Eye on Europe 16 by Paul Healy

EYE ON EUROPE STOCKHOLM NETWORK

CONNECTING THINK TANKS, CREATING IDEAS

ISSUE SIXTEEN

WINTER 2009

STATES AND MARKETS

general provisions, hybrid instruments and subordinated term debt). Additional areas of difficulty concerned which institutions should be subjected to the Basel I framework. It was argued that the Basel Accord potentially disadvantaged universal banks of the European kind, which are subject to capital requirements, relative to specialist firms in the securities, insurance and consumer finance area, which are not.

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Basel II emerged in the late 1990s with the anticipation of providing a more robust framework for regulating and managing the risk profile of the banking sector. It is based on three pillars.

Just as there is no such thing as a free lunch, one may argue that there is no such thing as an entirely free market. For the market to function successfully, especially in today’s complex and interconnected global economy, all the players need to know the rules of the game. So to what extent – if any – should governments intervene in financial markets, both in terms of regulating them but also in terms of policing them? Global arrangements concerning capital adequacy requirements, for example, the socalled Basel I and Basel II frameworks, touch upon this delicate relationship between states and markets. When the global economy is in good shape and markets are on the rise, the need for such frameworks seems less relevant. During these phases it seems self-evident to argue in favour of the efficiency gains of international financial liberalisation, and in particular that it improves the industrial allocation of capital. In boom times, the supervisory role of regulators is perceived as a stumbling block to global prosperity. However, when things turn sour and when markets show their chaotic side – something which could not be more prominent than in the current period of credit crunch, financial meltdown and global bailouts - the existence ISSUE SIXTEEN

of such regulatory frameworks then starts to seem more important. And it is in this context that Basel I and Basel II should be considered. The 1988 Basel Accord, negotiated and concluded by the Basel committee of the G-10 countries (operating under the Bank of International Settlement), emerged as a response to the financial fallouts of several European banks in 1974, most notably Germany’s Herstatt Bank.These failures emphasised the need for an agreement on bank supervision, especially in the European markets. In other words, the general perception at the time was that financial markets could not just be left to their own devices.These problems, combined with growing concern about the divergence of capital adequacy requirements between different monetary authorities, finally resulted in an international agreement - the Basel Capital Adequacy Accord of July 1988, otherwise known as Basel I. Broadly, the framework aimed to establish minimum capital adequacy standards across the major countries. Basel I set a minimum capital standard of 8% of risk weighted assets (of which at least 4% must consist of ‘Tier 1’ or core capital) to be achieved by the end of 1992. Since 1988, this framework has been progressively introduced by a number of countries. Arguably, Basel I had several weaknesses. For example, it allowed for a significant degree of national discretion in terms of how countries might achieve the minimum requirements by the 1992 deadline.The most noted example was the discretion allowed with respect to ‘Tier 2’ capital (undisclosed reserves, revaluation reserves,

The first focuses on the minimum capital requirements, taking into account the components of credit risk, operational risk and market risk. The second pillar focuses on the issue of governance - essentially the degree of regulatory and supervisory powers that should be used to oversee the successful implementation of the first pillar.The third pillar of Basel II (Market Discipline) focuses on the disclosure requirements from banks that operate in countries that adhere to the framework. Nevertheless, based on the current state of the global financial markets the easy answer would be to say that Basel II is failing. Critiques of the framework can persuasively argue that compromises reached in order to allow for this framework to exist resulted in a very weak framework that lacked any real ability to do much at all in terms of reducing risk and preventing crisis. CONTINUED ON PAGE 2

IN THIS ISSUE: If it ain’t broke, don’t fix it

Book review: The Ascent of Money

Spotlight on Energy and Environment Programme

Is Lisbon Making a Comeback?

Think Tank profiles

EYE ON EUROPE

Yet despite such valid criticism, the achievements of the Basel I and Basel II frameworks should not be underestimated. One should first ask what could have happened to the banking system in the recent period if this framework had been absent. Of course, the situation could have been better, but it is equally plausible that we would have experienced much worse crises than we have seen to date. At times where banks and other well-known household financial institutions turn to the state for help and rescue, it reminds even the most fervent supporters of the free market that a framework such as Basel II is needed. The question is not whether we should have it or not, but rather how can we make it better and more effective. Indeed, in order to meet these challenges, in July 2008, the Basel Committee on Banking Supervision (which operates under the auspices of the Bank of International Settlement) put forward a proposal for revisions to the Basel II market risk framework. Emphasis was given to more enhanced supervision of assessment of risk, both internally as well as by the regulator. Also, as part of its efforts to make Basel II more effective, The Basel Committee on Banking Supervision announced in January 2009 that it is broadening the mandate of its Accord Implementation Group to concentrate on implementation of Basel Committee guidance and standards. The current condition of the market offers an opportunity to treat the Basel II framework more seriously and to understand that checks and balances are needed for the international banking system. However, it is equally important to remember that today’s economic downturn should not be used - or abused - to present very rigid regulatory requirements that may stifle the financial markets and their ability to innovate. The next few months will be about trying to strike the right balance between states and markets. Helen Disney is Founder and Chief Executive of the Stockholm Network A version of this article first appeared in the 15 September 2008 issue of Quantum Magazine

IF IT AIN’T BROKE, DON’T FIX IT It would be hard to find anyone who actively opposes the concept of innovation. Both developed and developing economies now recognise the importance and impact of innovation on their national economic performance, global competitiveness and overall wellbeing.And, in the age of the ‘knowledge economy’ there has undoubtedly been intensifying interest in identifying the desired set of policy tools needed to encourage innovation. Innovation is, however, a complex concept, and takes place in various shapes and forms. It is a social and economic phenomenon as much as it is a technological one. The study of innovation is constantly evolving, adding to our knowledge and understanding of how innovation takes place and how it may be improved or enhanced. Equally challenging is the attempt to understand further the relationship between knowledge and innovation. For example how does the creation and use of knowledge lead to more innovation? And to what extent do new innovations increase our knowledge? In other words, innovation is such a complex and deep concept that it would be impossible and even presumptuous to try to argue that one is able to predict and control the process. Despite its complexity, however, we can still identify some governing patterns that underlie the innovation process. First, technological innovation cannot be characterised in terms of ‘good’ or ‘bad’ innovation. In some current public discussions there is a tendency to argue that incremental innovation contributes less to society than radical innovation and, as such, is less desirable. In other circles, innovation that focuses on the components of a product is afforded a higher status than innovation that concerns the manner in which such products are introduced to the market and to the public. In real life, though, the contribution of innovation to society cannot be categorised in such a simplistic way. Incremental improvements can have effects which are just as significant as radical innovation, while innovations that concern processes and architectures surrounding a product may be as essential to the market and to the public as the original product innovation itself.

Nevertheless, it seems that a perception is emerging in some segments of the policy-making community that the use of compulsory, nonmarket-driven tools in the private sector will lead to greater innovative output, compared to the existing models of innovation that are based on voluntary market-driven efforts. With regard to the compulsory aspect of the above model, we can broadly define the term compulsory as the act by a national or supra-national authority of forcing the innovator to give up (in total or in part) proprietary knowledge assets, be they technology, knowledge, know-how, or trade secrets. Compulsory practices can be based either on the specific revocation of the legal rights of the innovator to prevent others from free-riding his proprietary knowledge asset without his permission, or by forcing the innovator to actively disclose all the particulars relevant to the use of knowledge assets.

Certainly, the professional pursuit of innovation underpins the ability to introduce new products to the market. But, of equal importance is the fact that innovation can be unpredictable, influenced by external events and ultimately nurtured by the ability of entrepreneurs to identify and seize opportunities once they present themselves.

But leaving aside specific industrial sectors, and looking at the theory as a whole, supporting a compulsory, non-market driven model to promote innovation could prove highly problematic. First, it is not backed up by theoretical or empirical underpinnings. On the contrary, much of the theory and empirical evidence suggests that innovation does not seem to occur in this way. Second, it is more likely that the exercise of this model is based on political considerations rather than a rational discussion of its merits.Third, it would seem that advocates of this model are suggesting turning the process on its head i.e. they advocate implementing the concept first in the hope and anticipation that it will work.

Technological innovation is deeply rooted in market forces. It is the incentives and rewards that the market provides which drives innovators to make the risky, time consuming and costly investments needed to bring new products to the market.The innovation process is driven by the voluntary will of the innovator to create and use knowledge rather than any form of compulsion.The voluntary market-driven efforts of innovators form a bottom-up process. If we accept that technological innovation is based on these voluntary, market-driven efforts, certain mechanisms do need to be in place. One such mechanism is the existence of intellectual property rights (IPRs) which provide the incentives both for the creation and the exchange of knowledge for the sake of promoting technological innovation. IPRs function as a safety-net that allows the process of knowledge creation to take place, not least in the phases that precede the introduction of these technologies to the market. IPRs also allow

Certainly experimentation with different models of innovation is not something that should be prohibited, as long as these experiments are undertaken at the expense and efforts of those who wish to pursue them. In this case alternative models are being touted not as complementary innovation models but as replacements to the long-established innovation process. In other words, the experimentation is taking place at the possible expense of innovation itself and, as a consequence, at the expense of the consumer. Helen Disney is Chief Executive and Meir Pugatch is Director of Research of the Stockholm Network A longer version of this article first appeared in the 17 December 2008 issue of Foreign Direct Investment magazine.

Second, technological innovation cannot be dictated or anticipated via top-down processes. History suggests that even the brightest minds cannot be expected to anticipate the manner in 2

entities to exchange and share their knowledge assets in a manner that guarantees their expected share of market reward from a given innovation.

which the nature of innovation will evolve and the way in which demand for such innovation will manifest itself.The case of the personal computer is just one example. Until the late 1970s, it was the general consensus at all levels within IBM that the future of computing would be dominated by the demand for computer mainframes. It is reported that in 1977 Ken Olsen, President, Chairman and founder of Digital Equipment Corp. argued: “there is no reason for any individual to have a computer in their home”. However, the market experienced a dramatic surge in household demand for personal computers. In just five years, the annual sales volume of personal computers matched sales of the mainframe market, which had been around for more than 30 years. Despite its failure to predict demand, and contrary to other companies, IBM did produce its own personal computer and, by 1983, dominated the market.

ISSUE SIXTEEN

Book Review: The Ascent of Money Niall Ferguson The year 2008 will surely be recognised by history as a financial nadir. Global stock markets have plummeted, large financial institutions have collapsed (or been bought out), and governments around the world have resorted to using public funds to rescue various ailing industries. What better time then to consider how we came to find ourselves in such a volatile arrangement? The Ascent of Money is more than just a biography of cash, it is an uncovering of the entire system that has been created because of money and a tool for understanding the practices and institutions that affect, and enrich, so much of our lives.The book’s author highlights in advance the lack of financial awareness in current society and there will be many who have felt ignorant about the changes that have occurred in recent times. The Ascent of Money can act for many as an educational device, a tool for comprehending contemporary crises and putting them into a historical perspective. Like its companion TV series, this book separates itself into six different sections that depict the ascent of money, covering credit, the bond market, the stock market, insurance, real estate and international finance. Each chapter identifies key figures and events that have contributed to our understanding and practice of finance including the Medici family, John Law, Nathan Rothschild, and George Soros. Readers will be fascinated by the book’s interpretation of how the real turning point in the American Civil War occurred before the South’s surrender at Vicksburg.The book details how in 1862 the South’s loss of New Orleans and its cotton-exporting port destroyed the value of the South’s cotton-backed bonds forcing its economy into ruin. There is also an insightful account of the pension reforms in Chile that took place between 1979 and 1981 under the supervision of Dr José Piñera, which resulted in sizeable reductions in government expenditure and has furnished almost 7.7 million Chileans with private pensions. What readers should get from this book is an

WINTER 2009

appreciation of how far our experiences with finance have come and how our global financial institutions and practices have developed. One gets a profound impression from this chronicle of finance that there is so much that we can learn from history in order to prevent past mistakes, but also to attempt a reproduction of previous successes. What is clear is that the value of finance in society is overwhelming and its ability to enhance the lives of people, as well as protect them from uncertainties, means that no momentary crisis will be able to do away with its principles. Consequently, anyone looking for a sequel to this book entitled The Descent of Money will have an unrewarding search. Overall, The Ascent of Money offers an intelligent and witty portrayal of our global financial experience, which is both useful and much needed in the often naïve discourse on the current financial crisis. Readers will also take away an important awareness of their own association and connection to the financial world, which begs the question ‘can you afford not to buy this book?’ Paul Healy is Policy Analyst at the Stockholm Network

Photo: Penguin Press

CONTINUED

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Spotlight on the Energy and Environment Programme:

CLIMATE CHANGE AND ARCTIC ECONOMIES

“States and companies will need to overcome several obstacles in order to realise this potential boon”

The Arctic is a land of immense diversity. Populated by only four million people, it is on the front line of anthropogenic climate change. Over the past fifty years, it has witnessed some of the largest temperature rises on the planet, as much as 3° to 4°C in Alaska and Canada’s Yukon and Northwest territories. The resulting environmental changes, from melting sea ice and permafrost to increasingly variable precipitation and wind patterns, are having serious effects on economies around the region. In this ongoing process there are no clear economic ‘winners’. The long shadow of economic uncertainty casts its pall over the whole range of northern non-state economic actors, including indigenous communities, the fossil fuel industry, and international shippers. Though separated by vast distances and differences, indigenous peoples are connected by their shared environmental adaptations. Their economic institutions reflect both their similarities and differences. Hunting, herding, fishing, and gathering form the backbone of their societies. Agriculture, the central institution in many southern economic systems, is almost totally absent, limited by long winters, short summers and low soil productivity. By transforming these ecosystems, climate change promises to forever alter the way indigenous peoples make their living. Increasingly, communities around the Arctic are finding that traditional knowledge is at odds with their shifting environment. Progressively later freeze-ups on the coasts of eastern Siberia, Alaska and the Canadian Arctic have limited hunters’ ability to travel safely across sea ice, the primary winter transportation corridor for the region’s coastal populations. Among other impacts, this constrains their access to the marine mammals that constitute an important segment of local diets. Later winters have also forced the Saami of Scandinavia and the Kola peninsula to find new routes for their reindeer herds, changing migration patterns and undoing millennia of evolved social behaviour. Traditional economic activities are being made more dangerous by unfamiliar weather patterns, which have led to more violent storm systems across the region and an increasing number of deaths. By raising the costs of hunting and herding, these unpredictable climatic swings are forcing many indigenous peoples to rely increasingly on supplementary income provided by wage labour and government subsidies. 4

“Commentators assume that success in one sector of the Arctic foreshadows similar success elsewhere” The changing population and distribution of prey species is also having dramatic effects. The gradual thinning and retreat of arctic sea ice is directly affecting the region’s seven primary marine mammals, including beluga and bowhead whales, the narwhal, ringed and bearded seals, the walrus, and the polar bear. These animals rely on sea ice for a variety of needs. The possible disappearance of summer sea ice over the next fifty to one hundred years would be disastrous for animals and indigenous peoples alike. On September 16 2007, sea ice covered 4.13 million km2 of the Arctic Ocean, an area slightly smaller than that covered by the European Union and a 39% decrease from the twentyyear average measured between 1979 and 2000. Four days earlier, global oil prices had hit an all-time high of $80 per barrel. In a deeply

ironic juxtaposition, circumpolar climate change therefore became equated with untapped fossil fuels, the very substances whose exploitation was primarily responsible for triggering climate change to begin with. With an estimated 90 to 200 billion barrels of oil and a third of the world’s undiscovered natural gas, the fossil fuel potential of the Arctic is undeniable. Nevertheless, the likelihood of its immediate exploitation remains doubtful. Public commentators, casting their eyes on Russia’s west Siberian and Barents Sea fields, assume that success in one sector of the Arctic foreshadows similar success elsewhere. However, western Siberia and the Barents Sea are special cases in the polar world. Both are mild, warmed by the northern arm of the Gulf Stream that keeps sections of the Norwegian and Barents Sea relatively ice-free. Compared to conditions farther east, these corporate and state ventures face relatively few environmental constraints. Operators in other maritime and terrestrial areas of the Arctic face more uncertain environmental futures. Offshore drillers are the most likely to benefit ISSUE SIXTEEN

from the long-term ecological effects of climate change. By opening more sea-lanes to maritime traffic for longer seasons, warming trends may reduce the currently high costs of exploration, construction, maintenance, and transportation. Nevertheless, uncertainty remains. Increasingly common storm systems and severe coastal erosion may undo some of the cost savings that might accrue to businesses from a warmer sea. The future of terrestrial oil and gas exploration is more unclear. These businesses are literally rooted in arctic permafrost. Their infrastructures are built on frozen ground. Over the past thirty years, a 2°C warming trend in the permafrost has led to a halving of the number of days during which the Alaskan Department of Natural Resources permits heavy vehicles on the tundra. This equates to a 50% shorter season during which heavy exploration and drilling equipment can be used. The effects of permafrost melting are particularly marked along the coast of the Arctic Ocean, where it has contributed to severe erosion around the ports, with the threat of even higher communication and transportation costs.The costs associated with this warming trend will be very high. Old buildings and port facilities will have to be retrofitted to cope with changing conditions. Thus, while a warmer Arctic may reduce some environmental constraints, its knock-on effects for infrastructure and travel will make the coming decades an increasingly challenging time for its terrestrial oil and gas industries. Though the summer sea ice in 2008 did not reach the minimum extent seen a year earlier, the season was marked by two important events. It saw the first recorded instance in which both the Asiatic and American transpolar sea-lanes, the Northern Sea Route (NSR) and Northwest Passage (NWP) respectively, were simultaneously ice-free. It also saw the lowestever recorded overall volume of arctic sea ice, with thin first-year floes making up 73% of the March ice pack.These events foreshadowed the beginning of a new era of activity for transpolar shipping, which could cut as much as 40% off shipping distances between East Asia and either Europe or the east coast of North America via Suez and Panama. States and companies will need to overcome WINTER 2009

several obstacles in order to realise this potential boon. First, governments will need to provide adequate support to ships passing through their waters. This will require considerable spending on port, search and rescue, and pollution control facilities, as well as the construction of icebreakers capable of operation in the increasingly variable ice conditions.To date, neither Canada nor Russia, the states most immediately concerned with the NSR and NWP, have made the necessary commitments. Port and support infrastructure on the NSR has become increasingly dilapidated since its heyday in the late 1980s, when the Soviet Union poured resources into its maintenance. The Canadian Arctic lacks all but the most rudimentary facilities. Icebreaker capacity is in even worse shape, having decreased in both countries since 1990. Russia has made a move to ameliorate its capacity shortfalls, commissioning its first polar class vessel since the fall of the Soviet Union. A recent order by the Canadian government for six ice-capable costal patrol ships will provide some support, though they will need to leave the Arctic before the winter freeze-up and will be based in southern ports rather than constituting a truly arctic force.

“Indigenous economies are under threat from unpredictable weather patterns, polar melting, and changing animal populations”

alongside demand for their services. Finally, given the inherent risks of arctic travel, companies will face significantly higher insurance premiums. A few general conclusions are immediately apparent. First, indigenous economies are under threat from unpredictable weather patterns, polar melting, and changing animal populations. Sustainable indigenous economies will only emerge once the economic benefits accruing to companies and states from industry and resource exploitation in the Arctic are shared with the populations that first spearheaded humans’ occupation of the polar landscape. Second, climate change will adversely affect the costs of doing business on the Arctic mainland, where expanding active layers of permafrost will undermine infrastructure and shorten winter transport seasons. Finally, the retreat of sea ice, while opening up new sources of fossil fuels and previously ice-bound maritime trade routes, will not translate into immediate economic benefits for businesses or communities. Both companies and governments will need to make significant infrastructure investments before realizing their potential economic windfalls. Only then might the Arctic economy live up to some of the expectations that have been heaped upon it. Richard D. Campanaro is a Research Student at the International Relations Department of the London School of Economics

Companies will also need to make considerable investments in order to take advantage of transpolar routes. In order to operate safely in arctic waters, vessels need to be reinforced to withstand contact with first-year ice. Such vessels, which cost significantly more than normal container ships, will only be able to take advantage of transpolar routes for a few months every year. Current estimates from the Arctic Monitoring and Assessment Programme (AMAP) of the Arctic Council foresee the NSR’s summer shipping season extending from the current 30 days to an estimated 90 to 100 days by 2080. Companies will also need to hire or train ice-ready crews with the special skills necessary in arctic waters, whose wages will increase 5

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IS LISBON MAKING A COMEBACK? In the midst of a financial and economic crisis, which pundits declare the world has not seen since the Great Depression, the EU may be re-discovering its decade-old commitment to making Europe ‘the most competitive and dynamic knowledge-based economy in the world’. When it was first launched, the Lisbon Agenda was intended to be a defining moment for the European Union (EU). At the annual spring meeting in Lisbon, Portugal, the European Council set out a new economic and social vision for a 21st century Europe. Last year the Stockholm Network produced the Lisbon Barometer, a statistical evaluation of whether the EU and its Member States were living up to their Lisbon Agenda commitments. By using nineteen statistical categories – some used by the European Commission itself and some picked to supplement the Commission’s measures – covering both standard and less traditional areas of innovation and competition, this barometer monitored and ranked the progress of nine EU countries towards meeting the goals of the original Lisbon Agenda of 2000 and the Lisbon Strategy for Growth and Jobs. Together with its sister publication, Explaining the Lisbon Barometer, the Lisbon Barometer provided a number of important insights into what has gone both right and wrong with the Lisbon Agenda. While the Barometer’s overall results were perhaps no surprise – with Sweden and the Netherlands coming out on top – its most interesting finding was the degree of variation between different countries, both in terms of their overall performance as well as within individual categories. In light of this finding, the paper’s central recommendation was that the European Commission should move away from viewing Lisbon I and II as a pan-European project requiring EU-wide targets and goals. Instead, the diversity, different aspirations, and varying requirements of each individual Member State should be embraced. But the research and recommendations of both the Lisbon Barometer and Explaining the Lisbon Barometer were written in an economic climate very different from the one of today.Then the Eurozone, the UK and the US were only entering a credit-crunch induced time of financial and economic difficulties. Since then, we have learned that the global recession will likely be both more widespread (also putting the clamps 6

DIRECTOR’S REPORT

economic slowdown underlines the importance of the Lisbon Strategy as a set of instruments to strengthen economic growth and resistance of economies to internal and external shocks.” From this it would seem clear that the goals of the Lisbon Agenda are still highly relevant to the long-term economic health and prosperity of the EU. Could it be that the current crisis provides the necessary impetus for finally making the goals of Lisbon a reality? Many from within the EU Commission certainly seem to think so.

“There is little doubt that innovation, research and the development and use of new technologies will play a leading role in any eventual global economic recovery” on growth in the developing world and the BRIC economies of Brazil, Russia, India and China) and deeper. Global finance and banking remain in dire straits, international credit markets are largely frozen, and packages of government aid and loans, while averting a disaster, have contributed to the ever increasing bubble of Western debt. Clearly, the economic prospects of the EU are vastly different now (the beginning of 2009) than they were 12-18 months ago, or in 2000 when the Agenda was first launched. Where does this leave the recommendations of these two reports, let alone the future of the Lisbon Agenda? Does the original Lisbon Agenda – and its clunkier named successor the Lisbon Growth and Jobs Strategy – have a real future? Most economists would agree that the primary responsibility of national and local governments during difficult economic times like these is to do everything possible to contain an economic recession from turning into something much nastier and more drawn out. Under current circumstances one would be forgiven for assuming that long-term costly policies on innovation, research and education would receive scant consideration alongside more urgent fiscal and monetary stimuli. But with regard to the EU and the Lisbon Agenda, such an assumption could be mistaken.

Recently the Polish Commissioner for Regional Policy, Danuta Hübner, commented that innovation and research should play a key role in helping Europe’s economies recover from the economic slump. On an official visit to the southeast of France, celebrating the achievements EU investment in local research and business policies had made, she said: “The current economic context underlines even more clearly the importance of innovation in relaunching competitiveness and creating jobs.” Similarly, the January launch of the European Year of Creativity and Innovation 2009 by Commission President José Manuel Barroso and Czech Prime Minister Mirek Topolánek, highlights the emphasis the Commission and Czech Presidency is placing on some of the most important characteristics of the original Lisbon Agenda. There is little doubt that innovation, research and the development and use of new technologies will play a leading role in any eventual global economic recovery. But “bottling” innovation, creating successful research clusters, and implementing pan-European research strategies are all easier said than done. In this sense, the contraction of Europe’s economies does not change the fundamental criticism of the Lisbon Agenda of being overly centralised. In fact, the recommendations made in the Lisbon Barometer of a greater focus on each individual Member State’s needs still ring true. Lisbon is still needed, but unless its goals and methods are fundamentally changed, success will prove to be as elusive as it has been in the past. David Torstensson is Senior Researcher at the Stockholm Network

Indeed, the current Czech Presidency of the EU Council provides a few clues as to the EU’s coming priorities. In their official Work Programme, released only a few months ago, the Czechs commented on the relationship between the current financial crisis and the Lisbon Agenda, stating that “a significant ISSUE SIXTEEN

The past few months have hardly been the most propitious of times for markets, nor indeed for states. As governments around the world seem to be revisiting the ideas of Keynes, digging deeper into their empty pockets to implement vast programmes of public spending to kickstart their economies, the outlook for growth and prosperity in 2009 is rather bleak.

It is evident that the quality of both are central to making sure that Europe remains a worthwhile place to invest in today’s much frostier economic climate. And it is no coincidence that both these themes are the heart of the agenda for the current Czech Presidency of the European Union, whose slogan is ‘Europe without Barriers’.Twenty years after the fall of the Iron Curtain, it is worth reminding ourselves of the importance of our political and economic freedoms, even in the face of today’s financial gloom.

In this Winter issue of Eye on Europe, we look at a range of topics which pertain to getting Europe’s economy back on track. Our leading articles, along with our update on the Stockholm Network’s new Lisbon Barometer, touch on two important and highly topical issues - financial regulation and innovation.

We also review historian Niall Ferguson’s new book The Ascent of Money, which provides a timely reminder of the history of money and some of the pitfalls of handling it. Essential reading for all politicians and business people.

WINTER 2009

including for think tanks – we are pleased to announce that we have recently added several new member think tanks to our network, including the Murray Rothbard Institute in Belgium and the Institute for Innovation & Valuation in Health Care in Germany, both of whom are profiled here. We welcome our newest member think tanks into this policy community and look forward to the pleasure of introducing them to you in print, as well as in person. Helen Disney is Founder and Chief Executive of the Stockholm Network

Although times are tough across all industries –

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PROFILE: Timbro

PROFILE:

Stockholm, Sweden

Ljubljana, Slovenia

Jože Pucˇnik Institute

lower-income earners, promotes choice in health care and pursues privatisation of state-owned monopolies and enterprises.Yet, it has shied away from the pressing issues of labour market reform, the unions’ stranglehold on the economy, and exorbitant taxes on high earners.

Timbro faced an uphill battle in its nascence.The Swedish political topography was dominated by groups espousing socialisation, collectivist economic planning and heavy taxation. Enterprise, private ownership and market economies were deemed, at best, lacklustre phenomena. At worst, these concepts were to be stricken from the vocabulary of political discourse. In 1978, in the face of a political proposition from the Social democrats to force all companies above a certain size to issue new stock shares to workers - so that within 20 years the workers would control 52% of the companies in which they worked - Timbro was formed.Though the proposition fell, it left an indelible mark on Swedish politics and society. Change, however, loomed on the horizon. Following intense debate in the 1980s over political ideologies and systems, the country’s socialist ambitions began to take a back seat. Sweden instead embraced deregulation and lowered taxes. Furthermore, the country earned international recognition for initiating a string of reforms ushering in greater freedom of choice. Today, most observers would aver that Sweden has evolved into a relatively mainstream Western European country. In fact, pundits and thinkers from around the world have hailed the Swedish model—peaceful coexistence between a vibrant system of enterprise and an ambitious state—as a smashing success. Timbro takes particular issue with this particular point. For one thing, the vast state apparatus places far too many constraints on its citizens, which in turn prevents Sweden from capitalizing fully on opportunities put before it.Too many businesses never get off the ground; too many

“Timbro

is needed more than ever.The mission of promoting a classically liberal, free-market agenda never ends”

people languish on the labour market’s sidelines; too many potentially beneficial initiatives never leave the drawing board. Sweden has a serious but difficult problem to diagnose.The country’s economy is undynamic and unresponsive, and complacency is setting in. The “culture of opportunity” is giving way to a debilitating “culture of entitlement.” At the same time, we are witnessing dramatic, tectonic change in the form of globalisation. Indeed, across the globe countless political decisions are made to foster business and stimulate trade. 12 years of social democratic rule separate the current centre-right government from the previous one – a period marked by indifference to reform.

The Jože Pucˇ nik Institute (IJP) was founded in 2006 as a think-tank of scientists, policymakers, experts and academics from various fields with the goal of enhancing political culture in Slovenia.With its activities the IJP wishes to encourage and support free exchange of opinions on topical questions in society which are important for development of democratic thought.

Taken together, this means that Timbro is needed more than ever.The mission of promoting a classically liberal, free-market agenda never ends.Timbro will continue to pursue rigorous issue advocacy and opinionshaping—that is, publishing books, reports and policy papers, as well as appearing in both the broadcast, print and social media. Atop Timbro’s agenda in 2009 are issues relating to wealth accumulation, reform strategies and the for-profit provision of public services.

In accordance with the political thinking and work of Dr Jože Pucˇnik, the IJP strives for: • Implementation of high standards of political culture in Slovenia • Democratic and open society • A society of Slovenian and European values • Tolerance and understanding in public life • Enhancement of plural cultural and scientific creativity • Cooperation with the like-minded political, cultural and scientific groups and individuals in Europe and around the world joined together by the principles of the society of democracy, openness and solidarity

Because Timbro’s activities are geared toward predominantly domestic audiences, the content of its website is delivered primarily in Swedish. However,Timbro does publish certain material in English and strives to keep its international audience abreast of upcoming events and publications.Timbro communicates with its stakeholders across a broad range of media, including Twitter, Facebook and various blogs. In addition to an ever-expanding presence online, Timbro is also growing its Sture Academy education program for college age men and women.Timbro recently celebrated its 30th anniversary and is already looking ahead to 30 more years of success as one of Europe’s leading think tanks.

In order to reach these goals the IJP carries out the following activities:

Billy McCormac is the Director of Communications & Publishing at Timbro

The current government, led by Prime Minister Fredrik Reinfeldt, provides large tax breaks for ISSUE SIXTEEN

• Organization of public debates and other forms of exchange of opinion • Providing expertise on topical political and social issues • Education and training of policymakers and public servants • Supporting scientific and cultural creativity • Encouraging political dialogue of various opinions on relevant themes at public events, in various publications and in media, International connections and exchanges The Jože Pucˇnik Institute is mainly interested in democracy promotion, civil society building, EU WINTER 2009

“With its activities the IJP wishes to encourage and support free exchange of opinions on topical questions in society which are important for development of democratic thought” Affairs and economic issues as well as more general topics in the fields of culture and society. In two and a half years of existence the Jože Pucˇnik Institute has organised a number of conferences, roundtables, discussions and published several books.The most important events have been: •The international conference “The Role of National Parliaments in EU Decision-Making Processes”, held in January 2007.This conference was attended by more than 120 participants including the Presidents of the Slovenian, German and Portuguese Parliaments and the Vice-President of the French National Assembly; and •The “Days of Jože Pucˇ nik”, considered the main event of the Institute.This two-day conference is held annually and focuses on a carefully selected topic that concerns Slovenian society. All major events are usually accompanied by the publication of related conference papers’

Healthcare Reform in Slovenia” in November 2008, as part of the Stockholm Network project “CEE Ahead”. In 2009 the Jože Pucˇnik Institute plans to organise two big events: a two-day conference dedicated to the present economic crisis and its impact on Slovenian society in March, and a two-day international conference marking the twentieth anniversary of democratic changes in Eastern Europe and Slovenia. The objective for the near future is to spread our activities into the neighbouring regions of the Western Balkans and to play a more active role on the internet. Mateja Jancˇar is Programme Manager of the Jože Pucˇ nik Institute

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A free-market think tank based in Stockholm, Sweden,Timbro has for more than 30 years originated the ideas and shaped the opinions that guide Swedish enterprise.

www.ijpucnik.si/

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www.timbro.se/

The Jože Pucˇnik Institute is also a member of different international networks, among others the Stockholm Network with whom it co-organised the conference “The Future of 9

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Medicine of the Mannheim Medical Faculty). The Summer School is directed to professionals of the health system.

Eschborn, Germany www.innoval-hc.com/ InnoVal-HC was founded in 2005 by German professors Oliver Schwarz, a specialist in econometrics, and Michael Schlander, a physician and economist. The Institute is an independent not-for-profit scientific organisation dedicated to research into the foundations of economic evaluation of health care technologies and their application, with particular emphasis on process (e.g. health care delivery, access, utilisation, cost, and financing) and product (e.g. diagnostics, pharmaceuticals, medical devices, and their appropriate use) innovations. The raison-d’être of InnoVal-HC is to contribute to the understanding of the trade-offs inevitably associated with diagnostic and therapeutic decisions, including their opportunity cost. This implies analyses and research into the: • Methods and ethical foundations of health economic evaluations • Mechanisms of delivery of and financing health care and their impact on outcomes, quality, and efficiency • Valuation of innovative technologies, procedures, and products • Acceptability analysis of new technologies based on cost-benefit evaluation, incremental cost-effectiveness ratios, and budgetary impact models • Utilisation of specific health care programmes, including their real-world effectiveness and resource impact • Decision analytic modelling to support efficient health care provision and research & development A fundamental principle of all InnoVal-HC projects is adherence to rigorous methodological standards and the strict

“The raison-d’être of InnoVal-HC is to contribute to the understanding of the trade-offs inevitably associated with diagnostic and therapeutic decisions, including their opportunity cost” separation of evidence (factual knowledge) and interpretation (opinion). InnoVal-HC and its founders take pride in the strict neutrality of their analyses. As a matter of principle, in order to maintain that independence, they accept financial support of projects exclusively under a policy of unrestricted educational grants. A self-regulatory Code of Conduct demonstrates the commitment of Innoval-HC to the highest attainable academic standards.

In terms of publications, InnoVal-HC’s chairman, Professor Michael Schlander, has published a range of papers in peer-reviewed periodicals like Current Medical Research and Opinion, the Journal of Medical Economics and Journal of Medical Ethics – as well as specialty journals such as the American Journal of Psychiatry, Health Services Research, European Child & Adolescent Psychiatry, Journal of Clinical Anaesthesia, the Drug Information Journal,The Pharmaceutical Executive, and Child and Adolescent Psychiatry and Mental Health, among others.

The InnoVal-HC Code of Conduct covers in detail the following subjects: 1 2 3 4 5 6 7 8 9

Current projects span pharmaceutical market regulation, approaches for “comparative effectiveness” evaluation, and the economic evaluation of particular medical technologies. Further health care utilisation studies are underway, drawing on the ‘Nordbaden database’ project established by InnoVal-HC, comprising the complete outpatient care data of more than 2 million patients covered by German statutory Health Insurance (SHI).

In terms of activities, in the past couple of years InnoVal-HC has inaugurated and organised the Heidelberg Health Economics Summer School, a high–level programme offered in cooperation with the University of Heidelberg (Department for Public Health, Social and Preventive

Antwerp, Belgium www.rothbard.be/ The Murray Rothbard Institute is an independent centre of research and education in philosophy of law and economic theory. Clear fundamental insights in those areas are crucial because the decisions based on them have a profound influence on prosperity and peace for mankind. Working mainly within the traditions of the Austrian school of economics and natural law theory, we want to contribute to both the academic and public debate.

A recent study examined Britain’s highly acclaimed approach to cost-effectiveness analysis (CEA), and its international potential. The analysis, published as ‘Health Technology Assessment by the National Institute for Health and Clinical Excellence (NICE)’ with Springer in New York, NY, revealed an astonishing number of technical problems associated with a recent NICE technology assessment, which had been conducted by a group of researchers from the renowned University of York, England. Beyond casting serious doubt on the real-life robustness of the technocratic approach adopted by NICE, the study proposed important lessons for international policy makers looking at NICE as a potential role model. Forthcoming papers by InnoVal-HC include an entry in the Encyclopaedia of Medical DecisionMaking and papers in Current Medical Research and Opinion and the German Journal for Evidence and Quality in Health Care, all currently in press.

Area of Application Mission and modus operandi of the Institute Professional Standards Good Scientific Practice Conflicts of Interest Implementation Allegations of Misconduct Effectiveness / Severability Clause References

PROFILE: Murray Rothbard Institute

Professor Michael Schlander is Chairman of InnoVal-HC

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Our two main programmes are publications and seminars. We translate and publish both new and existing works - advanced academic books as well as short accessible books for the intelligent layman. Our seminars are chiefly aimed at university students, to provide them with a firm theoretical understanding in economics or philosophy of law. The success by which a doctor can cure his patients does not rest solely on his good intentions. Just as critical are his medical knowledge and the available medicines - we only have to think about the popular but fallacious historical practice of blood-letting. In the same way, the means used by politicians, reformers and activists seeking to better society are often detrimental to their cause.That is why we believe in a dispassionate presentation of discussion about what we consider to be the key theoretical insights to successfully ‘diagnose’ and ‘cure’ the crucial challenges facing society. We focus on economic theory, and philosophy of law and institutions, with special attention to the interdisciplinary possibilities of those two sciences. Within these broad areas, we place special emphasis on the theory of

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“We believe in a dispassionate presentation of

discussion about what we consider to be the key theoretical insights to successfully ‘diagnose’ and ‘cure’ the crucial challenges facing society” business cycles, monetary institutions, and the normative foundations of legal and political rights, among others. The Rothbard Institute was founded at the end of 2007 and started operations in 2008. So far it has published two books: • het Fundamenteel Rechtsbeginsel (the Fundamental Principle of Law), by Prof Frank van Dun, an academic book on philosophy of law; and, • What Has Government Done To Our Money?, a translation of a popular book by Murray Rothbard on monetary theory and history. By translating this book into Dutch, the Murray Rothbard Institute has made this terrific little work available to the 22 million Dutch-speaking people of Belgium and The Netherlands, in the heart of Western Europe.

Grant from the Atlas Economic Research Foundation in November 2008. In 2009 we will continue our series of seminars on philosophy of law and economic theory in Belgium’s two main university centres, Ghent and Leuven; organise an intensive four-day long summer seminar for students, and publish several books. We will pay special attention to explaining the root causes of the economic crisis that we are currently facing. Michaël Bauwens is co-founder of the Murray Rothbard Institute

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Institute for Innovation and Valuation in Health Care (InnoVal-HC)

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PROFILE:

We have also organised two series of series of seminars, one on philosophy of law and one on economic theory and the current economic crisis.The Institute received a Project

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RECENT PUBLICATIONS

IP – PARIS EVENT

SN – THE ECONOMIST EVENT.

Workshop on “Evidence-Based Policy in the Field of Intellectual Property Rights”, held in Paris on 22 September 2008.The speakers were Mario Cervantes, OECD; Denis Dambois, European Commission; Dr Yoav Shechter, MSD Israel; and Dr Meir Pugatch and Helen Disney of the Stockholm Network.

The Economist´s cartoonist Kevin `KAL` Kallaugher and Henry Naylor (creator of TV`s `Headcases` and `Spitting Image` head writer) discussed cartooning, campaigning and chicanery and explore how art can be used to interest, excite and intrigue any audience.

Stockholm Network Weekly Bulletin

If it Ain't Broke, Don't Fix It A discussion paper on the benefits of a voluntary market-driven approach to innovation

FORTHCOMING PUBLICATION The State of the Union – Spanish version

This weekly e-update keeps subscribers up to date on all Stockholm Network member think tank activities including events, announcements and publications.

The Stockholm Network has joined forces with FAES Foundation, one of its member think tanks, to translate a publication that was first launched in April 2008, The State of the Union or El Estado de la Union, in its Spanish version.

Newsletters

From the first issue of The State of Union - launched in 2005 - to this follow-up edition, we have witnessed quite a number of political and economic changes in the EU.This publication highlights the market oriented economic reforms put forward by the 27 EU members up to early 2008. Yet, in the past few months, the global financial crisis has threatened the achievements of many EU countries, which have successfully managed to embrace these reforms during the past few years.This publication will be available online. For further information on publication date please check www.fundacionfaes.es

Receive information about current issues as well as expert analysis and insight into debates in our three programme areas: If it Ain’t Broke, Don’t Fix It

Climate of Opinion Courting Confusion? Where is Canada`s Intellectual Property Policy Heading?

Each issue focuses on a different aspect of energy and environment policies. Recent issues have explored China, OPEC, carbon mitigation policy and future fuels.

CEE AHEAD – SLOVENIA EVENT The Stockholm Network and the Jože Pucˇnik Institute joined forces to organise a workshop on “The Future of Healthcare Reform in Slovenia”. Helen Disney and Dr Meir Pugatch of the Stockholm Network were joined by the President of the Institute, Mihael Brejc MEP, and Natasˇa Sˇusˇtar, Director of the Institute.

ABOUT THE NETWORK The Stockholm Network is a leading pan-European think tank and market-oriented network. It is a one-stop shop for organisations seeking to work with Europe’s brightest policymakers and thinkers. Today, the Stockholm Network brings together over 130 marketoriented think tanks from across Europe, giving us the capacity to deliver local reform messages and locally-tailored global messages across the EU and beyond. Combined, the think tanks in our network publish thousands of op-eds in the high quality European press, produce many hundreds of publications, and hold a wide range of conferences, seminars and meetings. As such, the Stockholm Network and its member organisations influence many millions of Europeans every year. 12

Gesundheit! Courting Confusion

The discussion was chaired by Krishnan Guru-Murthy, Channel 4 News.

POLICY ISSUES

WHAT DO WE DO

The Network is a forum for sharing, exchanging and developing pan-European research and best practice. Interested in ideas which stimulate economic growth and help people to help themselves, we promote and raise awareness of policies which create the social and economic conditions for a free society.These include:

We conduct pan-European research on, and create a wider audience for, marketoriented policy ideas in Europe. Our website contains a comprehensive directory of European free market think tanks and thinkers. We advertise forthcoming events (our own and those of partner organisations) and facilitate publication exchange and translation between think tanks. We also post regular news flashes and updates on European think tanks and their activities.

Reforming European welfare states and creating a more flexible labour market Updating European pension systems to empower individuals Ensuring more consumer-driven healthcare, through reform of European health systems and markets Encouraging an informed debate on intellectual property rights as an incentive to innovate and develop new knowledge in the future, whilst ensuring wide public access to such products in the present Reforming European energy markets to ensure the most beneficial balance between economic growth and environmental quality Emphasising the benefits of globalisation, trade and competition and creating an understanding of free market ideas and institutions

Would you like to join the Stockholm Network? Please contact us on +44 20 7354 8888 or email info@stockholm-network.org

A HEALTHY MARKET? The Health Quality Agenda

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Know IP Discusses notable developments in the field of intellectual property taking place both in Europe and beyond. Previous issues have included patent reform, parallel imports and creative content online.

The Health Quality Agenda

If you would like to subscribe to any of these newsletters, including the Eye on Europe, please email: info@stockholm-network.org To download these and any of our publications, please visit: www.stockholm-network.org/Publications-List

Health Care Reform in Central and Eastern Europe: Setting the Stage for Discussion

UPCOMING ADDITIONS

Poly Briefs

El progreso de las reformas de mercado en la UE

WEB UPDATE: CEE AHEAD CEE Ahead seeks to advance health reform and modernisation in Central and Eastern Europe through enabling a broad and informed debate about better ways to deliver and finance sustainable healthcare in Europe. The CEE Ahead website provides country snapshots which detail the progress of health reforms in individual countries since transition, along with regular news updates on reform developments. In addition, the website contains information on CEE Ahead publications and events, as well as links to other related websites, publications and initiatives.

To access the website, please visit: www.stockholmnetwork.org/Conferences-andProgrammemes/Health-andWelfare/CEE-Ahead

The policy briefing service will offer regular, concise summaries and analyses of critical developments in our three programme areas.

MEET THE TEAM Chief Executive and Founder Helen Disney. Director of Research Dr Meir Pugatch Chief Operating Officer Dr Cristina Palomares Fellows Paul Domjan and Jacob Arfwedson Research Team David Torstensson, Senior Researcher Paul Healy, Policy Analyst Rachel Chu, Research Officer Accounts Nasrin Hassam

Highlights developments in contemporary European health and welfare policy. Previous issues have considered health care reform in Central and Eastern Europe, and the US debate on health care.

EL ESTADO DE LA UNIÓN

Health Care Reform in CEE

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