting and welding products. Also, with product managers reporting to the technical function rather than to business units, some new products have been technically strong but less tailored to market needs, and some product launches have been delayed. To solve these problems, the executive committee is reviewing product-development plans in more detail and asking for regular progress reports.

Extreme Logistics’ performance-management issue

Sometimes, addressing the three questions can spark meaningful conversations that take managers in unexpected -and beneficial- directions. This happened at a company we’ll call Extreme Logistics, a global provider of food services to drilling, mining, and other operations in out-of-the-way locations. Anticipating slower growth and lower margins from increased competition, the company’s CEO asked the HR leader to consider imposing a single performance-management system on all of the five geographical divisions. Historically, each had its own. The CEO felt that a common one might enable him to have closer control of costs and management quality. The head of HR proposed a centralized system that would link a balanced scorecard of metrics to incentives. Knowing that the CEO supported the initiative, skeptical division heads nodded the proposal through the concept stage. Once HR began to work out the details, however, vocal resistance emerged. One division head said he was prepared to “play the game” of this new system if he had to, but only to ensure that his people got the bonuses they deserved. Another worried that the system would undermine her management style, which was to “lead from the front rather than to treat people as units of accounting.” To deal with the emerging political impasse, the CEO and the head of HR turned to the three questions. The initiative clearly did not qualify as a mandated item. It was also hard to see it as a major contributor to the key sources of value added by the corporate center. Management had recently identified these as encouraging entrepreneurial initiative, coordinating global customers, managing local governments, and centralizing common operating activities.

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So, if the proposal was to get a yes to the second question, it would have to clear the 10 percent hurdle on its own. This, too, seemed unlikely. True, the CEO and HR head could imagine scenarios in which the hurdle could be met: a 5 percent cost reduction, plus a 10 percent improvement in the quality of managers, they reckoned, would suffice. Yet the pair ultimately concluded that a central performance-management system would hardly achieve such goals on its own. Nonetheless, the discussion of scenarios prompted the CEO to consider other ways of achieving a significant cost reduction and an increase in management quality. He considered launching cost reduction projects and using existing business review meetings to create more demanding profit budgets and to monitor cost reduction plans, for example. With regard to management quality, the head of HR suggested developing a leadership program and setting targets for the businesses to improve or change the bottom 20 percent of their management talent. Was a centralized performance-management system, with a balanced scorecard tied to incentives, essential to either a cost or management-quality campaign of the type the CEO and the head of HR were considering? They were inclined to think it was. But in discussions with some of the business presidents, the CEO and the HR head became convinced that most of what they wanted could be achieved without centralizing the performance-management system.

Timeless as the tug-of-war between centralization and decentralization is, it remains a dilemma for most companies. We heard that point loud and clear in some 50 interviews we conducted recently with heads of group functions at more than 30 global companies. That conclusion led to the third question: how likely was a centralized performance-management system to cause negative side effects? The proposal failed this hurdle as well. Some of the business presidents thought it would make their managers less motivated. Moreover, the head of HR, the CEO, and the CFO all lacked experience running a system of the type proposed. Hence, it might become bureaucratic and distract the corporate center from the four areas that had previously been identified as places where it could add value, and from the two new initiatives -cost reduction and management-quality improvements- both of which are currently being evaluated to see if they meet the 10 percent hurdle.

* Andrew Campbell is a director of the London-based Ashridge Strategic Management Centre of Ashridge Business School; Sven Kunisch is a PhD student at the University of St. Gallen Institute of Management and a visiting fellow at Harvard Business School; Günter Müller-Stewens is professor of strategic management at the University of St. Gallen.

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

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

Special Report: The Opening of Southern Corridor: The Key Players N. Peter Kramer Editor-in-chief

In the north of Europe the gas battle is over. Russia has started filling the Nord Stream gas pipeline, a direct connection with Germania, bypassing Poland and the Baltic States. But what is going on in South-East Europe? Several costly new pipeline schemes are competing to build a trans-Caspian link with Azerbaijan and Turkmenistan. Nabucco, backed by the European Commission, and the Russian South

Stream project are among the competitors. But in the meantime analysts are telling us that the Caspian Sea littoral states will only produce enough gas in the future to fuel one of these several costly new trans-Caspian pipeline projects. In this special report of European Business Review, we try to give our readers a broader perspective on the situation. It is about energy security and about politics. EUROPEANBUSINESSREVIEW

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

The executive teams of the consortiums that plan and propose pipelines for the transport of Azerbaijan’s natural gas to Europe, are on the alert, as October 1st, was the date set by Azerbaijan’s state company, Socar, for the submission of “offers” by interested parties.

By EBR

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xcept for its financial benefits, the “contest’s” prize, i.e. the selection of the pipeline that will constitute the so-called “Southern Corridor”, has a strong geopolitical dimension, whereas it will offer an advantage for the transport of more gas quantities, in addition to those provided by the Shah Deniz II natural gas field for export. The reserves of this specific gas field of the Caspian Sea, whose development will be completed in 2017, exceed one trillion cubic meters (Azerbaijan’s assured reserves are estimated at 2.2 trillion cubic meters), and it has been chosen by the EU as one of the alternative sources for Europe’s “green fuel” supply, aiming to limit its dependence on Russia. Furthermore, new discoveries in Azerbaijan, like the Umid gas field, create conditions for the export of far larger quantities. Naturally, their main part will be directed towards Europe, since by 2030, the energy balance of its 27 member states will require increasingly bigger imports of western gas due to the decrease of the North Sea production. For this reason, the EU has signed two agreements with the Azerbaijani government so far: the first one, a memorandum on energy cooperation, was signed in 2006, whereas the second one, signed in January 2011, was in the form of a “Joint Declaration on the Southern Gas Corridor”. The important thing is that this second agreement is not simply a Memorandum of Understanding, but it refers to specific activities. Thus, a joint task force was established within its scope, with the participation of government and business entities’ representatives who are interested in the production, transport and supply of natural gas.

The role of the Azeris and Socar

According to the development plans of Shah Deniz II, its production will reach

16 bcm per year. Turkey will absorb 6 bcm of that quantity, and the remaining 10 bcm are intended for export to Europe. From the 3 pipeline projects, the ITGI (Interconnector Turkey-GreeceItaly) and the ΤΑΡ (Trans Adriatic Pipeline) have a supply capacity conforming to the quantities that will be exported by Shah Deniz II. On the contrary, Nabucco’s planned capacity per year is 32 bcm and, in order to secure such a quantity, it must approach other countries like Turkmenistan but, first, it must place huge pipelines at the bottom of the Caspian Sea (Turkmenistan-Azerbaijan). On the other hand, the Azeris have set explicit criteria for the pipeline selection, such as: • The transport cost that directly depends on the selected project’s construction cost • The political safety offered by the countries through which it will pass • The ability of the pipeline’s capacity extension by the least possible cost • Each project’s degree of maturity. In addition, they have announced that the selected consortium must accept Socar as partner, with participation in the consortium management. From the above it is clear that Azerbaijan’s government intends to create conditions for: • The least possible surcharge on its gas by the transport cost, so that its price to the European markets will be competitive • The control of gas handling through its participation in the consortium of the selected pipeline.

Infrastructure

It must be noted that before the “Southern Corridor” reached its invitation-totender stage, great infrastructure projects took place earlier so that the gas would be able to reach the gates of the EU. In 2006, the South Caucasus Pipeline or, otherwise, the Baku-Tbilisi-Erzurum

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

pipeline was completed. With a length of 690 km and a capacity of 9 bcm per year, that pipeline connected the networks of Azerbaijan and Turkey through Georgia. In 2007, the Turkey-Greece Interconnection began to operate. In the first stage, Greece receives 0.75 bcm of Azeri gas by that pipeline whose initial capacity is 5 bcm, through the Turkish network, after an agreement between DEPA, the Public Gas Corporation of Greece and the Turkish BOTAS. Many people justly refer to this project as the first stage of the “Southern Corridor”, since both the ITGI as well as the TAP, are based on the interconnection of the Turkish and Greek networks. BOTAS and DEPA specialists declare that the choice of one of those two projects as the “Southern Corridor” pipeline will require a network infrastructure upgrading on the Turkish and Greek soils so that the Azeri gas can be transported without any problems; on the other hand, it is estimated that the cost of those works is totally manageable and that it can be paid off easily by the Azeri gas passage fee revenues collected by the network managers.

The proposals

In the middle of last August, an invitation to tender was published, inviting each one of the ITGI, TAP and Nabucco consortiums to submit its proposal concerning its pipeline on October 1st. Socar, Azerbaijan’s state oil company, and not ΒΡ, which heads the Shah Deniz II consortium, took the initiative of that invitation, since it was agreed that the Azeri state company would be in charge of the team that will negotiate the gas transport works to Europe. As previously mentioned, two of the three proposed projects (ITGI, TAP), fully conform to the production capacity of Shah Deniz II. In addition, those projects are at a much more advanced stage, compared to the third project, Νabucco, whereas their cost is around 1.4 billion euros, contrary to Nabucco’s that exceeds 8 billion euros due to its great length (over 3,500 km) and its great transport capacity that reaches 32 bcm. From the above it is very clear that Nabucco’s medium-term role exceeds the limits and capacities of the known

Caspian natural gas fields that are in a development phase. Independent analysts state that Nabucco aims more to gas transport from regions like Turkmenistan, North Iraq, and possibly Iran, if in the future this country’s political state of affairs changes and the restrictions concerning the cooperation with it in the energy domain are lifted. As far as the “maturity” of the three investment projects is concerned, Nabucco is in a very early planning stage. Preliminary studies for the examination of the grounds through which it will pass, in order to locate old ammunition and other hazards, were only recently assigned. In other words, no initiative has been taken for the beginning of the necessary environmental studies on the pipeline’s approximately 1,200 km that will cross Bulgaria, Romania, Hungary, and Austria and on its 2,500 km that will cross Turkey as an independent pipeline. From the other two pipelines, the ΤΑΡ has completed its preliminary studies on the Greek and Albanian grounds, and the submission of the environmental impact final study to the relevant Greek authorities is imminent. The ITGI is in the most advanced stage of all. It has secured the environmental impact licenses for its overland parts on the Greek and Italian soil, a specialized company is studying in detail the pipeline’s underwater passage and the exact spot of the unique compression station that is necessary for the operation of the underwater section, has been specified on the Greek shores of the Ionian Sea. During the last 18 months, there has been a lot of discussion concerning the possibility of cooperation of the individual projects. So far, only the realization of preliminary discussions between the ITGI and TAP consortiums (DEPA-Edison, ITGI, EGL-E.ON-Statoil, TAP), has been disclosed, since the two pipelines have a common start, common destination and common route in the biggest part of their course, but there has been no final outcome until now. Also, from the ITGI side, a proposal of cooperation with Nabucco has been made to the Nabucco consortium. As DEPA President and CEO, Harry Sachinis, publicly pointed out, the Nabucco and ITGI pipelines could operate in a complemen-

tary way. The ITGI consortium believes that its project is perfect for Azerbaijan’s natural gas transport; it has the right size, it’s less costly, and it’s in the most advanced stage regarding all the other projects. Thus, the “Southern Corridor” could open through the ITGI and, when Nabucco will find the right quantities for its size, the ITGI can help by offering to Nabucco any additional gas required from the liquefied gas terminal in Northern Greece. Generally, the Head of the Public Gas Corporation of Greece believes that, finally, in the future, Europe will need both the ITGI and Nabucco, whereas he places the realization of the latter at a much later date due to the problem of securing its necessary gas quantities. PFC Energy, a specialized US firm, recently completed an evaluation of the three prospective pipelines of the “Southern Corridor”, grading their cost effectiveness, their complexity, their construction cost and their conformity to Azerbaijan’s natural gas production till 2020, and it concluded that the pipeline to be selected is the GreekItalian ITGI for the following reasons: • It’s the simplest project. After Azerbaijan and Turkey, it passes through one country only, Greece, contrary to the other projects that plan to pass through more countries. • Its size fully conforms to the Shah Deniz II production. • I ts cost is approximately 1,14 billion euros, therefore it’s an “inexpensive” choice. • I t offers an option of expansion towards Bulgaria, through the IGB pipeline (Interconnection Greece - Bulgaria), which the EU promotes and financially assists. This pipeline has the same partners with the ITGI (DEPA-Edison). • It has secured strong political support by all the countries involved (Azerbaijan, Turkey, Greece, Italy). EUROPEANBUSINESSREVIEW

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

President Aliyev: “ We are now building our energy policy on the Gas factor”

Azerbaijan is an old oil nation. It was in Azerbaijan that the world’s first oil was industrially produced in the 19th century. First offshore oil production was also registered in Azerbaijan in the 20th century. In other words, we have good traditions. By Ilham Aliyev*

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lthough Azerbaijan was known as a high-risk state in 1994, the invitation of major foreign companies, creation of favorable conditions for them and adoption of necessary measures to protect their investment, including those in the legislative field, helped Azerbaijan to ensure its own energy security. Today, Azerbaijan is stepping up its role in the energy security of other countries. At present, Azerbaijan transports oil to world markets by three routes. We have fully met our diversification goals in this sphere. Our oil, which is transported in three directions today, is taken to world markets through very safe routes. The construction of oil pipelines, especially the Baku-Tbilisi-Ceyhan pipeline, was a historic event too. And not only because Caspian oil was delivered to Mediterranean markets for the first time, but also because this pipeline opened a new way, a new corridor. There was a very complex geopolitical situation in our region at the time. Despite that, foreign investors attracted major funds and international financial institutions provided support. Azerbaijan also met all its commitments in a worthy and successful manner. Therefore, as a result of the commissioning of the Baku-Tbilisi-Ceyhan oil pipeline we not only accessed new markets and opened a new corridor but also paved the way for a large revenue flow into our economy. We have used these funds very prudently. The State Oil Fund established in Azerbaijan in 1999 is one of the most transparent entities of this nature in the world. The activities of the fund have received good feedback from international organizations – the United Nations and others. The Oil

Fund is an absolutely transparent entity. This has enabled us to use the revenue rationally and fairly. It is thanks to this that the number of people living in poverty has dropped from 49 to 9 per cent in the last seven years. If it hadn’t been for such a transparent and modern entity as the Oil Fund, we couldn’t have achieved such success. It is evidence that the funds flowing into Azerbaijan are distributed fairly, the accumulation and spending are carried out transparently. This also has a positive impact on Azerbaijan’s standing in the world. At a certain stage, especially after the commissioning of the Baku-TbilisiCeyhan oil pipeline, one would have thought that we had met our goals, that now we only had to manage the revenues, that Azerbaijan had realized its policy of diversification and could be content with its achievements, so to speak. However, our approach is completely different. And not only in this sphere, but also in all others. Our successes are only a certain stage, a step for us. We always look ahead and plan our steps within the framework of a longterm program to ensure a successful and sustainable development. So the second important issue we were facing was to introduce Azerbaijan to the world not only as an oil but also as a gas nation. Especially given the fact that the implementation of the contract on the Shah Deniz gas field signed in 1996 had commenced and very major gas fields were discovered in Azerbaijan. I can say that the discovery of the Shah Deniz gas field did not attract so much attention at the time because the gas factor was not in the spotlight in the world, especially in Europe. Sub-

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

sequently, only several years ago, we started realizing the impact of the gas factor on energy security of countries. Nonetheless, Azerbaijan took all the measures necessary, and I can say that the discovery of Shah Deniz became a very momentous event for global energy markets. We are now building our energy policy on the gas factor because, as I mentioned, all our oil projects have been implemented. From now onwards we will continue our policies by maintaining production at a stable level. Our work in the sphere of gas markets is goal-oriented. The diversified export infrastructure we have created is serving the interests of Azerbaijan and provides support to neighboring markets. The construction of the Baku-TbilisiErzurum gas pipeline was also a historic event. I want to reiterate that if the Baku-Tbilisi-Ceyhan oil pipeline hadn’t been built and this corridor hadn’t been opened and tested, then the opening of the gas corridor would have certainly faced great difficulties. In other words, we built the gas pipeline in the already existing corridor, and the Baku-Tbilisi-Erzurum gas pipeline is a major factor, a serious factor on regional and continental scale today. After that, we refurbished the gas pipeline infrastructure that existed earlier. Today Azerbaijani gas is delivered to world markets in four directions. We are exporting gas to neighboring countries, and the number of our oil and gas pipelines has already reached seven. Of course, in order to rationally use our rich gas fields we need major and reliable markets. The markets regulated by law, the markets that need our gas. Azerbaijan is pursuing a consistent policy in this direction. We have been following a policy on the Southern gas corridor for several years now. Serious discussions have been under way for several years and, at the same time, specific steps are being taken. Back in 2006, the European Union and Azerbaijan signed a memorandum on energy cooperation. That was a first step that largely reflected the intentions of both sides. Subsequently Azerbaijan managed to demonstrate its gas resources at various international forums. Today, we have confirmed gas reserves of 2.2 trillion cubic meters.

In January this year, the European Union and Azerbaijan signed another important document – the Joint Declaration on the Southern Gas Corridor. This declaration is not just an expression of intention. It is a specific document. We are working on this document. A working group has been established between the European Union and Azerbaijan, and it is working very fruitfully. I hope that all the necessary documents will be signed in the near future. We will thus have a foundation for the development of the second stage of the Shah Deniz project. I have no doubt that all our tasks will be fulfilled. Our past, our history, the experience gained and the political will show that even in a more difficult situation we successfully managed to implement more complex projects. Therefore, I believe that the future of the Southern gas corridor will be fine. We have enough gas reserves. They will be sufficient for us and consumers at least for another 100 years. If we consider that we are producing perhaps twice as much oil as was initially predicted, I can confidently say that our natural gas reserves of 2.2 trillion cubic meters are, as they say, a modest figure. According to forecasts, there is even more gas, and I am sure that larger volumes of gas will be discovered as a result of drilling operations. There have been several important developments in Azerbaijan’s energy policy since the last exhibition. I want to point to two of them. The first, as I said, was the signing of the Declaration on the southern gas corridor between the European Union and Azerbaijan in January, while the second was the discovery by Azerbaijani oil workers of a major gas field Umid. This, above all, is an indication that we have other large reserves in addition to Shah Deniz. Our oil workers and geologists always emphasize that. On the other hand, the significance of the Umid field lies in the fact that it was discovered by Azerbaijani oil workers, by the State Oil Company of Azerbaijan. The experience of our oil workers and the experience gained from cooperation with foreign companies have already produced concrete results. In the Umid project, the State Oil Company of Azerbaijan is both the investor and operator. The discovery of Umid suggests that there are sufficient

reserves of gas in the adjacent prospects. We are sure of that. I do hope that the exploration of Azerbaijan’s gas fields will be continued at the following stage. Currently, the issue of energy security is one of the most important issues on the global agenda. In order to ensure the energy security of our partners, Azerbaijan performs the tasks assigned to it consist-

ently and with a great will. I believe that the current collaboration between consumers, transit countries and producers will produce good results, because it is only through the interaction of these three parties that we can succeed. This is why I want to say again that a working group has been established between the European Union and Azerbaijan. This group includes potential investors, consumers and producers. Azerbaijan is a fully self-sufficient country. Our foreign exchange reserves are growing. Currently, their level has reached almost $35 billion. Our economy is growing, and our gross domestic product has grown three times over the past seven years. In 2003, our budget expenditure amounted to $1.2 billion dollars, while in 2011 it reached $20 billion. Our country is pursuing a very strong social policy, stepping up struggle against unemployment and reducing poverty. Our industrial capacity and the non-oil sector are developing. I can say unequivocally that the foundation of all these successes was laid by the signing of the Contract of the Century in 1994.

* Ilham Aliyev is the President of Azerbaijan. EUROPEANBUSINESSREVIEW

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

Interconnector Turkey - Greece - Italy (ITGI): A mature project may open the way for the Southern Corridor

he natural gas Interconnector Azerbaijan - Turkey - Greece Italy (ITGI) possesses a majority of strategic advantages for the transport of Azeri gas to Europe, including the underwater Greece - Italy pipeline. The project was planned and prepared during the last decade, so its maturity is higher than any other similar project. During that period, important preparatory steps were taken on the political, technical and financial level, whereas its business partners, the Public Gas Corporation of Greece-DEPA and the Italian Edison, have the necessary political support, the experience and adequate funds to complete the project. On October 1st, DEPA and Edison submitted to Socar, Azerbaijan’s state oil company, their proposal concerning the ITGI pipeline, initially for transport of 12 bcm of Azeri gas, a capacity that can easily be expanded to 24 bcm in its overland section and to 16 bcm in its underwater section. The terms offered by the ΙΤGI to the natural gas producers of the Shah Deniz II field, ensure low transport cost, security, quick completion, ability of capacity expansion at low cost, and gas supply not only to Central, but also to Southeast Europe. The ITGI project consists of the pipeline’s approximately 600 km long overland section, which crosses the northern part of the country from the region of Komotini till the Ionian Sea shores of Thesprotia. Its 200 km long underwater section, the “Poseidon” pipeline, will reach the Italian shore in the Otranto area. The pipeline’s total length, the fact that it crosses only one country, Greece, before reaching Italy, and its cost, estimated at 1.4 billion euros, offer to the ITGI the characteristics of the most inexpensive and safest solution for Azerbaijan’s natural gas

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transport to the European markets. The EU has characterized this pipeline as an interfrontier project of first priority that will contribute to the safety of its energy supply, whereas in 2010, the community bodies approved its financial support by 100 million euros through the energy sector’s European Financial Reconstruction Plan (Directive 663/09). The following preparatory steps have already been carried out: • Since 2007, the 300 km long GreekTurkish Karatsabe-Komotini pipeline, a part of the basic infrastructure for the ITGI realization, operates. • In 2008, the “Poseidon” company was founded (50% DEPA, 50% Edison), which will construct and manage the underwater pipeline. • In 2010, the Greek and Italian authorities provided the environmental authorizations for the overland and underwater parts of the pipeline. • In April 2010, an agreement was signed between “Poseidon” and INTECSEA-IV OIL & GAS Consortium for the preparation of the underwater pipeline’s study (FEED). • In July 2010, a memorandum of cooperation was signed between “Poseidon” and the Hellenic Gas Transmission System Operator-DESFA, for

coordination of the activities related to the two systems’ interconnection. • In January 2011, Fugro Geoconsulting Ltd. was assigned and it already carries out the seabed’s detailed marine survey for the passage of the underwater pipeline. • The “Poseidon” company invited tenders for the supply of steel pipes for the underwater pipeline and it prepared a short list for selection of suppliers, based on offers received. • More than four interstate agreements between the countries involved have been signed to support the project. • In January 2011, the company for the Interconnector Greece-Bulgaria IGB (DEPA, Edison Bulgarian Energy Holding) was founded. This pipeline will operate before 2014 and it will supply Southeastern Europe by Azerbaijan’s gas through the ITGI. The above facts prove the project’s high degree of maturity, which no other similar project from those competing for the Azeri gas’ “Southern Corridor”, possesses. In addition, its characteristics not only offer the optimum solution for the Azeri gas transport to Europe, but also they serve that country’s interests in the best possible way, elevating it to a dynamic “player” in the European gas market.

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

“ ITGI may open the Southern Corridor due to the gas quantities it has secured and its low cost.” An exclusive interview for European Business Review! We had the chance to talk with Mr. Harry Sachinis, Chairman and CEO of DEPA, in the Athens headquarters of the Greek Public Gas Corporation.

Could you please mention briefly the advantages of ITGI compared to the competitive projects (namely TAP and Nabucco)? ITGI is the most advanced and cost effective Southern Gas Corridor Project, offering the quickest gas route to market and benefits both the EU and Azerbaijan. The ITGI proposal, backed by DEPA and Edison, has many advantages but I would like to focus on those that turn this pipeline into the solution that will serve the EU’s goal, energy supply security, in the least expensive and speediest way while also serving the Azeris interests. Crucially, the ITGI system will also deliver increased energy security to Southern Europe. By allowing reverse flows through the Poseidon interconnector between Greece and

Italy, additional gas from North Africa could be transited on to Bulgaria and the rest of Southern Europe. With the looming prospect of gas cut-offs from traditional supply routes, it makes little sense to limit Southern Europe’s supply options. The ITGI construction can begin immediately, offering an outlet towards the European markets of 10 bcma of Azeri gas and the fastest way to get Azeri gas to Europe. ITGI, with a potential upgrade through the use of an added compressor can provide Italy up to 16 bcma and through IGB up to 5 bcma for Bulgaria and the rest of CE Europe. Therefore, ITGI system is scalabe from 10 to 21 bcma. The interconnections that will be exploited for the gas transport are the Turkey - Greece pipeline (TGI) that has

been operating since 2008 delivering Azeri gas to Greece; the underwater pipeline IGI “Poseidon” that connects Greece and Italy and the overland Greece - Bulgaria pipeline (IGB). The last two pipelines are in the preliminary works phase, but the EU has characterized them as projects of special importance for its supply security and it will finance their construction by €100 and €45 million respectively. At the moment as far as we know, there is no pipeline project for the Southern Corridor that cumulatively possesses so many advantages such as a guarantee of the gas quantities required for its operation, their absorption by the markets and especially the possibility of immediate realization of the works that must be executed in order to cover the needs of the Central EUROPEANBUSINESSREVIEW

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

and Southeastern European markets. Additionally ITGI’s detailed marine survey has been completed, the Front End Engineering Design is well on its way and to conform fully to the EU’s third energy package, ITGI has already secured Third Party Access exemption for 8 bcm. ITGI has been issued with all the environmental licenses required from the Italian and Greek side as a result of a multi-year process. We understand other projects are not at this stage yet. It is worth noting also that ITGI is the most technically advanced project enabling ITGI to have a high degree of certainty in its cost estimates for the project, the cornerstone of developing a commercially sound tariff. In short, the project begins tomorrow if we get the green light from the Shah Deniz II and Socar consortium.

Your competitors for the “Southern Corridor” strongly promote the financial resources of their partners. Are you in a position to compete with them on this ground? That parameter would be important if we were proposing a pipeline of 30 or 40 bcm annually, but our proposal is very specific: it concerns a 12-bcm pipeline with total budget of approximately 1.4 billion euros. The financing plan for such projects includes bank loans, own funds and grants from community funds. A similar plan will be used in the case of the ITGI. Additionally the EU which has declared ITGI as a Project of European Interest and has agreed to cofinance the project up to €145 million, through the E.E.P.R. framework. ITGI is very comfortable that it has the financ-

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ing in place for the project. Financing a currently is the most accessible source, gas pipeline is based upon the availability even if new gas fields like Absheron are of the gas, ready customers, certainty of pushed to come online on time. There is cost estimates and the payment of tran- no opportunity to support a large pipeline sit fees, all of which our investors recog- today. The only gas available today for nise ITGI has, insulating ITGI from the several years will be the 10bcm from Shah issues of the Greek debt situation. ITGI Deniz II which matches perfectly ITGI’s has secured co financing from the Eu- capacity. The reality today is that for all ropean Commission of up to of €145 the new, larger discoveries of gas being anmillion for Poseinounced, no new don and IGB and gas will be availIGI Poseidon has able before 2021. In short, the project begins already at least ITGI welcomes tomorrow if we get the green 17 perspective these larger finds light from the Shah Deniz II buyers showing because they and Socar consortium. interest in capacincrease Euroity rights with pean energy seITGI. In terms of curity and make DEPA itself it can cover its own funding Nabucco more likely through offering of the project; its net profits were €90 Europe 40m bcm. In the first phase, we million in 2010, €100 million euros in shall transfer 12 bcm through ITGI to Itthe first quarter or six months? of 2011 aly and through Italy’s network to Austria, and they are estimated at approximately as well as 5 bcm to Bulgaria through the €200 million euros for the entire 2011. IGB pipeline. As you may know, the EU As a Group we have no problem at all proposes the construction of interconnecto finance the ITGI project, and I don’t tors similar to the IGB in the South East think there are any competition issues Europe region, specifically between Bulregarding those matters. garia – Romania, Bulgaria – Serbia, and Romania - Hungary. The cost of those From time to time, we have seen state- pipelines is very low, whereas all the abovements regarding a possible coopera- mentioned countries will be able to secure tion between competing projects for natural gas from Azerbaijan through the the Southern Corridor. What is your IGB, but also from the LNG spot market view on this? through the Greek pipeline network. This We’ve always said we’re open to discus- entire system of interfrontier energy consions about merging pipeline projects but nections will supply at least 5 bcm per year this is a commercial decision that must be to the Southeastern European markets taken in concert with the SD2 consortium from diversified sources, utilizing the existas it may affect the price achieved for SD2 ing networks implementing interventions gas. So, at the moment, we’re concentrat- of minimal cost. To conclude, what we ing on the ITGI system which will deliver are saying is that the “Southern Corridor” commercial value to the SD2 consortium should initially open through the ITGI, and energy security for Europe. For coop- due to the gas quantities it has secured and eration to exist, the parties involved must its low cost. have common goals and it must ensure that mutual profits will ensue for both sides. Socar has imposed a number of criWe believe that some kind of cooperation teria for the selection of the project with the Nabucco consortium may result that will eventually transfer the gas based on the above. Our view is the fol- from Azerbaijan to Europe. Which is lowing, Nabucco is planning to transport the most important attribute of ITGI gas to Europe, but it requires quantities in your opinion that will make the exceeding 30 bcm. Since a pipeline of such project more attractive to the Shah size and cost cannot be depreciated by less Deniz Consortium? quantities. DEPA and several independ- If you were in the position of Azerbaient experts too, believe that it’s impossible jan’s government, SOCAR, or the Shah to secure such quantities in the near future Deniz II consortium and you intended from one source only i.e. Azerbaijan which to export 10-12 bcm of natural gas to

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

Europe, what would you look for? Defi- Finally there is not another pipeline that nitely you would need to have secure not only has invited tenders but has also exports, unaffected by all kinds of risks, received offers for the supply of the pipes a competitive gas price for the European that will be cast on the seabed, as “Poseimarket, gas sales to as many region-mar- don S.A.” has done. kets as possible, avoidance of delay in deliveries, to have a say in the transport To which extent, is the realization of your product and possibly, to be able of ITGI relevant to DEPA’s business to sell some additional quantities with- plans for expanding in the region? out the requirement of new, big invest- The realization of an energy infrastrucments. We believe that the ITGI covers ture project such as the ITGI offers imall those requirements of a producer. We portant business opportunities to DEPA believe ITGI is a reliable partner to the as an active natural gas company in the Azeri government and our proposal is region. During its course, the pipebuilt to recognize the country’s aspira- line crosses the entire northern part of tions. Our focus is to help the Azeri’s Greece, i.e. the regions of Thrace, where maximize revenue and sell gas to the the Greek-Turkish borders exist, Macnearest markets as it becomes available. edonia and Epirus, before it reaches the ITGI allows more profitability also for Ionian Sea shores. It follows the Roman the Azeri’s Shah Deniz II gas due to our Via Egnatia that connected the Adritarget markets proximity to Azerbaijan. atic Sea with the empire’s eastern provOur pipeline passes through EU coun- inces. Bulgaria, FYROM and Albania tries only, where European directives are situated north of the pipeline and for network management are in effect. the Aegean Sea south of it. The existing pipeline that serves On the other hand, the Greek network, ΤΑΡ passes through covers half of that Albania, which is “ ITGI - A proposal that route, i.e. from not an EU country, will serve EU’s goals the Greek-Turkish before it reaches Itaand Azeris interests”. borders till Thesly. As for Nabucco, saloniki; from there it passes through it continues towards three EU countries before it reaches Austria and that may Southern Greece. The regions of Epirus involve difficulties in the acquisition and Western Macedonia will gain acof environmental licenses etc. What I cess to natural gas when the ITGI will mean is that the ITGI is the simplest be constructed, whereas the pipeline is and cheapest project, therefore it ensures very close to the Greek-Albanian border. the best delivery price to the gas produc- On one hand, DEPA will be able to set ers, compared to other more complex up new companies that will supply gas and expensive projects. ITGI is a system to those areas and, on the other hand, whose construction may begin imme- Albania may obtain natural gas from diately and I don’t believe that there is DEPA through the Greek network, if another pipeline, which has secured its it’s in its best interest. The works for management terms from the EU, carried the IGB pipeline to Bulgaria have alout detailed studies concerning the me- ready begun and FYROM may receive chanical and environmental issues and gas through the Greek network since the that has acquired the necessary licenses route through Greece is much smoother from the competent state authorities. compared to routes passing through its other neighboring countries. Initially, DEPA will supply its neighboring countries, like Bulgaria, with Azeri gas and gas ITGI is the most advanced from the LNG spot market. The LNG and cost effective Southern terminal on Revithoussa Island with an Gas Corridor Project, annual capacity of 5 bcm, which will rise by 40% after two years due to an upoffering the quickest gas grade in progress, is already integrated route to market. to the Greek network, and DEPA plans

the construction of one more overland or floating LNG terminal, in Northern Aegean Sea. In the same area, there is an exhausted underwater natural gas field, which the Greek State intends to use by converting it to an underground natural gas depot of approxiThe ITGI system mately 600 mcm useis scalabe from ful capacity. In other 10 to 21 bcma. words, in the area of Northern Greece, from where the ITGI passes, there will be available gas of Russian origin through the existing network, Azeri gas, spot market gas from the LNG Terminals and gas from the underground depot of Kavala. Therefore, the groundwork will be done for the creation of a natural gas hub in which quantities of different origin will be collected with the prospect of local price creation. From those points, DEPA controls the Greek-Bulgarian pipeline, IGB, which has obtained an operation license as an independent system. The LNG terminal and the natural gas underground depot, in which it will seek to participate, are included in its plans. To conclude ITGI’s operation will enable the opening of the Southern Corridor, offering the fastest route for moving Azeri gas to Europe and ensuring European energy security. ITGI is ready to go. EUROPEANBUSINESSREVIEW

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

“ Political decisions regarding the Southern Gas Corridor must be based on sound commercial and technical principles” By Kjetil Tungland, Managing Director of TAP (Trans Adriatic Pipeline)

“2011 is a momentous year, with critically important decisions due to be made that will not only determine the future of TAP and other pipeline projects in the Southern Gas Corridor, but will also have a profound and lasting impact on Europe’s energy security.” TAP is in a strong position at this critically important stage and we remain optimistic of the outcome. In addition to being technically viable, safe and offering the most commercially attractive transportation route for shippers, TAP has the enormous advantage of being the shortest new-build pipeline and the most cost-effective route for delivering Shah Deniz II gas into Europe. Our project enjoys the support of the European Union and is regarded as integral to the EU’s energy policy. TAP has several features that enhance Europe’s energy security. These include the possibility to physically reverse

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gas flow in the event of an emergency, develop storage opportunities in Albania, and a commitment to include several tie-in points along the pipeline for other spur lines into South Eastern Europe. Furthermore, TAP is a large pipeline with a capacity of 20 bcm. It is designed to effectively transport the 10 bcm of Shah Deniz II gas from Azerbaijan during the first phase, while accommodating additional supplies as they come on stream. Europe’s energy security does not simply require political will and consensus. In these challenging economic times, when decisions are subject to unprecedented public scrutiny, it is even more essential to choose the most efficient and cost-effective solutions that do not require massive subsidies from the public sector in order to be physically realised or made commercially viable. To do otherwise risks failure and renewed uncertainty over Europe’s en-

ergy future. TAP brings confidence as it is supported by financially robust and technically strong shareholders without any need for public funds. It is absolutely essential that the official support and decision-making process is transparent and takes place on a level playing field, without fear or favour, based on clear criteria understood by everyone. There is so much more at stake than just the fate of any one particular pipeline. Political decisions regarding the Southern Gas Corridor, and indeed all similar projects and initiatives, must be based on sound commercial and technical principles. Our continued adherence to the highest environmental, social and technical standards will ensure that TAP continues to be a robust project that will meet the requirements as set out by the gas vendors, the host governments as well as the International Financing Institutions (IFIs) and bank financiers.

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

Nabucco looks to newlydiscovered Azeri gas

zerbaijan’s state energy company has announced the discovery of major natural gas reserves off the country’s Caspian coast: the Absheron field. Nabucco spokesperson Christian Dolezal told EurActiv that the pipeline consortium was counting not only on supplies from Shah Deniz II, but also on newly discovered gas fields. Khoshbakht Yusifzade, vice-president of SOCAR, the Azeri state-owned gas company, said on 12 September that the Absheron field holds at least 350 billion cubic metres (bcm) of natural gas. The find takes Azerbaijan’s total proven gas reserves to 2.55 trillion cubic metres, according to Yusifzade.

gal comfort with the Intergovernmental Agreement, which is a treaty, and the bilateral Project Support Agreement. Nabucco is proceeding with the environmental and social impact assessments, and we’ll enhance negotiations with the lenders.

Nabucco’s planned capacity is 38 bcm/ year, while Shah Deniz II is expected to supply 10 bcm by 2017. Christian Dolezal was speaking to EurActiv* Senior Editor Georgi Gotev.

Once the Azeri state company SOCAR has decided to whom to attribute gas from Shah Deniz II, is it possible that some pipeline projects could merge, as the European Commission has recently advocated? Now it is up to the potential gas suppliers to make their commitment and it is up to the shareholders to decide on these questions. Currently there is no need for mergers.

Can you describe the procedure before it becomes clear which companies will obtain the gas from Shah Deniz II? Do you think Nabucco has a better chance than competitors like ITGI and TAP? What about Turkey as a rapidly developing country in need of more gas? We cannot comment on the procedure but we are well prepared. Nabucco is working on a well-designed offer and we are convinced that we do have the most competitive transport solution for the clients and for the shareholders. The gas market is growing and new gas supply needs an outlet to many new customers. This is a win-win situation for both - suppliers and customers. What’s new with Nabucco, in the meantime? What is the consortium doing to improve its chances for the bid? Nabucco is the most competitive and most developed project in the southern corridor. Nabucco offers maximum le-

Shah Deniz II is not enough to fill the Nabucco pipe. What other sources are envisaged? On [top] of [the] Shah Deniz II quantities, Azerbaijan has additional gas volumes for export available with gas fields like Absheron, Umid, etc. Nabucco further follows its multi-sourcing approach, envisaging as well gas from Turkmenistan and Iraq.

* Based on independency and close mutual co-operation, the EurActiv Network delivers localised EU policy information in 15 languages, reaching readers across Europe and beyond. The co-branded partner publications produce content in Brussels (Belgium), Bulgaria, the Czech Republic, France, Germany, Greece, Hungary, Italy, Lithuania, Poland, Romania, Serbia, Slovakia, Spain and Turkey - reaching over 80% of EU citizens in their mother tongue. Visit EurActiv at www.euractiv.com EUROPEANBUSINESSREVIEW

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

OMV - the leading energy Group in Central and Southeastern Europe

Chairman and CEO of OMV, Mr. Gerhard Roiss

ith Group sales of EUR 23.32 bn and a workforce of 31,398 employees in 2010, OMV Aktiengesellschaft is one of Austria’s largest listed industrial companies. As the leading energy Group in Central and Southeastern Europe, OMV is active in Refining & Marketing (R&M) in 13 countries. In Exploration & Production (E&P) OMV holds a balanced international E&P portfolio In Gas & Power (G&P) OMV sells approximately 18 bcm gas per year. Through its 2,000 km long gas pipeline network in Austria G&P transports approximately 89 bcm gas annually. OMV’s Central European Gas Hub is with around 34 bcm annual trading volume one of the most important gas hubs in Continental Europe. The Group further strengthened its

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leading position in Central and Southeastern Europe through the acquisition of a majority stake in Petrol Ofisi, Turkey’s leading company in the retail and commercial business. OMV now has approx. 4,800 filling stations incl. Petrol Ofisi. The market share of the group in the R&M business segment in the Danube Region is approx. 20%. Under its 3plus strategy, OMV combines the strengths of its E&P, G&P and R&M business units in order to ensure that it provides the best possible supply service to its three core markets of Central and Eastern Europe, Southeast Europe and Turkey. OMV uses the synergies that result from the combination of these strengths to extend its supply chain from oil and gas through to electricity and eventually renewable energy.

OMV participates at the Nabucco gas pipeline consortium. Chairman and CEO of OMV is Mr. Gerhard Roiss. Gerhard Roiss studied economics in Vienna, Linz, and Stanford, USA. In 1990 he was Head of OMV Marketing in the OMV Group. In the same year he was appointed to the management board of PCD Polymere GmbH. In 1997 he transferred to the Board of the OMV Group and was responsible for Plastics and Chemicals. 2000 he also assumed responsibility for the Exploration and Production business. From January 1, 2002, to March 31, 2011, he was Deputy CEO of the OMV Group responsible for Refining & Marketing including Petrochemicals. He has been CEO of OMV Aktiengesellschaft since April 1, 2011.

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

Securing the EU’s energy interests abroad Source: European Commission

he European Commission has adopted a Communication on security of energy supply and international cooperation, setting out for the first time a comprehensive strategy for the EU’s external relations in energy. Improved coordination among EU Member States in identifying and implementing clear priorities in external energy policy is central to the approach outlined by the Commission. In today’s ever-changing global energy markets, the EC says achieving EU energy security calls for adequate coordination at home and a strong and assertive position abroad. Alongside the Communication, the Commission proposed a Decision setting up an information exchange mechanism for intergovernmental agreements in the field of energy between Member States and third countries. It will extend and complement the notification procedure already applicable to gas agreements to all forms of energy. And it will provide for an instrument to exchange information at EU level before and after negotiations with third countries. The proposed mechanism is set to strengthen the negotiating position of Member States vis-à-vis third countries, while ensuring security of supply, proper functioning of the internal market and creating legal certainty for investment.

Background

Günther Oettinger,

The share of imported energy in the EU - currently 80% for oil and over 60% for gas - continues to rise. National decisions and agreements with third countries have a significant impact on the development of energy infrastructure and energy supply to the EU as a whole. EU interests need to be better promoted in relations with both transit countries and energy producing countries. At the same time, new patterns of supply and demand in global energy markets and growing competition for resources also make it necessary to ex-

ercise the combined weight of the EU in external energy relations. In line with the Energy 2020 strategy, today’s Communication proposes to enhance the external dimension of the EU energy policy through improving transparency among EU Member States on their energy agreements with third countries, strengthening coordination when approaching partner countries, when taking position in international organisations, and when developing comprehensive energy partnerships with key partner countries. The strategy lists 43 concrete actions which include notably: •M ember States have to share among each other information about international agreements with third countries in the field of energy. This includes agreements which are still under negotiation. On a case-by-case basis, the Commission may provide an opinion on the conformity of these agreements with EU law and with the EU security of supply objectives. • Energy agreements with third countries could also be negotiated at EU level where necessary to achieve the EU core objectives. This is the case for an agreement with Azerbaijan and Turkmenistan on a Trans-Caspian gas pipeline, where a specific mandate from the Council has been requested. •T he EU will propose a new partnership on renewable energy projects with the Southern Mediterranean countries. • The EU will advocate for international legally binding nuclear safety standards in multilateral discussions, including under the International Atomic Energy Agency (IAEA), and will aim to extend nuclear safety assessments to EU neighbouring countries. • The EU development policy will include a greater emphasis on improving access to sustainable energy for the least developed and developing countries. EUROPEANBUSINESSREVIEW

ESTONIA: SMALL COUNTRY, BIG AMBITIONS

Estonia:

small country, big ambitions. The Estonian Ministry of Foreign Affairs and ‘Enterprise Estonia’ invited a group of 12 AEJ Journalists (from the UK, Ireland, Poland, Czech Republic, Belgium, Germany and Austria) to visit the capital Tallinn in June. They had meetings with Prime Minister Andrus Ansip, Minister of Finance Jürgen Ligi and officials of the Bank of Estonia and found out how high developed the influence of IT and e-services on everyday life in Estonia is. 48

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Conclusion at the end of the visit was that this smallest Baltic state could be a positive example for others. You can find a selection of the articles written by the AEJ Journalists on the next pages.

N. Peter Kramer Editor-in-chief European Business Review

Frugal Estonia’s digital route to recovery

ESTONIA: SMALL COUNTRY, BIG AMBITIONS

By Hugh O’Shaughnessy

Estonian prime minister Andrus Ansip talks to Hugh O’Shaughnessy about the country’s e-revolution, the power of its ID card, and the decision to reduce taxes for business and private citizens.

ndrus Ansip, prime minister of Estonia, is keen on economic progress based on orthodox strategies and he makes no secret of his aim to reduce taxes for business and the private citizen. “We have got to make the economic environment more business friendly,” he says. He does little to hide his lack of respect for other members of the eurozone who have plunged into deficit financing and sets out his aims in the present times of change. “Economic experts all over the world agree that a balanced budget, reserves and as flexible an economy as possible, including a low debt burden, are of key importance in coping with the crisis. A government that starts distributing borrowed money to cover daily expenses has learned nothing from the crisis experiences of recent years,” he says. Dressed soberly in a red tie, white shirt and a very modest grey suit, this former sailor in the Baltic fleet, back from when his country was part of the Soviet Union, has a broader range of experience than most heads of government. His career embraced spells as an academic at Tartu University and a senior official in the local Communist Party, before going into finance when Estonia quit the expiring USSR in 1991. He successively joined the board of Rahvapank (People’s Bank); became a bankruptcy trustee of the Tartu Commercial Bank, chairman of the fund manager Fondijuhtide, then chairman of Livonia Privatization IF. From 1998 to 2004 he was mayor of his native city, Tartu.

Young talent

As he talks in his office on Toompea Hill, overlooking Estonia’s capital Tallinn, he clearly takes enormous pleasure in leading his 1.4 million fellow citizens in the task of pulling the country into the front rank of electronic states and consolidating its economic power. After all, his small Baltic state is the homeland of Skype, the revolutionary communications system invented by three young Estonians. He explains the power of the ID card which all Estonians must have. The card unlocks a series of services from registering a company to completing a tax return, from buying a virtual bus or tram ticket, which the ticket inspector can check electronically, to finding a parking space in the city and paying the fee to occupy it. It can also issue an electronic signature. “About 99% of bank transactions are electronic and 94% of tax returns are made electronically. Tax refunds are back in people’s accounts within five days. That’s a great incentive,” he says.

Electronic revolution

The e-revolution is certainly affecting the way commercial banks do business. With virtually all banking transactions done on the internet at any time of day, Mr Ansip is an strong supporter of ever more uses for the ubiquitous ID card. And as in many other countries, the reign of the cheque in Estonia is coming to an end. Having survived a serious foreign attack on the integrity of their electronic systems in 2007, Estonians say that they cannot only run an e-government but that they can also defend it. The idea of a Co-operative Cyber Defence Centre of Excellence in the context of NATO was put forward by Estonians in 2004. Mr Ansip says it is now working in Estonia employing a number of experts in the field and providing NATO member states throughout the world with the necessary expertise in cyber defence. For a former communist, the prime minister is surprisingly fanatical about balanced budgets. Although he stops short of criticising the Greek or any other government, he makes it clear that economic practices of southern European countries are very different to those in the Baltic. Underlining once more his support for state frugality, he says: “People have got to balance their books. That’s all there is about it. Voters don’t trust you if you don’t balance the books.” Mr Ansip points to the debt of the Estonian government, well under 10% of the gross national product and the lowest in the EU. It is smaller than Luxembourg’s, a mere fraction of the EU average, which approaches 80% and tiny when compared with more than 120% in Greece. EUROPEANBUSINESSREVIEW

ESTONIA: SMALL COUNTRY, BIG AMBITIONS

E-STONIA, a connected country! As many visitors especially this year, a group of European journalists visited the capital city of the new euro land, Estonia. A bit Baltic and a bit Scandinavian, this year’s European cultural capital Tallinn welcomed us in a way we could not have imagined. The cradle of the world-wide success of Skype proved to be a charming place with a charming young and talented population. The cultural capital of 2011 has lots to offer with its medieval street pattern and well-kept traditions brilliantly combined with the most futuristic e-society. Coming from a 68% Estonian and a 25% Russian background, Estonia is having a relatively young population that uses the euro currency since January this year. With a varity of cultural spots to visit and a foreign-oriented business society, Estonian Tallinn offers something for all. By Niels Schreuder*

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first thing we discovered in Estonia is that almost all 1.3 million Estonians have an ID card that is all they need. The card with chip helps to identify themselves, is their domestic bank card, their drivers licence, their insurance card, their voting ballot and gives access to a series of services all in real-time and at the same time. Meeting Andrus Ansip, the northeast European country’s prime minister, we learned about his government’s efforts of introducing e-governance as a simple and forward way of dealings between citizens and their government. In 2005, Estonia became the first country in history to make internet voting available in a nationwide election. National elections in 2007 and earlier this year re-elected the prime minister since his coming to power in April 2005. Despite the worldwide economic and financial crisis the Estonians seem relatively satisfied with their stable coalition government of the Reform Party, the Pro Patria and Res Publica Union. Business people, tourists as well as ordinary citizens, all enjoy broadband wireless internet access with coverage almost everywhere around the country. Ranking Wi-Fi areas around the world, Tallinn was found among the top ten of most connected places on earth. This record is even more impressive for a connected society that only regained its independence in the summer of 1991. Having cultivated its own language, Estonian, after decades of Russian-spoken rule, a young talented generation hits the forefront. The prime minister brought in perspective how a small country of only 45 227 km² has built up a solid e-driven economy with the lowest government debt rate in the EU. A strong focus on high-tech and e-driven services combined with strict liberal budgeting made Estonia the first mover of its geographical area and early adopter of the euro.

ESTONIA: SMALL COUNTRY, BIG AMBITIONS

Besides free Wi-Fi access to the internet in all urban areas, this EU member states has the highest penetration rates of mobile phone technology in the world. Estonian company, Eesti Telekom is behind this revolution towards a modern information society. No country in Europe, at present, has a better telecommunications infrastructure of which most was installed after the renewed independence in 1991. It is at the same time a great export product such as Skype is, the voice application for internet telephone service. Six engineers that used to work together at Kazaa, the P2P file-sharing, started the whole Skype thing that was purchased by eBay in 2005. In a few years’ time, Skype’s user base has grown to hundreds of millions of users, the Tallinn office grew to 300 employees hiring talent from different nationalities and Skype has opened other offices around the world. The company’s name by now has become an international accepted verb for realtime high quality audio network communication, but the cradle was in beautiful Tallinn. The fast growing ICT sector having a turnover of 1.3billion EUR is becoming more and more known to the world, with a 23% of exports currently. Our city trip also called at the Estonian ICT Demo Center where we received an overview of how Estonia creates and executes e-governance projects. The ingenious highly-developed ID card system was presented to us as well as other examples of Estonian technology developed and used by two. Indrek Vimberg and Anna Hrapovitskaja, both proto-type examples of the young talented and connected e-generation

that runs today’s Estonia, presented their holistic solutions. Estonian’s ICT solutions for households, e-government solutions including e-voting to sell to other countries, IT teaching processes as well as ICT technological solutions for better healthcare will soon be found all over the globe. Today, already more than half of car drivers in downtown Tallinn pay for their parking via SMS, 99% of banking transactions in the country are performed online and 94% of tax files filed in 2011 were done online. Faithful to its innovative approach and openness, Estonia just launched a new website www.e-estonia.com, which brings together significant experience, that has made Estonia the No. 1 country in the world in the field of e-governance. It provides more detail on the e-state’s e-government, i-voting, e-Tax Board, e-school, e-health and e-police. Amazed by Tallinn, a worthy European cultural capital and by the solid economic governance of Estonia, we enjoyed the medieval city centre, its food and its history. We visited the newly allocated beach area with its maritime museum being built. Another highlight was a visit to the Estonian contemporain art museum, Kumu. The difficult Finno-Ugric language of Estonia, related to Finnish, was no obstacle thanks to the country’s well-educated population of which especially the younger generation is close to fluent in English. The Estonian enthusiasm, pro-active approach and high connectivity are infectious. We recommend visiting Tallinn and promised Estonia to keep connected!

* Niels Schreuder is a Brussels-based EU observer.

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ESTONIA: SMALL COUNTRY, BIG AMBITIONS

Estonia’s Success Story: The Short Version

Words of wisdom from a few who helped make Estonia the high-tech and debt-free stronghold of Eastern Europe. By Martin Ehl* Colleagues and friends think I am a Polophile. But during my visit to Estonia last week I realised that, if anything, I am an Estonophile, even though I am able to say only “cheers” and “thank you” in Estonian. Allow me to present for your consideration a few views of Estonians whom I have met. The following quotations should illustrate why this country has an efficient system of electronic public administration, should not be scared of rising interest rates for state bonds because it does not release any, and features a public debt of only 6.5 percent of gross domestic product. “ The public is against borrowing money against the future of our children. Voters understand that managing the state without debt is essential and they appreciate that” - Prime Minister Andrus Ansip, explaining the reason why he was reelected in March. He thereby became the first Estonian prime minister to defend his seat since the country regained its independence in 1991.

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“ Ninety-four-and-a-half percent of people filed their tax returns electronically. The Estonian tax office is probably the only one in the world that does not collect money but pays it out” - Peeter Luikmel, an economist from the Estonian National Bank. He was explaining the law that obligates the state to pay within five working days any overpaid taxes owed to those who submit the form electronically. “ Estonians use their common sense when it comes to the economy, in contrast to some nations in Southern Europe” - Finance Minister Jurgen Ligi. “ I am evaluated according to whether I finish a task or not, not according to the hours that I am present in the office. Thanks to e-government I can work evenings” - Maria Varton, a project manager at the Economy Ministry and the mother of three small children. “ It takes 18 minutes to establish a new company with the help of the electronic system of public administration. There were competitions when somebody did it in 15” - I ndrek Vimberg, head of ICT Demo Center, a showcase for Estonian high tech. “ We have splendid technicians and designers, but the problem is marketing and presentation. In addition, it’s still a handicap for a company to have its origin or base in a post-communist country. Sometimes I have the feeling that it’s enough to have an address in San Francisco and interest in your company rapidly increases” - Tonu Runnel, founder and head of the website-building company Edicy. “ We hope that Nokia will go bankrupt and more skilled IT people will come here from Finland” - the manager of an expanding Estonian IT company, complaining about the lack of qualified employees. “Estonians hardly use credit cards” - Vimberg, explaining Estonians’ reluctance to go into debt. “ At the beginning we didn’t have time to ask the government for support – we preferred to just do business. It is better

to focus on business and acquire a few customers and money from them, rather than rely on the government” - Martti Paju, sales manager at the software company Erply, speaking about the possibility of drawing government support for newly established small companies. “ This year 24 percent of voters used the electronic voting system” - Vimberg, of ICT Demo Center. “ Business relations with Russia are the best in the last 20 years. In political relations there is some space for improvement” - Prime Minister Ansip. “ After 1990 a young generation grew up without any knowledge of Russian. They are trying to catch up but it is a problem for them when they look for a job” - journalist Toomas Toomsalu on relations between Estonian-speakers and the native Russian-speakers who make up 20 percent of the population. “ It is difficult to say how we survived. But we are here and we are happy” - Ansip on how it was possible that the Estonians survived thousands of years of foreign supremacy and established their first national state only in 1918.

* Martin Ehl is the foreign editor of the Czech daily Hospodarske noviny, where this column originally appeared.

ESTONIA: SMALL COUNTRY, BIG AMBITIONS

Estonia:

goodbye to eastern Europe and welcome to the north? Since the beginning of this year, Estonia is the youngest member of the Eurozone family. Compared with its Baltic neighbours Latvia and Lithuania but also compared with some other EU member states Estonia is doing quite well. GDP growth rate in the first half of the year was the highest in the Union. It has the lowest debt in the EU: just 6.6% of GDP. It boasts the biggest drop in unemployment, from 18.8 to 13.8%. A clear signal was when the rating agency Fitch raised Estonia’s standing recently to A+, while the neighbours both hanging on triple B. What is causing Estonia’s rise? by N. Peter Kramer

on’t tell Estonians that they live in a small European country. Estonia is larger than Denmark, The Netherlands or Switzerland and has more than twice the size of Slovenia. Conversely, with its population of 1.34 million, Estonia ranks among the smallest countries in Europe. The Esto-

nian economy has relied, as far back as memory goes, on the country’s favourable location at the Baltic Sea. The capital Tallinn played a long time a major role in the Hanseatic League, rich and famous by trade and export! Estonia has known more economical crises in the past. Many Estonians remember when the Russians stopped the economical and energy relation in 1997-8. ‘It has brought us experience how to survive and how to build a new position’, according to Peeter Luikmel, economist of the Bank of Estonia. Export is the magic word. After that the youngest global crisis hit also Estonia, export and production slowed down. But the last year showed a growth of export with 53%. And also the industrial production has grown remarkably with 26% in the same period. The

booming production of mobile phones by Ericsson, the country’s largest exporter, is of course a significant factor. ‘But it is not only the export growth, the recovery is broader based. The recession made consumers turn to local products’. During the crisis in 2008, the Estonian government choose for internal devaluation by a fiscal adjustment of 9% of GDP and cuts in nominal wages. But inflation became such a serious problem, that the European Central Bank gave a negative advice for Estonia’s entry in the Eurozone. Luckily for Estonia, the politicians ignored the EBC advice and the country could enter the Euro family January 1 of this year. The inflation is slowing now, but the Bank of Estonia is still worrying about overheating of the country’s economy. A previous boom brought also double digit growth and reckless lending, followed by a construction bust and a 14% fall in GDP. The hope is that the banks have learned from this past. Estonia has, after the restoration of independence 20 years ago, applied for a model of open economy that is free of undue bureaucracy, now it scores well in business friendliness and clean government rankings. Two major power stations, relying on the extensive deposits of oil shale, make a vital contribution to Estonia’s energy independence. Adoption of innovative IT applications, in the private and public sector, brings fame to the country. Estonians are accustomed to e-banking, web-based tax declarations and voting at elections using a digital ID card. Now these e-solutions have become articles for export. The Economist wrote ‘the go-ahead Estonians are scenting the next challenge. Should the Euro crumble, they are determined to be on the inside track for a new German-centred ‘super-euro’. Economist’s conclusion for Estonia: ‘Goodbye eastern Europe, welcome to the new north’. Well, let’s wait and see. Estonia is still the poorest member of the Eurozone and its GDP is only 65% of EU average; average monthly gross salary is Euro 797, one third compared with Finland, big brother on the other side of the water. But Estonia is impressive and amazing with an open culture. Don’t underestimate it! EUROPEANBUSINESSREVIEW

ESTONIA: SMALL COUNTRY, BIG AMBITIONS

Estonia: small country, big ambitions. Estonia’s New Year switch from the Kroon to the Euro looked like terrible timing. But this jewel-like Baltic state’s fiscal conservatism, passion for e-government and close trade and financial links with its credit-worthy Baltic neighbours have helped ensure that the rumbling of prospective financial implosion from the Euro-zone’s “Club Mediterranee”countries has dampened neither the Euro-enthusiasm nor the self-confidence of the Euro’s latest entrant. by Anthony Robinson*

stonia pressed on with its Euro conversion timetable despite the sickening drop in trade and economic activity following the collapse of Lehman Brothers which induced its Baltic state neighbours Latvia and Lithuania as well as Poland and others to quietly roll-back their own Euroentry target dates. But an equally sharp export-led rebound in recent months has taken exports and industrial output back and beyond pre-crisis levels and the outlook for employment and growth now looks much rosier than it did in January when the Euro seamlessly replaced the Kroon, according to the central bank’s Peeter Luikmel. With limited natural resources – mainly land and shale-oil deposits in the largely ethnic-Russian populated east of the country - the young technocrats who have run Estonia since it regained independence 20 years ago opted to maximize the opportunities opened up by the electronic revolution and the potential for tourism and trade. According to Prime Minister Andrus Ansip the wider benefits of this strategy, beyond economic dynamism, are more open government and a generation of honest taxpayers. “Some 99 per cent of bank transactions are electronic and 94 per cent of tax returns are made electronically. Tax refunds are back in people’s accounts within 5 days That is a great incentive.” He admits that having a small population of less than 1.4m people makes administration easier, but so does a simple flat tax system with only one concession - re-invested earnings are tax free until they produce income.

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Ansip heads a three party coalition government which reacted to the global slowdown by cutting government spending and raising taxes. The combination re-balanced the budget at a cost of soaring unemployment. But all the coalition parties won re-election with an increased majority. His conclusion? “It shows that people tend to trust governments more when they keep their budget deficits under control. We’ve always had balanced budgets here since independence and I am grateful to Estonians for understanding the need for higher taxes and lower real incomes. Now unemployment is falling rapidly and we are creating lots of new jobs.” As for joining the Euro, the Prime Minister points to the high proportion of Estonia’s trade with EU countries and close ties with Finland. Both speak the same Finno-Ungaric language and Helsinki is only 85kms by ferry from Tallinn. “Around 70 per cent of foreign direct investment comes from Finland and Sweden and they take 35 per cent of our exports. Before entering the Euro the Kroon maintained a constant exchange rate with our EU partners and the central bank built up reserves of 12 per cent of GDP. Joining the Euro simply removes any risk of exchange losses for our biggest investors and trade partners.” Estonia did not escape from the Soviet Union and its dysfunctional rouble in order to join a dysfunctional Euro however and its leaders have clear views on how Euro zone governments should operate. It is far more than a question of financial adjustment. Finance Minister Jurgen Ligi acknowledges that the programme for Portugal is “not bad” but argues that

ESTONIA: SMALL COUNTRY, BIG AMBITIONS

Greece is the biggest problem because it reflects a wider crisis of the society and the Greek nation. The Estonian way to solve the Euro crisis has a simple charm – members of a club should obey the rules, citizens should pay their taxes and governments should live within their means. It’s not rocket science – but it is understandable and it makes sense. What is more, Estonia’s economic dynamism, openness to new ideas combined with devotion to deeply conservative principles makes this tiny country of increasing interest to its huge but still unpredictable neighbour Russia and other former Soviet states. In Soviet times the Kremlin made Estonians a minority in their own country by exiling or exterminating the national elite and transferring Slav workers and security forces to new homes and jobs in the Baltic States.Today the Russian speaking minority is around 25 per cent – heavily concentrated in the capital Tallinn and in the eastern border city of Narva and the surrounding region. A few are descendants of 18th century dissident Orthodox “Old Believers.” and others who came to Estonia when Peter the Great wrested control of the Baltic States from Sweden – and employed the largely German-speaking Baltic nobility to run the expanding Russian empire. Most were post-war draftees into factories and collectivized farms simply left stranded by the ebbing of the Soviet tide. As elsewhere in the Baltic states this Russian minority now has access to EU passports and does business in Euros, which is good news for the younger and better educated.. Tallinn’s stunning new Kumu Art Museum is currently showing a superb exhibition of the works of Pavel Filonov. His grim portrait of Stalin haunts an exhibition of Russian avant-garde painters who continued working, but were never exhibited, during the terrible 1930’s. But if you travel by tram in Tallinn your fellow travelers are far more likely to be Russian than Estonian speakers and most unlikely to possess a passport. For these ageing widows and retired soldiers and factory workers the new Estonia is a mystery. While Putin’s Russia also struggles to come to terms with the modern world Estonia, along with Kazakhstan, have become, in very different ways, the most successful of the post-Soviet states. What they have in common is a powerful will to succeed and a strategic vision. Estonia was the smallest and least populated province of the former Soviet Empire, while Kazakhstan’s President Nursultan Nazarbayev rules the largest and most richly endowed of the 15 former Soviet republics after the Russian Federation itself. Estonia is a Scandinavian-style democracy while Nazarbayev rules his Eurasian republic like a contemporary silk-road Khan. But the wily autocrat constantly reminds Kazakhstan’s multi-ethnic 16m population that the richest country in Asia per capita is not resource-rich Kazakhstan but a tiny island which lives on its wits and even has to import sand and gravel if it wishes to expand – Singapore. In May this year President Nazarbayev showed a similar interest in tiny Estonia as he made his first official state visit at the head of what local officials described as “an enormous delegation.” While the Kazakhs sought tips to modernize their administration their Estonian hosts were impressed by the energy, shrewdness and curiosity demonstrated by the 71 year old recently re-elected founding president. “Of course, we’re not so sure about the internal politics” a senior official added.

Despite their obvious differences, the two former Soviet states have a surprising amount in common, apart from a shared Soviet history, and large ethnic Russian minorities. They also both ran for the exit 90 years ago when the Russian revolution sparked civil war. But while all three Baltic states managed to defeat the Red Army’s attempt to force them back into the Soviet fold, landlocked Kazakhstan’s first bid for independence was swiftly and violently suppressed by Trotsky’s triumphant Red Army. Victory did Trotsky little personal good. Stalin exiled him to the former Czarist military garrison town of Almaty, then the Kazakh capital, only 200kms from the Chinese border but 4,000 kilometres from Moscow. Trotsky was the first of millions of exiles to be shipped east across the endless steppe as Kazakhstan became one of Stalin’s main dumping grounds. Millions of Balts, Poles, Volga Germans, Chechens and other undesirables were jammed into cattle trucks and offloaded onto the alternately freezing or searing Kazakh steppe. Among them were the cream of the Baltic and Polish intelligentsia, arrested, interrogated and shipped east in the brief internal between the Molotov-Ribbentrop pact, which delivered the Baltic states into Stalin’s hands, and Hitler’s subsequent June 1941 invasion of the enlarged Soviet Union. In personal accounts of those times Baltic exiles often record with gratitude the help they received from the Kazakh population, themselves degraded and humiliated by forced collectivization. In the 1980’s, as Mikhail Gorbachev sought with increasing desperation to modernize the Soviet Union, the independence-minded Baltic states found an unexpected ally in the east. Speaking to a group of European journalists in his sunny office with fine views over the medieval towers of Tallinn and a modern port bustling with cruise liners and trans-Baltic ferries, Prime Minister Ansip recalled that “the only other Soviet leader who backed our demands for greater independence during the Union Treaty negotiations with Gorbachev was Nazarbayev - who was clearly thinking along similar lines”. Under Nazarbayev’s 20 year rule Kazakhstan has attracted over $120bn of foreign investment and achieved a seven fold rise in GDP. Chinese and Western investors are co-financing the construction of a modern highway and new rail links across the country to connect China with Europe. New pipelines now transport oil and gas from the oil rich Caspian to China and new mines will also fuel China’s future growth. Nazarbayev is seeking new investors into non-oil sectors to diversify the economy – and new outlets for the country’s rising oil, grain and mining exports to the West.. His visit to Estonia with its modern ports, dynamic high tech industries and administrative efficiency reflects his recognition of Estonia’s potential contribution to Kazakhstan’s own modernization.

* Anthony Robinson is a former FT Moscow correspondent and East Europe editor EUROPEANBUSINESSREVIEW

LEADERSHIP

Influence:

it’s about math, not motivation There are six sources of influence you can leverage to affect change. Most leaders fail because they work on only one, writes Joseph Grenny By Joseph Grenny*

ost leaders secretly wish for a magic wand, or some supernatural power that would allow them to do something mere mortals can’t. While many leaders would like to conjure a few more points in market share or zap a competitor to a distant part of the galaxy, the best use of such newfound powers would be to solve problems of influence. Wouldn’t it be wonderful if, with a simple wave of the hand, we could cause large groups of people to behave differently? That would be true magic. Last year, I was speaking with a leader who was trying to make a financial pivot in response to weakening market conditions. He needed to get his 10,000 employees to move to a leaner cost structure -and he needed it fast. So he did what most leaders do: He wrote an e-mail. It was a great e-mail. It laid out the facts. It called for action: reduce $6 million per month in operating costs in 60 days. It was persuasive. It was clear. It even answered the essential WIIFM (“What’s in it for me?”) question by concluding with this statement: “Our first

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priority is to keep our team intact. Our only hope of avoiding layoffs is to find efficiencies through reducing waste and improving processes. Your engagement is essential!” The e-mail went out to all employees. It was followed by a series of management meetings with senior executives that repeated the message and gave reduction targets to each division. That e-mail was sent on Feb. 6. By July 4, the leader declared the influence strategy dead and imposed top-down head-count reductions. When I asked him what went wrong, he concluded: “No one wants to sacrifice for the common good so they wait for others to pony up first. It’s all about self-interest.” What this leader didn’t realize and what so many people don’t actually know is that most of their influence problems are actually math problems. At all times, the employees, customers, suppliers, or partners you want to influence are subject to six distinct sources of influence. Whether you can see these sources or not, they are there. Whether you like it or not, they work for you or against you. That’s where the math

LEADERSHIP

comes in. Most of our attempts to lead change draw on a single source of influence. That means the other five are working against you. When you don’t get the new behavior you’re seeking from employees, it is because you haven’t marshaled a sufficient number of these sources of influence.

Are You Smarter Than a Sixth-Grader?

We illustrated this mathematical quandary recently in an experiment at our Change Anything Labs at the foot of the Wasatch Mountains in Utah. One Saturday morning, we offered two dozen sixth-graders a chance to earn some easy money. Each of the kids completed four simple tasks over the course of 10 minutes (alphabetize a handful of candies, sort toys by color, etc.). They were paid $10 for each task they completed. Without breaking a sweat they could earn $40 to take home and make their dreams come true. To ensure the subjects were personally motivated to hang on to their earnings, we asked them to think of something they would buy once they returned home. As you’d expect, all had a ready target for their wealth: toys, video games, dolls, and even some higher aspirations. One sweet girl said she was thrilled to have the cash to save for a Christmas present for her sister. Next, we warned them that we’d place temptations in their paths. After each task was complete, they would be invited to buy something at the Change Anything General Store. We walked them over to a counter that was spread with lowbudget candies and trinkets with outrageously high prices. For example, a bag of Skittles was priced at $6, a can of Silly String was priced at $10, etc. As the kids reviewed the offerings, most shook their head in amazement at the ridiculous markups. So how much would you guess they saved? All $40? O.K., they’re sixth-graders -so let’s assume they would buy a candy or two. How about $35? Or $30? In the end, the average kid left with $13 and a look of disappointment. One boy bought five cans of Silly String and left in debt to the Change Anything General Store. (Don’t worry, his loan was forgiven when he left.) We then put a second group of kids through the same process. Same tasks. Same pay. Same temptations. But this group walked away with 260 percent of the first group’s meager savings.

• Social Ability In the second group, one of the confederates provided critical information -reminding the subject how much cheaper purchases would be at another store. • Structural Motivation In the first group, kids saw a scoreboard that showed who had purchased the most. In the second, the scoreboard ranked the biggest savers. • Structural Ability In the first group, the kids’ savings and spending were done through a “credit account.” In the second, transactions were paid in cash. This meant that the second group experienced the loss of their cash immediately. As you can see, these small, powerful, and seemingly invisible sources of influence were leveraged in completely different ways in the two conditions. And the results were profound. A 260 percent difference in saving rates!

Want More Influence?

This little experiment powerfully illustrates the reason most leaders fail in their attempts to influence change. They send out a memo to a tribe of busy employees expecting a little verbal persuasion will offset the six sources of influence these folks experience every day that drive their attention in an entirely different direction. It’s a naive and hopeless pursuit. And then when their efforts fall short, they blame the only thing they can see -their employees. “It’s all about self-interest!” It’s not about self-interest. It’s about math. Too few leaders have a full appreciation of the complex web of influences that drive individual’s choices. That’s why so many scholars and leaders talk about leading change as a 5-, 10- or 20-year challenge.

It’s not about time. It’s about math.

Leadership starts by recognizing that the problem is not some moral deficiency in our people. Their behavior is powerfully influenced by the many sources of influence that we fail to see -and therefore fail to address.

You’re Surrounded

So what accounts for the difference in behavior between the two groups? The first was doomed from the outset because we intentionally leveraged the six powerful sources of influence to encourage them to spend. • Personal Motivation We let them taste one of their favorite candies before they began their work. In the second group, we did not give out samples. • Personal Ability The first group received no training on how to track their savings and spending. The second group was given a thorough review on tracking techniques. • Social Motivation The first group was surrounded by three accomplices who encouraged them to spend. In the second group, one of the confederates changed sides and encouraged them to save.

* Joseph Grenny is the co-author of three immediate New York Times bestsellers: Influencer, Crucial Conversations, and Crucial Confrontations. He is cofounder of VitalSmarts, an innovator in corporate training and organizational performance, and a consultant to the Fortune 500. EUROPEANBUSINESSREVIEW

LEADERSHIP

What makes an ideal Crisis Manager? F In the midst of what seems like endless crisis, some managers have developed skills that allow them to rise above the fray. Here’s how they’ve managed to do it. By Vickie Elmer

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uel prices are climbing. Your company’s stock price is slipping and so is staff morale. The computer is freezing up, again - is it a virus? The drumbeat of stress and anxiety nears: An unsolicited buyout offer for your employer; workers demanding raises, or the option to work from home; college tuition up again. Add all these items up and the pressure that an every day manager faces may seem unbearable. “We used to think of pressure as this random acute phenomenon that happened every once in a while. Now it may be more of a permanent whitewater state, something that executives need to deal with almost as a constant state,” says John Hamm, a former venture capitalist turned business and executive coach. Davia Temin, a New York based crisis and public relations executive agrees. “Crisis has become the new normal,” she says.” In a recent Harris Poll for Everest College, 10% of workers ages 35 to 54 ranked “unreasonable workload” as the most stressful aspect of their jobs, classifying it as a more potent source of stress than the commute or fear of layoffs. More than half of workers say their productivity suffers as a result of stress, and money, work and the economy are the largest stressors in recent years, according to surveys by the American Psychological Association. Stress and pressure costs employers an estimated $300 billion a year in lost productivity, absenteeism and turnover. Managers and executives share this load - but some have developed an ability to thrive in an intense, competitive, fast-

LEADERSHIP

can make a huge difference. Effective leaders channel staffers’ “intense reactions to recurring setbacks in a way that constructively keeps the organization moving forward,” Menkes writes in his book. By encouraging a team to come together around some important goal, it cultivates tenacity and encourages collaboration. In Better Under Pressure, readers meet several executives who use these three principles in daily life and during crises. A CEO of a regional hospital system - and one of the subjects in the book - faced an urgent situation just after he started his job: The Inspector General had sanctioned the hospital and it had 23 days to show that it was correcting its care of obstetrics patients or the hospital would lose its Medicare certification. “You’re staring at the near-death of your organization,” the CEO told Menkes. Yet the CEO used the crisis as an opportunity to bring people together and improve things quickly. He was aware of the circumstances and calm under pressure in part because he had some experience with major challenges before. “Crisis forces leaders to boil things down to the essentials of what really needs to get done in order to succeed - and then to pursue those essentials with renewed intensity,” Menkes writes in his book. Menkes believes that anyone can develop and learn these traits. “It’s absolutely learned... The smartest person can be changing environment. Such people know how to bring out rendered stupid in the right set of circumstances,” he says. If they don’t learn to manage pressure and stress, they may lose the best in their teams during a crisis. “The people who are going to thrive in the future are those their ability to lead or even think at a crucial moment. who can use this pressure to excel, as oxygen. People who Temin, the crisis management executive, sees many such exhave translated very difficult circumstances into opportu- ecutives. “Very few people have all the skills” to manage a nity,” says Justin Menkes, author of the recently published huge meltdown, she says. Those skills include stamina, a clear view of the situation and “the ability to focus themselves full book Better Under Pressure. Menkes’ book is based on his work with corporate boards as bore on the problems at hand.” they evaluate, test and consider who to hire or promote as Executives with honesty and “a spirit of improvisation” may their next CEO. Menkes, who is a consultant with executive do well under extreme pressure, she says. “That uncanny abilsearch firm Spencer Stuart, gathered evaluations of 150 CEO ity to improvise... gets you through a huge amount.” candidates to isolate the behaviors that the top-performing So how do executives develop into a calm problem solver and quartile exhibited and the bottom quartile lacked. After five realistic optimist? years of research, he found three key consistent characteristics Some companies offer programs or assignments that help their managers develop these qualities, Menkes says. Such that the best leaders display: 1. R ealistic optimism. The exceptional leaders demonstrated programs often increase a manager’s responsibilities and an ability to understand the actual circumstances of a crisis pressure at a steady, measured rate. Others managers develop and see a chance to excel. Managers must “have a passion for these qualities by themselves or with the help of a mentor. confronting reality,” Menkes writes Temin runs occasional “crisis games” with in his book, referring to a pragmatic More than half of workers executives so they can role-play scenarios mindset. “You have to show you’re say their productivity suffers and discover how they react to upheaval. staring into the sun with them; you’re as a result of stress, and money, Executive coach John Hamm says that aware of the risks,” he says. managers should remember to recall what makes them talented and take 2. F inding order in chaos. This com- work and the economy the time to trust themselves and their bines calmness, clarity of thought are the largest stressors in recent team. As an executive coach, he sees and a drive to fix the situation. It re- years, according to surveys managers collapse several issues into quires practice to stay clear-eyed and by the American Psychological one large mess, so he often asks them fearless when the world is tipping. It Association. Stress and pressure to remove the emotion, the anxiety and also requires zeal to solve a puzzle by costs employers an estimated start untangling things, bit by bit. He engaging your staff. asks them to use facts to fight off fear. 3. S ubservience to purpose or cor- $300 billion a year in lost “How do we allow the pressure to call porate goals. This commitment to productivity, absenteeism us to a higher ground?” he asks. the higher calling or the greater good and turnover. EUROPEANBUSINESSREVIEW

BUSINESS TIPS

In Marketing, a Few Bad Words Can Be a Good Thing How positive impressions get bolstered by bits of negativity. Suppose you’re quickly searching reviews online to pick a restaurant for a friend’s birthday. According to this paper, when most of the reviews are positive about important things like the food, atmosphere, and price, one slightly negative mention of a less-central aspect - a lack of parking, for instance - will actually enhance your initial positive impressions. In the right circumstances, especially 60

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when consumers are in a hurry or slightly distracted, as they often are when evaluating online advertising, people think more favorably about a product or business if they’re served a little dose of negative information after a large helping of positive.

By Danit Ein-Gar (Tel Aviv University), Baba Shiv (Stanford University), and Zakary L. Tormala (Stanford University)

BUSINESS TIPS

revious research on marketing has largely concluded that negative reviews can put off would-be customers. But this paper finds that businesses should consider sharing relatively minor negative details or reviews in a bid to intensify initial favorable impressions. The researchers call this phenomenon the “blemishing effect,” writing that “a minor negative detail in an otherwise positive description of a target can give that description a more positive impact... than it would have on its own.” It works this way, the researchers posit: Encountering minor conflicting information causes consumers to reevaluate their initial impressions, but because that negative information is relatively weak, it doesn’t sway them from their first judgments. In fact, in line with previous psychological research, the act of thinking again about the good aspects of the product or business actually increases the perceived favorability and salience of those initial impressions. The authors based their conclusions on several experiments, which took into account how focused or distracted people were when evaluating product information. In the first study, 141 consumers were split into two groups and asked to evaluate an Internet description of hiking boots. In one group, participants were told it was important to not shift their eyes from the computer screen, and that they had to report the number of times they did so at the end of the experiment. In line with previous research and the authors’ separate pretest, when the participants focused heavily on their eye movements, they paid less attention to the information they were evaluating; this was the “low-processing” group. People in the “high-processing” group were instructed not to keep their eyes glued to the screen but to evaluate the information as they normally would; this group formed a more thorough and careful opinion of the product. Before they read the information, each group was split into two sections. One section was given only positive information about the boots: that they featured a designer orthopedic sole, included a five-year warranty, and came with two spare shoelaces. The other section in each group read the same information in the same order with one change: A phrase at the end - “comes in many colors” - was replaced with “comes in only two colors.” All the participants were then asked how interested they were in buying the boots. The analysis showed that participants in the low-processing group evaluated the boots more favorably when they received information that was an amalgam of good news followed by slightly bad news. The opposite was true for the participants who were more focused on the product description: Their view was more favorable when they received only good information. The second study involved 235 college students who were offered a popular chocolate bar on a hot summer day, chilled to please and at half its regular price. To replicate the distracted and focused conditions, the researchers approached students either immediately before they took an exam (when, pretests confirmed, they were less focused on the chocolate bar) or while they were strolling on campus. The slightly negative piece of information presented to some students was that the bar was cracked in the middle. Once again, the somewhat

distracted participants who were fed one piece of bad news had a more positive reaction - and bought more candy bars -than distracted participants who heard only good news. Another study involved 136 consumers and repeated the hiking boots scenario, but this time the negative information - a photo showing that the shipping box had broken during transit - was presented before the good attributes. This study revealed that the blemishing effect holds only when the piece of negative information follows good news. The researchers note that the “first instinct of marketers is to hide, downplay, or mask negative reviews.” But this study suggests that when a product’s defect is minor or peripheral to the core values of the brand, marketers should consider highlighting that disadvantage in some situations. Given the flood of information that surrounds us, consumers will inevitably receive some negative tidbits, the authors point out, so the question becomes how to turn those negatives into a positive. Marketers can present information in an order that takes advantage of the blemishing effect and seizes on customers’ divided attention, the researchers say, by placing ads on bus posters, online pop-up banners, and social media sites like Facebook, or in busy and noisy locations. In particular, marketers should exert their influence in online advertising or reviews because consumers typically scan these quickly or become distracted as they read. Sorting reviews on a company’s website strategically, rather than just by date, would allow marketers to highlight certain negative remarks after a few positive comments to elicit the blemishing effect.

Bottom Line:

Slightly distracted consumers will think more highly of a business or product when they receive a small piece of negative information after hearing about several positive attributes. Marketers should embrace, rather than fight, negative remarks by incorporating them into online advertising and other settings that target unfocused consumers. EUROPEANBUSINESSREVIEW

BUSINESS TIPS

Ways to Communicate

Your Strategy More Effectively

A frustrated CEO recently shared with me that her employees had lost their edge. They were internally focused, their speed-tomarket was down, and they couldn’t find a good balance between serving customers well while making healthy margins. The result was slow progress against the company strategy and an inability to profitably deliver on the value proposition. By Georgia Everse*

he had attempted to motivate employees and be clear about the strategy, but she was falling short and was looking for answers on what to do next. The solution in many cases is to overhaul internal communications strategies in order to convince employees of the authenticity, importance, and relevance of their company’s purpose and strategic goals. Here are just a few communications approaches that will help you effectively reach your employees and encourage behaviors that advance your strategy and improve your results.

1. Keep the message simple, but deep in meaning.

Most organizations have a deeper meaning as to why they exist. This tends to influence strategy, decision-making and behaviors at executive levels, but often isn’t well articulated for employees. What you call it doesn’t matter, your purpose, your why, your core belief, your center. What does matter is that you establish its relevance with employees in a way that makes them care more about the company and about the job they do. It should be at the core of all of your communications, a simple and inspiring message that is easy to relate to and understand. Strategy-specific messages linked to your purpose become tools to help employees connect their dayto-day efforts with the aspiration of the company.

2. Build behavior based on market and customer insights

For employees to fully understand how your strategy is different and better than the competition they need to be in touch with market realities. The challenge is in how to effectively convey those realities so that your people can act on them. By building internal campaigns based on market and customer insights, you bring your strategy to life for your employees through this important lens. Package your content so that it can be shared broadly with all departments in your organi-

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zation, but in a hands-on way. Expose managers first then provide them with easy-to-implement formats for bringing their teams together, with toolkits that include all the materials they’ll need. The purpose is to encourage their teams to develop department-specific responses, and to generate new ideas and new behaviors based on what they’ve learned.

3. Use the discipline of a framework.

Not all messages are created equal. They need to be prioritized and sequenced based on their purpose. I suggest using an Inspire/Educate/Reinforce framework to map and deliver messages on an annual basis. • Inspire. Messages that inspire are particularly important when you are sharing a significant accomplishment or introducing a new initiative that relates to your strategy. The content should demonstrate progress against goals, showcase benefits to customers, and be presented in a way that gets attention and signals importance. The medium is less important than the impression that you want to leave with employees about the company. Whether you’re looking to build optimism, change focus, instill curiosity, or prepare them for future decisions, you’ll have more impact if you stir some emotion and create a lasting memory. • Educate. Once you’ve energized your team with inspiring messages, your explanations of the company’s strategic decisions and your plans for implementing them should carry more weight. To educate your teams most effectively on the validity of your strategy and their role in successful execution, make sure you provide job-specific tools with detailed data that they can customize and apply in their day-to-day responsibilities. It is most important for these messages to be delivered through dialogues rather than monologues, in smaller group sessions where employees can build to their own conclusions and feel ownership in how to implement.

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•R einforce. It isn’t enough to explain the connection between your company’s purpose and its strategy - and between that strategy and its execution - once. You’ll need to repeat the message in order to increase understanding, instill belief and lead to true change overtime. These reinforcing messages need to come in a variety of tactics, channels, and experiences and I’ve highlighted some approaches below. Ultimately, they serve to immerse employees in important content and give them the knowledge to confidently connect to the strategy. You’ll also want to integrate these messages with your training and your human resource initiatives to connect them with employee development & performance metrics. Recognize and reward individuals and teams who come up with smart solutions and positive change.

4. Think broader than the typical CEOdelivered message. And don’t disappear.

Often corporate communications has a strictly top-down approach. I’ve found that dialogue at the grassroots is just as important, if not more so. Employees are more likely to believe what leaders say when they hear similar arguments from their peers, and conversations can be more persuasive and engaging than one-way presentations. Designate a team of employees to serve as ambassadors responsible for delivering important messages at all levels. Rotate this group annually to get more people involved in being able to represent the strategy inside the company. And when the message comes from leadership, make sure it’s from your most visible, wellregarded leaders. Another mistake is the “big launch event and disappear” approach. Instead, integrate regular communications into employee’s daily routines through detailed planning against the messages mapped in your Inspire/Educate/Reinforce framework.

5. Put on your “real person” hat.

And take off your “corporate person/executive” hat. The fact is, not many people are deeply inspired by the pieces of communication that their companies put out. Much of it ignores one of the most important truths of communication - and especially communication in the early 21st century: be real. “Corporate speak” comes off hollow and lacking in meaning. Authentic messages from you will help employees see the challenges and opportunities as you see them and understand and care about the direction in which you’re trying to take the company.

7. Use 21st-century media and be unexpected.

The delivery mechanism is as important and makes as much of a statement as the content itself. Most corporate communications have not been seriously dusted off in a while, and the fact is, the way people communicate has changed tremendously in the past five years. Consider the roles of social media, networking, blogs, and games to get the word out in ways that your employees are used to engaging in. Where your message shows up also says a lot. Aim to catch people somewhere that they would least expect it. Is it in the restroom? The stairwell? On their mobile phone?

8. Make the necessary investment.

Most executives recognize how important their employee audience is. They are the largest expense to the company. They often communicate directly with your customers. They single-handedly control most perceptions that consumers have about the brand. So if this is a given, why are we so reluctant to fund internal communication campaigns? I suggest asking this question: What am I willing to invest per employee to help them internalize our strategy and based on that understanding, determine what they need to do to create a differentiated market experience for our customers? Do the math and set your hoped-for ROI high whether it is financial performance or positive shifts in behavior and culture. If you choose not to invest be certain of the risk. If you don’t win over employees first, you certainly won’t succeed in winning with customers, as they ultimately hold that relationship in their hands.

6. Tell a story.

Facts and figures won’t be remembered. Stories and experiences will. Use storytelling as much as possible to bring humanity to the company and to help employees understand the relevance of your strategy and real-life examples of progress and shortfalls against it. Ask employees to share stories as well, and use these as the foundation for dialogues that foster greater understanding of the behaviors that you want to encourage and enhance versus those that pose risks. Collectively these stories and conversations will be a strong influence on positive culture-building behavior that relates to your core purpose and strategic goals.

* Georgia Everse is a communications and marketing executive with 30 years of experience and a proven track record of finding innovative solutions to complex business problems. She specializes in helping C-level executives find and articulate their vision and successfully use strategic communication to achieve their growth goals. Georgia is a visiting professor for the Ferris State University MBA program, in Design and Innovation Management. She is currently a partner with Genesis Inc., a brand, strategy and communications consultancy. EUROPEANBUSINESSREVIEW

FROM EAST TO WEST

From East to West

By Gianni Skaragas

“In My Time”: The inner workings of the Bush administration In his new memoir, “In My Time”, former American Vice President Dick Cheney defends his hard-line views on national security, saying he has no regrets about the abusive interrogation techniques pursued in the name of fighting terrorism. The often-controversial Cheney reiterates that the harsh interrogation policies enhanced the government’s actual ability to gather reliable and “invaluable” intelligence - a view with which such national security experts and retired military leaders as Senator John McCain, CIA Director General David Petraeus and former Marine Corps Commandant General Charles Krulak (Ret.) disagree. In 2005, Senators John McCain and Lindsay Graham led an effort to end the enhanced interrogation program and required that all U.S. Government interrogations be conducted under the rules of the U.S. Army Field Manual. According to Amnesty International, “Information obtained through coercion led directly to one of the greatest intelligence failures of the past decade - the assessment that Iraq posed an imminent security threat to the United States. Suspected Al Qaeda trainer Ibn al-Shaykh alLibi was rendered by the CIA to Egypt, where he was tortured. To make his interrogators stop, he told them that there was a link between Saddam Hussein and Al Qaeda. This intelligence was used in part to justify the Iraq War. No such link existed.” The memoir, co-written with his daughter Liz, also reveals that Cheney opposed a federal rescue of the auto industry. “I had continued throughout my career to be philosophically opposed to bailing out specific companies or industries,” he wrote.

Dirty Pop In an attempt to keep “poor taste and vulgar content” from the ears of the nation’s youth, the Chinese Ministry of Culture issued a new list of 100 banned songs, including such Western artists as Britney Spears, Beyoncé, Canada’s Simple Plan, Katy Perry, Take That, Backstreet Boys and Lady Gaga, as well as Taiwan’s Chang Hui-mei, who sang the Taiwan anthem at the inauguration of former President Chen Shui-bian in 2000. It started when Björk chanted “Tibet! Tibet!” during a performance in Shanghai in 2008, during “Declare Independence.” After her controversial actions, the Chinese Government has become more cautious when considering music artists. Since 2010, all songs posted on music websites are required to receive prior approval, “in accordance with the Interim Provisions on Administration of Internet Culture and other regulations.” It is not the first time that best-selling music artists have had problems with Chinese censors. The Rolling Stones were ordered to drop some of their best-known songs from their concerts in 2003 and 2006. In 2010, Bob Dylan called off his tour of Southeast Asia, after his first-ever concerts in China were cancelled. According to the International Federation of Phonographic Industry, music pirating is so prevalent in China that 95% of music sales are of pirated copies.

Modified Ecstasy holds promise as blood cancer treatment Ecstasy, the illegal psychoactive drug, which was popularized in clubs and raves in the 90’s, was known to kill certain cancer cells. British scientists now say it could help with treatment for blood cancer, according to a study published in the Investigational New Drugs journal. Researchers from the University of Birmingham and The University of Western Australia have chemically re-engineered MDMA -the scientific name for Ecstasy- adding different molecular groups to increase its tumor-fighting

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properties. The modified version, attracted to the fats in the cell walls of blood-cancer cells, was found to be 100fold more effective than the original MDMA compound. The modified compounds have been demonstrated only in samples in a test tube. Although it is too early to know whether safer and less toxic MDMA analogues are effective against blood cancers in general, lead researcher Professor John Gordon says, “The results hold the potential for improvement in treatments in years to come.”

FROM EAST TO WEST

The re-colonization of Africa A new discussion on the NATO-led military attacks on Libya began with an open letter signed by a number of prominent Africans, criticizing the Security Council’s authorization of the use of force to overthrow the government of Libya. The signatories argue that NATO had a regime change agenda. Dr. Chris Landsberg, director of the Centre for Policy Studies in Johannesburg, said, “The re-colonization of Africa is becoming a real threat.” More than 200 African intellectuals signed the letter. “Contrary to the provisions of the UN Charter, the UN Security Council authorized and has permitted the destruction and anarchy which has descended on the Libyan people. At the end of it all, many Libyans will have died and have been maimed (and) much infrastructure will have been destroyed.” The signatories include spokeswoman for the African National Congress Jesse Duarte, former Minister in the Presidency of Republic of South Africa from 1999 to 2008 Essop Pahad, poet Wally Serote, political analyst Willie Esterhuyse of the University of Stellenbosch and former intelligence minister Ronnie Kasrils. Giovanni Innocenzo Martinelli, Tripoli’s Catholic bishop, is among those concerned at the NATO-led campaign. “Bombing is always an immoral act. If there are violations of human rights, I cannot use the same method to stop them,” Libyan born Martinelli told the official Vatican news agency, Fides. In the past half year, NATO has dropped over 30,000 bombs and without a single NATO casualty, the Western regimes have killed over 60,000 Libyans

Major banks face potential payouts of billions of dollars The federal government’s effort to recoup taxpayer losses, incurred during the mortgage crisis that created the 2008 financial meltdown, has sparked a debate over whether the Obama administration can bear the cost to be seen as the crusader against the nation’s largest banks. The Federal Housing Finance Agency (FHFA), an independent regulator, filed lawsuits against 17 banks accusing them of selling the largest totals of allegedly fraudulent securities (nearly $200 billion), of lying to the federal government and to investors about the quality of the mortgage-backed securities. Included among the defendants are such domestic and foreign financial institutions as Bank of America and its Merrill Lynch and Countrywide Financial divisions, Goldman Sachs, JPMorgan, Citigroup, Barclays, Nomura Holdings, Société Générale S.A, HSBC Holdings, Credit Suisse and Deutsche Bank. “Defendants falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans,” the FHFA said in the suit against Merrill Lynch. A number of financial analysts criticized the lawsuits, arguing that the legal assault is hurting share prices and economic recovery. The FHFA notes that the nation’s financial system cannot function if sellers of securities fail to fulfill a legal responsibility to accurately represent the characteristics of certain investments. EUROPEANBUSINESSREVIEW

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Happy Birthday Italy, a multicultural youth event

By Agnès Quatrevaux*

he Risorgimento (‘Resurgence’ movement) showed the way to Italy’s unification with the proclamation of the Italian Kingdom on March 17, 1861. This movement has been led by young people, willing to create a strong and united country as the only condition to free the Italian people from the foreign invaders. “Young Italy” was one of the movements, created by Giuseppe Mazzini and mostly relied on young people. It became a member of the broad movement called Young Europe. Cavour and Garibaldi were the two other leading figures of the riots who led to the unification of Italy. “We have made Italy. Now we must make Italians1”. Applied to the actual European Union, Happy Birthday Italy is an event whose aim is to bring back to life the spirit of the young rebels of the Risorgimento. Of course, the activities in Turin are not that revolutionary. The goal was to gather 500 young people, allow them to interact with one another and discuss various European and youth-related topics. The main concept was to develop ideas and solutions to current issues through a festive event. In this tough crisis time, youngsters are usually the first in line. There is no need to remind that on average 25% of them are jobless. Through the Indignados movement and other youth revolts, like the recent one in the United Kingdom, they want to express themselves and take their place in society. Their reflection appears in the discussions they have with their peers and with the political sphere. It is then absolutely necessary to link young people with their political representatives. That is the reason why ThinkYoung in collaboration with Thinkingpot launched the event based on the last experience of the Yeppies. With the support of Officine Grandi Riparazioni, Turin’s museum created in a former train factory, and the CUS Torino, the universitary gym which provided the accommodation, youngsters made an appointment at the beginning of the summer holidays, from the 7th to the 11th of July, 2011. It has been organized for Happy Birthday Italy in three sessions. Among the workshops, the participants had the opportunity to talk about youth opinion, the Franco-Italian Relation, Kosovo, team spirit, legality, the role of social journalism, agriculture, law and the sustainable development. These workshops have been prepared by professionals or even the youngsters themselves. Sev-

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eral student associations were involved in the organization such as the European Law Student Association (ELSA), the Association Internationale des Etudiants en Sciences Economiques et Commerciales (AIESEC) or the Erasmus Student Network (ESN). The atmosphere of the whole event was both serious and easy-going. The enthusiasm of the stakeholders and the participants was palpable. A lot of new ideas emerged and together they tried to find solutions to the different issues discussed. For instance during the FLARE workshop about legality, young people were asked to mime scenes of illegal activities such as discrimination, receiving stolen goods, counterfeiting or even theft. The other groups had to guess which situation it was referring to. Afterwards, a debate followed between the youngsters about which kind of illegal activities they are used to live with in daily life and how they can fight against them. During the ‘Advocacy for young people in Kosovo’ workshop which interested a lot, a quiz about Kosovo with gifts on top made them discover the badly-known country. The perspective of meeting a lot of young people from throughout Europe was a huge motivation for the participants to join us in Turin. With this unique human experience, all the participants left with the pleasure to have met a group of diverse European people and even beyond. We not only had the pleasure to welcome people from all over Europe, but also youngsters from Russia, India and China for example. The cultural aspect was not left aside. Much time was reserved on the program to enjoy the city, its palaces, its squares and its famous museums. The Traffic festival happened to be at the same time. Some of them left Turin with the goal to visit neighbor countries like Switzerland or Spain. All these elements mixed together made HBI a huge success. As one of our participants said, “Looking forward to the next event! I had a fantastic time in Turin”. Some have already expressed their desire for the event to be organized next year in another city. Maastricht? To celebrate the 20th anniversary of the Maastricht treaty?. Rome? To celebrate the 55th anniversary of the Treaty of Rome? European history conceals a lot of important dates and with this comes the chance to celebrate and allow young Europeans to meet and discuss the future of Europe. The fate of Europe is in our hands! Let’s link young European citizens together for a brighter future! Let’s Think Young!

* Agnès Quatrevaux is project manager of the think tank THINK YOUNG www.thinkyoung.eu Note: 1) Massimo d’Azeglio’s quote