EBR September - October 2011

Country Report: Estonia

Small Country Big amBitionS

Economic Outlook:

the gloBal governanCe DefiCit

Opinion:

the Warren Buffett DeBate

SEPTEMBER / OCTOBER 2011, PRICE € 5,00 www.europeanbusinessreview.eu

the opening of Southern Corridor: the Key Players

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The Buffett debate EU leaders face crossroads in European integration

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

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ChairmanKonstantinos C. Trikoukis

PublisherChristos K. Trikoukis

Editorial ConsultantsAthanassios Papandropoulos

Anthi Louka Trikouki

Editor in ChiefN. Peter Kramer

Issue ContributorsJeffrey 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

CorrespondentsBrussels, London,

New York, Paris, Berlin, Istanbul, Athens,

Helsinki, Rome, Prague

Public RelationsMargarita Mertiri

Financial ConsultantTheodoros Vlassopoulos

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Happy birthday Italy, a multicultural youth event

66

Estonia: Small Country, Big Ambitions

Influence: It’s about math, not motivation

To centralize or not to centralize?

What makes an ideal crisis manager?

48

56 30

58

The Global Governance deficit

28

For previous editions archive and up-to-date

information on major topics and events

you may visit our website

http://www.europeanbusinessreview.eu

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

10 OPINIONSTripped up by Globalisation

Doha is dead, Europe must define its bi-lateral trade deals strategy

The Buffett debate

18 EUROPEAN AFFAIRSEU leaders face crossroads in European integration

A genuine Euro-Med region could be the EU’s bridge to Africa

24 ECONOMIC OUTLOOKThe Crisis and fiscal policies in the peripheral countries of the Eurozone

The Global Governance deficit: The theater of the absurd

30 TRENDSTo centralize or not to centralize?

34 SPECIAL REPORTThe key players in Europe’s energy policy

48 ESTONIASmall country, big ambitions

56 LEADERSHIPInfluence: It’s about math, not motivation

What makes an ideal crisis manager?

60 BUSINESS TIPSIn 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 PAGEHappy birthday Italy, a multicultural youth event

A BRUSSELS VIEW

EUROPEANBUSINESSREVIEW8

robin hood tax, a u-turn and a pirouette by the Commission

The 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 im-portant moment for the world and espe-cially 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 unre-marked. This year he used the magic words financial transaction tax -already strongly supported by the two biggest EU econo-mies Germany and France - and bingo.

Never before has Barroso received so much applause in the European Parlia-ment. In the last three years he said, member states have granted aid and pro-vided guarantees of 4.6 trillion to the financial sector. It is time for the finan-cial sector to make a contribution back to society . A remarkable moment. Taxes on financial transactions were long rel-egated to the rallies of anti-globalisation activists and less than a year ago the Eu-ropean Commission declared officially that this kind of taxation would be not very useful. But now the financial trans-action 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.

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 be-cause 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 market-ing tool for offshore centres. The UK is likely to veto the plan amid fears of the damage it will cause to London s finan-cial district. The British Treasury let it be known that it has no objection to the proposed tax but any financial transac-tion 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.

A new institutional set-up for the Euro-zone’s economic governance will take cen-tre stage at the next EU summit mid Octo-ber. 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?

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.

by N. Peter Kramer, EU correspondent

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

OPINION


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 – and deserve the lion’s share of the blame.

By Jeffrey Sachs*

tripped up by globalisation

EUROPEANBUSINESSREVIEW 11

OPINION

I’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 in-vestments in large swaths of industry, have been lost to inter-national 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, in-creased 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 in-comes 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. Sec-ond, it would cut wasteful spending, for instance in misguid-ed 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 distin-guish 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 recov-ery. Part of this must be earned through better skills and technol-ogies – 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 Ger-many 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 mar-kets. 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 incred-ibly shrinking leader, waiting to see whether Congressional power barons will call. More generally, the US cannot pros-per 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 recov-ery in the US and Europe reflect these fundamental short-comings. 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 capi-tal 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.

OPINION


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*

When the Doha Development Round (DDR) of mul-ti-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 con-cluding 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 vulner-able 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 inter-national 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 dis-ciplines for export taxes and duties, competition policy and investment. Ironically, investment and competition were re-moved from the Doha Round’s agenda after the 2003 Can-cun 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 dif-ficult. It is not a debate for before the DDR is concluded, but it is certainly another good reason to accomplish the round.

Doha is dead, europe must define its bi-lateral trade deals strategy


OPINION

The dire straits of the DDR have understandably raised ques-tions 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 negotia-tions in July 2006, the EU re-calibrated its trade policy to se-cure market access and improve the business climate in its major trading partners. This paved the way for an ambitious new gen-eration of FTA negotiations with Korea, India and the whole ASEAN bloc. In the context of the Global Europe communica-tion 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 ne-gotiations 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, Singa-pore, 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 far-reaching 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 coun-try 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 Coopera-tion 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 encour-agement for pursuing the FTA av-enue, but it’s equally important to realise how serious are the many difficulties. Now that it is negoti-ating 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 ques-tion is what to do with developed countries and Europe’s strategic 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 long-standing 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 nego-tiations 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 de-veloping countries? If Doha is dead, the proliferation of FTAs may well see dwindling interest in multi-lateral trade liber-alisation. 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

Paavo Väyrynen

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

“unearned” income from interest, dividends and capital gains.

Is he RIGHT or WRONG?

the Buffett debate


OPINION

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 includ-ed 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 domes-tic 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 mid-dle-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 ex-tending 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

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 pro-grams, the combination of a greatly expanded elderly popula-tion 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 indus-trialized 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 Euro-pean 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.

Why Warren Buffett is

right

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

By William G. Gale*


OPINION

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 differ-ence 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, sig-nificantly lowering its yield.Focusing on the super-rich also fosters a counterproductive attitude toward material success. The way to promote a hard-working, entrepreneurial and innovative society is to cel-ebrate 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 ex-cess 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 insur-ance generates overconsumption of health care and contrib-utes 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 corpo-rate 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 main-tains 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 en-couraging 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 criti-cizes - 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 pro-mote 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.

Why Warren Buffett is wrong By Jeffrey A. Miron*

* 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

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? 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

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?


EUROPEAN AFFAIRS

“German Chancellor Angela Merkel and French President Nicolas Sarkozy met in Paris to pre-pare 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 treaty, while the European project is already struggling so badly on its current terms?What the markets often lose sight of is that this situation is not only - or even primarily - a financial and economic crisis. France originally intended European integration as a means to bolster its international position. Germany was shattered after the conclusion of World War II. The French picked up the pieces and, by initiating the process that eventually led to the creation of the European Union, Paris refashioned Germany into a platform from which France could project power.This system used German strength to entice other states to join the growing union. France promised three things: that Euro-pean states would be more important collectively; that mem-bers would become rich by relying on German wealth; and that Germany would never again be in a position to hurt other European states.By the middle part of the last decade, though, Germans had outgrown sixty years of policymaking shaped by what can be best described as an extended national apology. Germany began acting like a real country again. Real countries have many characteristics in common. They obvi-ously like to speak for themselves, and they don’t like to be taken advantage of by their neighbours.Germany started using its superior economic position to re-work EU institutions to its liking. Until now, France has co-operated, driven by a mix of inertia, opportunity and fear.Inertia because it takes more than a few years to admit that after two generations, the ability to feed off the strengths of another economy without paying any price is gone. Nevertheless, oppor-tunity still motivates because Paris may yet prove able to manage Germany and ride on its coattails. Fear of what might happen should Germany outgrow France also fuels Parisian cooperation.The European economy is hardly a zero-sum game. However, in the modern European system, economics is the glue that has held together the unstable political alignments of the post-World War II order. And that glue is not sticking like it once did.

Of the three main benefits that drew states into the Euro-pean Union, two - that European states are more important collectively, and that other states can become rich thanks to German wealth - are no longer in play.The European Union’s efforts at political and military unifi-cation can best be described as stillborn.Economically, the current crisis has robbed the European Union of much of its shine. Data released put collective EU growth at an unenviable 0.2% compared to the previous quarter. French growth came in at a flat zero.If the European Union cannot guarantee importance or wealth, then its remaining raison d’etre comes down to keeping the Germans in line. Considering that the Germans are in the process of rewiring the union to suit their own national prefer-ences, the entire premise behind EU membership for many

states rests on precarious ground.Against this backdrop sits a massive disconnect between what the European elites - especially in the financial sector - desire and what the general popula-tion prefers.The elites have invested seventy years and tens of trillions of euros (once financial assistance, bond purchases and cross-collateralisation of debt are all added up) to make European institutions work. The European Union is the key to their politi-

cal and economic positions. They have already made it clear that they will pay any price to keep the European Union alive.However, the average German, Frenchman or Latvian feels somewhat differently. With the benefits of the European system losing their luster, questions are starting to be asked about not just the EU institutions, but about whether Euro-pean leaders are still fit to lead.Polls regularly indicate that half of Germans want the deut-schmark back, and more than half think the Greeks should be unceremoniously ejected from the euro zone. So far these at-titudes have not translated into a rejection of any major state’s political mainstream - but the Germans’ general disgust with the bailout programmes is hardly an enthusiastic endorsement.”

The European economy is hardly a zero-sum game. However, in the modern European system, economics is the glue that has held together the unstable political alignments of the post-World War II order. And that glue is not sticking like it once did.

EUROPEAN AFFAIRS


The Arab world’s upheavals and Europe’s persistent economic crisis are making Eu-ropean-Mediterranean Union more cru-cial than ever, argues Elisabeth Guigou. France’s former EU minister sees a genuine partnership with the Arab countries as pav-ing the way for an eventual Euro-African framework able to exert global influence.

By Elisabeth Guigou*

The 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, cul-tural, 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 en-ergy resources and raw materials that they, like Europe, lack.Yet, Europe’s formal political ties with its southern neigh-bours have been languishing. Ever since the summit held in Paris in July 2008 to launch the Union for the Mediterrane-an, 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 ini-tiators of the Barcelona Process – Jacques Delors and Felipe Gonzales – and to the people of Europe and African the crea-tion of a Euro-Mediterranean community, and following on that a Euro-African one, that together with it would consti-tute 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 Eu-rope 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 politi-cal 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.

a genuine euro-med region could be the eu’s bridge to africa

Jacques Delors


EUROPEAN AFFAIRS

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-for-mulation of the partnership through the creation of a Euro-Mediterranean 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 peo-ple fewer by 2030, while the southern Mediterranean has a forceful young population that desperately needs job oppor-tunities. 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 Mediterra-nean, 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 3% of global foreign direct investment. To boost investment in both directions, a zone of monetary stability should be cre-ated; a Euro-Mediterranean monetary system would avoid the discrepancy between trade that is paid in euros and that in dollars, and an eventual expansion of the eurozone shouldn’t be excluded. A system for guaranteeing exports and invest-ments within a stable legal framework is also needed, and a “targeted development bank” would be an important step in creating a financial framework favourable for investment.Industrial re-deployment might also be the answer to out-sourcing by European companies, so we need to build an integrated Euro-Mediterranean structure that encourages in-dustrial, agricultural, energy and job mobility. Central and eastern Europe should be the example, because in tandem with Germany they strengthened and developed industrial sectors with high added-value. This model industrial re-de-ployment created new industrial jobs for Germany, too, so it’s worth studying closely.A European energy community should also be considered as a way of acceler-ating Europe’s energy transition and further developing renewable energies. This could eventually lead to a Euro-Mediterranean energy community, and indeed it’s one of the proposals made by the European Commission in the Spring of this year.The greater mobility of people must become a strength of all our countries. Jobs mobility should replace unwanted migration – so there would be the mobility of students and professors on the one hand, and improved occupational mo-bility for both European and African workers on the other. Europe could finance more and better training to help meet

its own labour shortages, while African countries will be able to provide employment for their young people. A Euro-Med-iterranean and Euro-African version of the Erasmus student exchange programme would also attract African students to Europe and interest European students more in the develop-ment of both the southern Mediterranean and Africa.Europe and the southern Mediterranean countries face the common challenges of shared security concerns, global warm-ing, migration and food security. So agriculture has to be in-cluded in a more ambitious project. A Euro-Mediterranean Union would meet not only these challenges but the wider pressures of globalisation as power shifts eastwards. China will soon become the leading global power, and its presence is already being felt throughout Africa. In this changing world, the new order of magnitude has become a billion people. Adding Europe’s 500m population to that of the southern Mediterranean and the Middle East makes a total of 900m, and if we then add the population of Africa we reach 1.7bn.

By 2050, Europe and Africa will to-gether comprise 2.5bn people, a quarter of the global population. With so much human potential, it will be possible to build on shared economic, social and ecological strengths and so carry greater weight in international organisations and when dealing with other major world powers. A great north-south re-gional grouping of this sort could ne-

gotiate in international institutions from a stronger position, most notably the WTO, and so preserve its own develop-ment model based on the three principles of proximity, com-plementarity and north-south solidarity.Fair trade and the sharing of added-value should replace free trade imbalances and the exporting of unprocessed raw mate-

A Euro-Mediterranean Union leading to a Euro-AfricanUnion could open the way to mutual development with a balanced win-win partnership on both sides.

EUROPEAN AFFAIRS


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. Al-though it is probably not enough on its own, a North Afri-can “common market “ is going to be essential. But this re-quires 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, Jor-dan, 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

houses in order, of course, so Europe must strengthen its eco-nomic 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 NAF-TA and Mercosur, so clearly Europe needs to help organise a large hemispheric region in order to counter-balance glo-balisation. 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 Euro-African 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.

* 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.

Felipe Gonzales

7o HAPCO_KTX_21X28_EN.indd 1 9/12/11 3:33:24 PM

ECONOMIC OUTLOOK


the Crisis and fiscal Policies in the Peripheral Countries of the eurozoneTo 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*

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.


ECONOMIC OUTLOOK

This shared history, however, has determined the nature of their states, a critical variable for understanding coun-tries’ 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 rev-enues 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 gov-ernment 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, child-care services, homecare services, social services, and others). In-dicators of this are many. One example is public social spend-ing 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 popu-lation 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 regimesThus, 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 al-most 30 years of democracy, such forces continue to be very in-fluential 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 ultra-right-wing forces still are within the Spanish state. They domi-nate 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 in-come, has declined since 1992, when policies were implement-ed (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 forc-es, 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 interven-tions (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 re-distributional impact of state interventions is that the Gini coefficients in all four countries are higher than the EU-15 av-erage (29.2). Spain’s Gini coefficient is 31.3, the same as Ire-land’s; Greece’s is 34.3; and Portugal’s is the highest at 36.8.

How the crisis has been building upAnother characteristic of this group of countries is the ac-ceptance 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 demo-cratic 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 con-sensus, both conservative-liberal and social democratic gov-erning 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 pro-moted by the left. The major economic thinker of Spain’s so-cialist 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 struc-tural 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 econ-omy came to a halt, the structural public deficit appeared in all its intensity. The public deficits in Portugal, Ireland,

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 expendituresThe 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 EU-15 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, bank-ing in Spain is the primary entity responsible for fiscal fraud. Mr. Botin, the coun-try’s major banker (presi-dent of Santander Bank, the third most profitable bank in the world, after two Chi-nese banks), was discovered this year to have 2,000 mil-lion euros in a Swiss bank account – not declared until two whistleblowers at the bank went to the press. Such tax avoidance is general prac-tice. 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 aroseBefore the financial crisis there was an economic crisis, largely the result of the decline in labor income as percentage of to-tal national income. The neoliberal policies developed since the 1980s (accentuated over the past 15 years, and carried out by governments of various political persuasions, includ-ing 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

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 lim-ited 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 de-regulation of banking (and deregulation of zoning laws) dur-ing 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 lo-cal 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 con-struction 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 sec-tor in the four peripheral Eurozone countries. When the bub-ble burst, the whole credit economy came to a stop.

The political origins of the public debtIn the four countries, there has been an alliance between the upper income brackets (the super-rich, rich, and upper mid-dle 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 re-lated 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 consideredThe 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, eliminat-ing 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 authori-ties). 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 manufactur-ing 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 enor-mous 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 al-lies, 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 ac-cept the huge sacrifices that the dominant classes have wanted for many years. In Spain, for example, the so-cialist government is cutting public social expenditures, which, besides adversely af-fecting 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 selec-tively 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 progres-sive democratic forces. In Spain, for example, under the fas-cist 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 cent-ers on correction of the fiscal regressiveness of the state and development of expansionary policies as a way of stimulating economic growth and job pro-duction. Sectors of the left in Spain believe this is not possi-ble, pointing to the Mitterrand case as an example of how one country cannot follow expan-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 con-trol of the major EU institutions by neoliberal dogma.

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

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

ECONOMIC OUTLOOK


Global governance in the 21st century is reminiscent of famous playwright Luigi Pi-randello’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*

the gloBal governanCe DefiCit: the theater of the absurd


ECONOMIC OUTLOOK

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 sum-mits 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 dy-namic, 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.

The 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 per-haps 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 TransformationThe Great Global Transformation got underway in the peri-od 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 centu-ry, 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 con-dition 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 illus-trates 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 physi-cally 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 ad-vanced 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 ap-pearance of the new actors - Australia, China, India, Indone-

* 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.

TRENDS


It’s a hard call made harder by power strug-gles. CEOs can force a more thoughtful de-bate by asking three critical questions.

By Andrew Campbell, Sven Kunisch, and Günter Müller-Stewens*

The chief executive of a European equipment manufac-turer 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 ap-pealing 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 in-fluential philosophy of decentralization in a series of memos during the 1920s, have recognized that badly judged cen-tralization can stifle initiative, constrain the ability to tailor products and services locally, and burden business divisions with high costs and poor service.1 Insufficient centrali-zation 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 decen-tralization 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 performance-management system. What’s more, none of the executives volunteered an orderly, analytical approach for resolving cen-tralization 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 ar-gued 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 ex-periences in the corporate trenches. It is embodied in three questions that can help stimulate new proposals, keep emerg-ing ones practical, and turn political turf battles into produc-tive conversations.

Three questionsEach 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 centrali-zation, they do not produce formulaic answers; considerable judgment is still required. They benefit companies by allow-ing 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.

to centralize or not to centralize?


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. Does 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 illus-trated by the product-management example, is how to judge whether it will do so. This point is particularly difficult be-cause corporate strategies rarely provide clarity about the ma-jor 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 diffi-cult 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 distraction- are often greater than the value created. Hence, the proposals should go forward only if the risks of these negative side ef-fects 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 opera-tions are not important to the commercial flexibility of indi-vidual 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 auto-mated cutting- and welding-equipment manufacturer, which we’ll call European Automation.

European Automation’s product-management problemSince centralized product management was clearly not man-dated, 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. Cen-tralization 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 manage-ment could lead to delays, additional costs, and uncompeti-tive 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 ma-jor cost savings.) After considerable discussion based on estimates of likely profit margins and on additional sales volumes from custom-ers 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 bet-ter. But the CEO, emboldened because the proposal passed

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 centraliza-tion 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 il-lustrates 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 review-ing product-development plans in more detail and asking for regular progress reports.

Extreme Logistics’ performance-management issueSometimes, addressing the three questions can spark mean-ingful 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 pro-posed a centralized sys-tem that would link a balanced scorecard of metrics to incentives. Knowing that the CEO supported the initia-tive, skeptical division heads nodded the pro-posal through the con-cept 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 central-izing common operating activities.

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 im-agine 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 ul-timately 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 meet-ings 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 pro-gram 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.

That conclusion led to the third question: how likely was a centralized performance-management system to cause nega-tive side effects? The proposal failed this hurdle as well. Some of the business presidents thought it would make their man-agers 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 dis-tract the corporate center from the four areas that had pre-viously been identified as places where it could add value, and from the two new initiatives -cost reduction and man-agement-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 profes-sor of strategic management at the University of St. Gallen.

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.

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SPECIAL REPORT: THE OPENING OF SOUTHERN CORRIDOR: THE KEY PLAYERS




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.

Special report: the oPening of Southern CorriDor: the Key PlayerSN. Peter KramerEditor-in-chief



Except 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 trans-port 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 as-sured reserves are estimated at 2.2 tril-lion cubic meters), and it has been cho-sen by the EU as one of the alternative sources for Europe’s “green fuel” sup-ply, aiming to limit its dependence on Russia. Furthermore, new discoveries in Azerbaijan, like the Umid gas field, cre-ate conditions for the export of far larg-er 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 govern-ment so far: the first one, a memoran-dum 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 Eu-rope. From the 3 pipeline projects, the ITGI (Interconnector Turkey-Greece-Italy) and the ΤΑΡ (Trans Adriatic Pipe-line) have a supply capacity conforming to the quantities that will be exported by Shah Deniz II. On the contrary, Nabuc-co’s planned capacity per year is 32 bcm and, in order to secure such a quantity, it must approach other countries like Turk-menistan 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 de-

pends on the selected project’s con-struction 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 Azerbai-jan’s government intends to create con-ditions 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.

InfrastructureIt must be noted that before the “South-ern Corridor” reached its invitation-to-tender 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

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



pipeline was completed. With a length of 690 km and a capacity of 9 bcm per year, that pipeline connected the net-works 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 Corri-dor”, 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 infra-structure 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 manage-able and that it can be paid off easily by the Azeri gas passage fee revenues col-lected by the network managers.

The proposals In the middle of last August, an invita-tion to tender was published, inviting each one of the ITGI, TAP and Nabuc-co 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 capac-ity 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 ana-lysts state that Nabucco aims more to gas transport from regions like Turk-menistan, North Iraq, and possibly Iran, if in the future this country’s po-litical 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 in-vestment projects is concerned, Nabucco is in a very early planning stage. Prelimi-nary studies for the examination of the grounds through which it will pass, in order to locate old ammunition and oth-er 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 Aus-tria 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 environmen-tal 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 pipe-line’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 indi-vidual projects. So far, only the realiza-tion of preliminary discussions between the ITGI and TAP consortiums (DE-PA-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, pub-licly 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 se-curing 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 con-formity to Azerbaijan’s natural gas pro-duction till 2020, and it concluded that the pipeline to be selected is the Greek-Italian ITGI for the following reasons:• It’s the simplest project. After Azerba-

ijan 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.

• Its cost is approximately 1,14 billion euros, therefore it’s an “inexpensive” choice.

• It 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 part-ners with the ITGI (DEPA-Edison).

• It has secured strong political support by all the countries involved (Azerbai-jan, Turkey, Greece, Italy).



Although Azerbaijan was known as a high-risk state in 1994, the invi-tation 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, es-pecially the Baku-Tbilisi-Ceyhan pipe-line, 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 geopoliti-cal situation in our region at the time. Despite that, foreign investors attracted major funds and international financial institutions provided support. Azerbai-jan also met all its commitments in a worthy and successful manner.Therefore, as a result of the commis-sioning of the Baku-Tbilisi-Ceyhan oil pipeline we not only accessed new mar-kets 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 pov-erty 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-Tbilisi-Ceyhan 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 com-pletely different. And not only in this sphere, but also in all others. Our suc-cesses are only a certain stage, a step for us. We always look ahead and plan our steps within the framework of a long-term 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 Azerbai-jan. 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-

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*

President aliyev: “ We are now building our energy policy on the gas factor”



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 en-ergy 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 main-taining production at a stable level.Our work in the sphere of gas markets is goal-oriented. The diversified export infrastructure we have created is serv-ing the interests of Azerbaijan and pro-vides support to neighboring markets. The construction of the Baku-Tbilisi-Erzurum gas pipeline was also a his-toric 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 pipe-line 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 pipe-line infrastructure that existed earlier. Today Azerbaijani gas is delivered to world markets in four directions. We are exporting gas to neighboring coun-tries, 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 di-rection. 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 tak-en. 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 neces-sary 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 situa-tion we successfully managed to imple-ment more complex projects. There-fore, 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 confi-dently 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 de-velopments 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 Euro-pean Union and Azerbaijan in January, while the second was the discovery by Az-erbaijani oil workers of a major gas field Umid. This, above all, is an indication that we have other large reserves in addi-tion 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 experi-ence of our oil workers and the experi-ence gained from cooperation with for-eign 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 en-ergy 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 con-sumers, 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 be-tween the European Union and Azerbai-jan. This group includes potential inves-tors, consumers and producers.Azerbaijan is a fully self-sufficient country. Our foreign exchange reserves are grow-ing. Currently, their level has reached al-most $35 billion. Our economy is grow-ing, 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.



The natural gas Interconnector Azerbaijan - Turkey - Greece - Italy (ITGI) possesses a major-

ity of strategic advantages for the trans-port 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 prepara-tory steps were taken on the political, technical and financial level, whereas its business partners, the Public Gas Cor-poration of Greece-DEPA and the Ital-ian 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 produc-ers of the Shah Deniz II field, ensure low transport cost, security, quick com-pletion, 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 sec-tion, 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 Ital-ian shore in the Otranto area. The pipe-line’s total length, the fact that it crosses only one country, Greece, before reach-ing Italy, and its cost, estimated at 1.4 billion euros, offer to the ITGI the char-acteristics of the most inexpensive and safest solution for Azerbaijan’s natural gas

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 Reconstruc-tion Plan (Directive 663/09).The following preparatory steps have already been carried out:• Since 2007, the 300 km long Greek-

Turkish Karatsabe-Komotini pipe-line, 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 au-thorities provided the environmental authorizations for the overland and underwater parts of the pipeline.

• In April 2010, an agreement was signed between “Poseidon” and IN-TECSEA-IV OIL & GAS Consorti-um for the preparation of the under-water pipeline’s study (FEED).

• In July 2010, a memorandum of co-operation was signed between “Posei-don” and the Hellenic Gas Transmis-sion System Operator-DESFA, for

coordination of the activities related to the two systems’ interconnection.

• In January 2011, Fugro Geoconsult-ing Ltd. was assigned and it already carries out the seabed’s detailed ma-rine survey for the passage of the un-derwater pipeline.

• The “Poseidon” company invited ten-ders for the supply of steel pipes for the underwater pipeline and it pre-pared a short list for selection of sup-pliers, 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 Az-erbaijan’s gas through the ITGI.

The above facts prove the project’s high degree of maturity, which no other simi-lar project from those competing for the Azeri gas’ “Southern Corridor”, possess-es. 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.

interconnector turkey - greece - italy(itgi): a mature project may open the way

for the Southern Corridor



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 ef-fective 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 pipe-line 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 Posei-don interconnector between Greece and

Italy, additional gas from North Africa could be transited on to Bulgaria and the rest of Southern Europe. With the loom-ing prospect of gas cut-offs from tradi-tional supply routes, it makes little sense to limit Southern Europe’s supply op-tions. 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 up-grade through the use of an added com-pressor can provide Italy up to 16 bcma and through IGB up to 5 bcma for Bul-garia and the rest of CE Europe. There-fore, 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 Az-eri 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 Cor-ridor 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

“ 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.



and Southeastern European markets. Ad-ditionally ITGI’s detailed marine survey has been completed, the Front End En-gineering 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 environmen-tal 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 not-ing also that ITGI is the most technically advanced project enabling ITGI to have a high degree of certainty in its cost esti-mates 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 fi-nancial 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 pipe-line 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 co-finance the project up to €145 million, through the E.E.P.R. framework. ITGI is very comfortable that it has the financ-

ing in place for the project. Financing a gas pipeline is based upon the availability of the gas, ready customers, certainty of cost estimates and the payment of tran-sit fees, all of which our investors recog-nise ITGI has, insulating ITGI from the issues of the Greek debt situation. ITGI has secured co financing from the Eu-ropean Commission of up to of €145 million for Posei-don and IGB and IGI Poseidon has already at least 17 perspective buyers showing interest in capac-ity rights with ITGI. In terms of DEPA itself it can cover its own funding of the project; its net profits were €90 million in 2010, €100 million euros in the first quarter or six months? of 2011 and they are estimated at approximately €200 million euros for the entire 2011. As a Group we have no problem at all to finance the ITGI project, and I don’t think there are any competition issues regarding those matters.

From time to time, we have seen state-ments regarding a possible coopera-tion between competing projects for the Southern Corridor. What is your view on this?We’ve always said we’re open to discus-sions about merging pipeline projects but this is a commercial decision that must be taken in concert with the SD2 consortium as it may affect the price achieved for SD2 gas. So, at the moment, we’re concentrat-ing on the ITGI system which will deliver commercial value to the SD2 consortium and energy security for Europe. For coop-eration to exist, the parties involved must have common goals and it must ensure that mutual profits will ensue for both sides. We believe that some kind of cooperation with the Nabucco consortium may result based on the above. Our view is the fol-lowing, Nabucco is planning to transport gas to Europe, but it requires quantities exceeding 30 bcm. Since a pipeline of such size and cost cannot be depreciated by less quantities. DEPA and several independ-ent experts too, believe that it’s impossible to secure such quantities in the near future from one source only i.e. Azerbaijan which

currently is the most accessible source, even if new gas fields like Absheron are pushed to come online on time. There is no opportunity to support a large pipeline today. The only gas available today for several years will be the 10bcm from Shah Deniz II which matches perfectly ITGI’s capacity. The reality today is that for all the new, larger discoveries of gas being an-

nounced, no new gas will be avail-able before 2021. ITGI welcomes these larger finds because they increase Euro-pean energy se-curity and make

Nabucco more likely through offering Europe 40m bcm. In the first phase, we shall transfer 12 bcm through ITGI to It-aly and through Italy’s network to Austria, as well as 5 bcm to Bulgaria through the IGB pipeline. As you may know, the EU proposes the construction of interconnec-tors similar to the IGB in the South East Europe region, specifically between Bul-garia – Romania, Bulgaria – Serbia, and Romania - Hungary. The cost of those pipelines is very low, whereas all the above-mentioned countries will be able to secure natural gas from Azerbaijan through the IGB, but also from the LNG spot market through the Greek pipeline network. This entire system of interfrontier energy con-nections will supply at least 5 bcm per year to the Southeastern European markets from diversified sources, utilizing the exist-ing networks implementing interventions of minimal cost. To conclude, what we are saying is that the “Southern Corridor” should initially open through the ITGI, due to the gas quantities it has secured and its low cost.

Socar has imposed a number of cri-teria for the selection of the project that will eventually transfer the gas from Azerbaijan to Europe. Which is the most important attribute of ITGI in your opinion that will make the project more attractive to the Shah Deniz Consortium?If you were in the position of Azerbai-jan’s government, SOCAR, or the Shah Deniz II consortium and you intended to export 10-12 bcm of natural gas to

In short, the project begins tomorrow if we get the green light from the Shah Deniz II and Socar consortium.



Europe, what would you look for? Defi-nitely you would need to have secure exports, unaffected by all kinds of risks, a competitive gas price for the European market, gas sales to as many region-mar-kets as possible, avoidance of delay in deliveries, to have a say in the transport of your product and possibly, to be able to sell some additional quantities with-out the requirement of new, big invest-ments. We believe that the ITGI covers all those requirements of a producer. We believe ITGI is a reliable partner to the Azeri government and our proposal is built to recognize the country’s aspira-tions. Our focus is to help the Azeri’s maximize revenue and sell gas to the nearest markets as it becomes available. ITGI allows more profitability also for the Azeri’s Shah Deniz II gas due to our target markets proximity to Azerbaijan. Our pipeline passes through EU coun-tries only, where European directives for network management are in effect. On the other hand, ΤΑΡ passes through Albania, which is not an EU country, before it reaches Ita-ly. As for Nabucco, it passes through three EU countries before it reaches Austria and that may involve difficulties in the acquisition of environmental licenses etc. What I mean is that the ITGI is the simplest and cheapest project, therefore it ensures the best delivery price to the gas produc-ers, compared to other more complex and expensive projects. ITGI is a system whose construction may begin imme-diately and I don’t believe that there is another pipeline, which has secured its management terms from the EU, carried out detailed studies concerning the me-chanical and environmental issues and that has acquired the necessary licenses from the competent state authorities.

Finally there is not another pipeline that not only has invited tenders but has also received offers for the supply of the pipes that will be cast on the seabed, as “Posei-don S.A.” has done.

To which extent, is the realization of ITGI relevant to DEPA’s business plans for expanding in the region? The realization of an energy infrastruc-ture project such as the ITGI offers im-portant business opportunities to DEPA as an active natural gas company in the region. During its course, the pipe-line crosses the entire northern part of Greece, i.e. the regions of Thrace, where the Greek-Turkish borders exist, Mac-edonia and Epirus, before it reaches the Ionian Sea shores. It follows the Roman Via Egnatia that connected the Adri-atic Sea with the empire’s eastern prov-inces. Bulgaria, FYROM and Albania are situated north of the pipeline and the Aegean Sea south of it. The existing

pipeline that serves the Greek network, covers half of that route, i.e. from the Greek-Turkish borders till Thes-saloniki; from there it continues towards

Southern Greece. The regions of Epirus and Western Macedonia will gain ac-cess to natural gas when the ITGI will be constructed, whereas the pipeline is very close to the Greek-Albanian border. On one hand, DEPA will be able to set up new companies that will supply gas to those areas and, on the other hand, Albania may obtain natural gas from DEPA through the Greek network, if it’s in its best interest. The works for the IGB pipeline to Bulgaria have al-ready begun and FYROM may receive gas through the Greek network since the route through Greece is much smoother compared to routes passing through its other neighboring countries. Initially, DEPA will supply its neighboring coun-tries, like Bulgaria, with Azeri gas and gas from the LNG spot market. The LNG terminal on Revithoussa Island with an annual capacity of 5 bcm, which will rise by 40% after two years due to an up-grade in progress, is already integrated 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 approxi-mately 600 mcm use-ful capacity. In other words, in the area of Northern Greece, from where the ITGI passes, there will be available gas of Rus-sian origin through the existing network, Azeri gas, spot market gas from the LNG Terminals and gas from the un-derground 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 col-lected 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 un-derground 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 Az-eri gas to Europe and ensuring European energy security. ITGI is ready to go.

“ ITGI - A proposal that will serve EU’s goals and Azeris interests”.

The ITGI system is scalabe from 10 to 21 bcma.

ITGI is the most advanced and cost effective Southern Gas Corridor Project, offering the quickest gas route to market.



“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 Cor-ridor, but will also have a profound and lasting impact on Europe’s en-ergy security.”TAP is in a strong position at this criti-cally important stage and we remain optimistic of the outcome. In addition to being technically viable, safe and of-fering 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 in-tegral to the EU’s energy policy. TAP has several features that enhance Eu-rope’s energy security. These include the possibility to physically reverse

gas flow in the event of an emergency, develop storage opportunities in Al-bania, 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 Az-erbaijan during the first phase, while accommodating additional supplies as they come on stream.Europe’s energy security does not sim-ply require political will and consensus. In these challenging economic times, when decisions are subject to unprec-edented 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 re-newed 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 proc-ess is transparent and takes place on a level playing field, without fear or fa-vour, 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 ini-tiatives, must be based on sound com-mercial and technical principles.Our continued adherence to the high-est environmental, social and technical standards will ensure that TAP contin-ues 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 Institu-tions (IFIs) and bank financiers.

“ 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)



Azerbaijan’s state energy company has announced the discovery of major natural gas reserves off the coun-

try’s Caspian coast: the Absheron field. Nabucco spokesperson Christian Dolezal told EurActiv that the pipe-line 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 to-tal proven gas reserves to 2.55 trillion cubic metres, according to Yusifzade.

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* Sen-ior Editor Georgi Gotev.

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 devel-oping 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 sharehold-ers. 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 do-ing to improve its chances for the bid?Nabucco is the most competitive and most developed project in the southern corridor. Nabucco offers maximum le-

gal comfort with the Intergovernmental Agreement, which is a treaty, and the bilat-eral Project Support Agreement. Nabucco is proceeding with the environmental and social impact assessments, and we’ll en-hance negotiations with the lenders.

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

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 re-cently 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.

nabucco looks

to newly-discovered

azeri gas * Based on independency and close mu-tual co-operation, the EurActiv Net-work delivers localised EU policy in-formation in 15 languages, reaching readers across Europe and beyond. The co-branded partner publications produce content in Brussels (Bel-gium), 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 EurAc-tiv at www.euractiv.com



With Group sales of EUR 23.32 bn and a workforce of 31,398 employees in 2010,

OMV Aktiengesellschaft is one of Aus-tria’s largest listed industrial companies. As the leading energy Group in Central and Southeastern Europe, OMV is ac-tive in Refining & Marketing (R&M) in 13 countries. In Exploration & Pro-duction (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 impor-tant gas hubs in Continental Europe.The Group further strengthened its

leading position in Central and South-eastern Europe through the acquisi-tion 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 com-bines 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 Cen-tral and Eastern Europe, Southeast Eu-rope and Turkey. OMV uses the syner-gies 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 Explo-ration 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.

omv - the leading energy group in Central and Southeastern europe

Chairman and CEO of OMV, Mr. Gerhard Roiss



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

The European Commission has adopted a Communication on se-curity of energy supply and inter-

national 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 priori-ties 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 set-ting up an information exchange mecha-nism 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 cre-ating legal certainty for investment.

BackgroundThe 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 pro-ducing 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 Commu-nication proposes to enhance the exter-nal dimension of the EU energy policy through improving transparency among EU Member States on their energy agree-ments with third countries, strength-ening coordination when approaching partner countries, when taking position in international organisations, and when developing comprehensive energy part-nerships with key partner countries.The strategy lists 43 concrete actions which include notably:• Member 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 coun-tries 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.

• The 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 En-ergy Agency (IAEA), and will aim to extend nuclear safety assessments to EU neighbouring countries.

• The EU development policy will in-clude a greater emphasis on improving access to sustainable energy for the least developed and developing countries.Günther Oettinger,

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, Ire-land, 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.

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 KramerEditor-in-chief European Business Review



Andrus Ansip, prime minister of Es-tonia, 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 envi-ronment 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 expens-es 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 Un-ion, 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 succes-sively joined the board of Rahvapank (People’s Bank); became a bankruptcy trustee of the Tartu Commercial Bank, chairman of the fund manager Fondi-juhtide, then chairman of Livonia Pri-vatization 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 Bal-tic 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 register-ing a company to completing a tax return, from buying a virtual bus or tram ticket, which the ticket inspector can check elec-tronically, 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 sup-porter 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 Es-tonians 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 min-ister is surprisingly fanatical about balanced budgets. Although he stops short of criticis-ing the Greek or any other government, he makes it clear that economic practices of southern European countries are very differ-ent 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 Esto-nian 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 com-pared with more than 120% in Greece.

frugal estonia’s digital route to recovery

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.

By Hugh O’Shaughnessy



A 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 insur-ance 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, Es-tonia 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 world-wide economic and financial crisis the Estonians seem rela-tively 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 en-joy 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 con-nected 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.

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 brilliant-ly combined with the most futuristic e-so-ciety. Coming from a 68% Estonian and a 25% Russian background, Estonia is hav-ing 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, Esto-nian Tallinn offers something for all.

e-Stonia,a connected country!

By Niels Schreuder*



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 employ-ees 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 real-time 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-devel-oped ID card system was presented to us as well as other ex-amples 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 solu-tions including e-voting to sell to other countries, IT teach-ing processes as well as ICT technological solutions for bet-ter 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 contem-porain art museum, Kumu. The difficult Finno-Ugric lan-guage 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 con-nectivity are infectious. We recommend visiting Tallinn and promised Estonia to keep connected!

* Niels Schreuder is a Brussels-based EU observer.



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 Esto-nia 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 consid-eration 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 be-cause 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, ex-plaining the reason why he was re-elected in March. He thereby became the first Estonian prime minister to defend his seat since the country re-gained its independence in 1991.

“ 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 fin-ish 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 moth-er of three small children.

“ It takes 18 minutes to establish a new com-pany with the help of the electronic system of public administration. There were com-petitions when somebody did it in 15”

- Indrek Vimberg, head of ICT Demo Center, a showcase for Estonian high tech.

“ We have splendid technicians and design-ers, but the problem is marketing and pres-entation. 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 Esto-nian IT company, complaining about the lack of qualified employees.

“Estonians hardly use credit cards”- Vimberg, explaining Estonians’ reluc-

tance 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 soft-ware 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 rela-tions 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.

eStonia’S SuCCeSS Story: the Short version

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



Since the beginning of this year, Estonia is the young-est 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 stand-ing recently to A+, while the neighbours both hanging on triple B. What is causing Estonia’s rise?

by N. Peter Kramer

Don’t tell Estonians that they live in a small European coun-try. Estonia is larger than Den-

mark, The Netherlands or Switzerland and has more than twice the size of Slov-enia. 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 favour-able location at the Baltic Sea. The capi-tal Tallinn played a long time a major role in the Hanseatic League, rich and famous by trade and export! Estonia has known more economical cri-ses in the past. Many Estonians remem-ber when the Russians stopped the eco-nomical and energy relation in 1997-8. ‘It has brought us experience how to sur-vive and how to build a new position’, ac-cording 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 remark-ably with 26% in the same period. The

booming production of mobile phones by Ericsson, the country’s largest export-er, is of course a significant factor. ‘But it is not only the export growth, the recov-ery is broader based. The recession made consumers turn to local products’. During the crisis in 2008, the Estonian government choose for internal devalu-ation by a fiscal adjustment of 9% of GDP and cuts in nominal wages. But inflation became such a serious prob-lem, that the European Central Bank gave a negative advice for Estonia’s entry in the Eurozone. Luckily for Es-tonia, 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, fol-lowed 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 in-dependence 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 gov-ernment rankings. Two major power stations, relying on the extensive depos-its of oil shale, make a vital contribu-tion to Estonia’s energy independence. Adoption of innovative IT applications, in the private and public sector, brings fame to the country. Estonians are ac-customed to e-banking, web-based tax declarations and voting at elections us-ing a digital ID card. Now these e-solu-tions have become articles for export.The Economist wrote ‘the go-ahead Estonians are scenting the next chal-lenge. 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 impres-sive and amazing with an open culture. Don’t underestimate it!

eStonia: goodbye to eastern europe and welcome to the north?



by Anthony Robinson*

Estonia pressed on with its Euro conversion timetable despite the sickening drop in trade and economic ac-tivity 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 Euro-entry 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.

Ansip heads a three party coalition government which react-ed 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 Swe-den 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 dysfunc-tional rouble in order to join a dysfunctional Euro however and its leaders have clear views on how Euro zone govern-ments should operate. It is far more than a question of finan-cial adjustment. Finance Minister Jurgen Ligi acknowledges that the programme for Portugal is “not bad” but argues that

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.

eStonia: small country, big ambitions.



Greece is the biggest problem because it reflects a wider cri-sis 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 minor-ity is around 25 per cent – heavily concentrated in the capital Tallinn and in the eastern border city of Narva and the sur-rounding region. A few are descendants of 18th century dis-sident Orthodox “Old Believers.” and others who came to Es-tonia 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 work-ing, 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 un-likely 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 suc-ceed and a strategic vision. Estonia was the smallest and least populated province of the former Soviet Empire, while Kaza-khstan’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 Kaza-khstan 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 in-terest in tiny Estonia as he made his first official state visit at the head of what local officials described as “an enormous del-egation.” While the Kazakhs sought tips to modernize their administration their Estonian hosts were impressed by the en-ergy, 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 gar-rison town of Almaty, then the Kazakh capi-tal, 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 dump-ing grounds. Millions of Balts, Poles, Volga Germans, Chechens and other undesirables were jammed into cattle trucks and off-loaded onto the alternately freezing or searing Kazakh steppe.Among them were the cream of the Baltic and Polish intel-ligentsia, arrested, interrogated and shipped east in the brief in-ternal 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 independ-ence-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 fer-ries, 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 pipe-lines 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 di-versify 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 ad-ministrative efficiency reflects his recognition of Estonia’s po-tential contribution to Kazakhstan’s own modernization.

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

LEADERSHIP


priority is to keep our team intact. Our only hope of avoid-ing 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 conclud-ed: “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, cus-tomers, suppliers, or partners you want to influence are sub-ject 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

Most leaders secretly wish for a magic wand, or some supernatural power that would allow them to do something mere mortals can’t. While many lead-

ers 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 con-ditions. 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

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*


LEADERSHIP

comes in. Most of our attempts to lead change draw on a sin-gle 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 ex-periment at our Change Anything Labs at the foot of the Wa-satch 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 low-budget 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 disap-pointment. 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.

You’re SurroundedSo 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 influ-ence 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 thor-ough 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.

• Social Ability In the second group, one of the confederates provided criti-

cal 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 en-tirely 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-inter-est!” 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.

* 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.

LEADERSHIP


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

Fuel prices are climbing. Your company’s stock price is slipping and so is staff morale. The computer is freez-ing 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 pres-sure that an every day manager faces may seem unbearable.“We used to think of pressure as this random acute phenom-enon 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 ex-ecutive 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 productiv-ity, absenteeism and turnover.Managers and executives share this load - but some have de-veloped an ability to thrive in an intense, competitive, fast-

What makes an ideal Crisis manager?


LEADERSHIP

changing environment. Such people know how to bring out the best in their teams during a crisis.“The people who are going to thrive in the future are those who can use this pressure to excel, as oxygen. People who have translated very difficult circumstances into opportu-nity,” says Justin Menkes, author of the recently published book Better Under Pressure.Menkes’ book is based on his work with corporate boards as they evaluate, test and consider who to hire or promote as their next CEO. Menkes, who is a consultant with executive search firm Spencer Stuart, gathered evaluations of 150 CEO candidates to isolate the behaviors that the top-performing quartile exhibited and the bottom quartile lacked. After five years of research, he found three key consistent characteristics that the best leaders display:1. Realistic optimism. The exceptional leaders demonstrated

an ability to understand the actual circumstances of a crisis and see a chance to excel. Managers must “have a passion for confronting reality,” Menkes writes in his book, referring to a pragmatic mindset. “You have to show you’re staring into the sun with them; you’re aware of the risks,” he says.

2. Finding order in chaos. This com-bines calmness, clarity of thought and a drive to fix the situation. It re-quires practice to stay clear-eyed and fearless when the world is tipping. It also requires zeal to solve a puzzle by engaging your staff.

3. Subservience to purpose or cor-porate goals. This commitment to the higher calling or the greater good

can make a huge difference. Effective leaders channel staff-ers’ “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 opportu-nity 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 rendered stupid in the right set of circumstances,” he says. If they don’t learn to manage pressure and stress, they may lose their ability to lead or even think at a crucial moment.Temin, the crisis management executive, sees many such ex-ecutives. “Very few people have all the skills” to manage a huge meltdown, she says. Those skills include stamina, a clear view of the situation and “the ability to focus themselves full bore on the problems at hand.”Executives with honesty and “a spirit of improvisation” may do well under extreme pressure, she says. “That uncanny abil-ity to improvise... gets you through a huge amount.”So how do executives develop into a calm problem solver and realistic optimist?Some companies offer programs or assignments that help their managers develop these qualities, Menkes says. Such programs often increase a manager’s responsibilities and pressure at a steady, measured rate. Others managers develop these qualities by themselves or with the help of a mentor.

Temin runs occasional “crisis games” with executives so they can role-play scenarios and discover how they react to upheaval.Executive coach John Hamm says that managers should remember to recall what makes them talented and take the time to trust themselves and their team. As an executive coach, he sees managers collapse several issues into one large mess, so he often asks them to remove the emotion, the anxiety and start untangling things, bit by bit. He asks them to use facts to fight off fear. “How do we allow the pressure to call us to a higher ground?” he asks.

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.

BUSINESS TIPS


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

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)

in marketing, a few Bad Words Can Be a good thing how positive impressions get bolstered by bits of negativity.


BUSINESS TIPS

Previous 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 ef-fect,” 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 judg-ments. In fact, in line with previous psychological research, the act of thinking again about the good aspects of the prod-uct 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 evalu-ate 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 move-ments, 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 informa-tion 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 in-formation 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 of-fered 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 hik-ing 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 sug-gests that when a product’s defect is minor or peripheral to the core values of the brand, marketers should consider highlight-ing that disadvantage in some situations. Given the flood of in-formation 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, mar-keters should exert their influence in online advertising or reviews because consumers typically scan these quickly or be-come 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 at-tributes. Marketers should embrace, rather than fight, nega-tive remarks by incorporating them into online advertising and other settings that target unfocused consumers.

BUSINESS TIPS


She had attempted to motivate employees and be clear about the strategy, but she was falling short and was look-ing 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 communica-tions, 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 day-to-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 differ-ent 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-

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 materi-als 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 priori-tized 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 in-troducing a new initiative that relates to your strategy. The content should demonstrate progress against goals, show-case 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 de-cisions 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 execu-tion, 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.

A frustrated CEO recently shared with me that her employees had lost their edge. They were internally focused, their speed-to-market 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*

Ways to Communicate your Strategy more effectively8


BUSINESS TIPS

• Reinforce. It isn’t enough to explain the connection be-tween your company’s purpose and its strategy - and be-tween 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 CEO-delivered message. And don’t disappear.

Often corporate communications has a strictly top-down ap-proach. I’ve found that dialogue at the grassroots is just as important, if not more so. Employees are more likely to be-lieve 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, well-regarded leaders. Another mistake is the “big launch event and disappear” approach. Instead, integrate regular com-munications into employee’s daily routines through detailed planning against the messages mapped in your Inspire/Edu-cate/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 com-munication 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 mean-ing. Authentic messages from you will help employees see the challenges and opportunities as you see them and under-stand and care about the direction in which you’re trying to take the company.

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 understand-ing of the behaviors that you want to encourage and enhance versus those that pose risks. Collectively these stories and con-versations will be a strong influence on positive culture-building behavior that relates to your core purpose and strategic goals.

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 larg-est expense to the company. They often com-municate 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 in-ternal 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 understand-ing, 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.

* Georgia Everse is a communications and marketing executive with 30 years of experience and a proven track record of find-ing 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 In-novation Management. She is currently a partner with Gen-esis Inc., a brand, strategy and communications consultancy.

FROM EAST TO WEST


“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 re-tired military leaders as Senator John McCain, CIA Di-rector 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 con-ducted under the rules of the U.S. Army Field Manual.According to Amnesty International, “Information ob-tained 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 Unit-ed States. Suspected Al Qaeda trainer Ibn al-Shaykh al-Libi 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 re-veals that Cheney opposed a federal rescue of the auto industry. “I had continued throughout my career to be philosophically opposed to bailing out specific compa-nies 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 Min-istry of Culture issued a new list of 100 banned songs, including such Western artists as Britney Spears, Beyon-cé, Canada’s Simple Plan, Katy Perry, Take That, Back-street Boys and Lady Gaga, as well as Taiwan’s Chang Hui-mei, who sang the Taiwan anthem at the inaugura-tion of former President Chen Shui-bian in 2000. It started when Björk chanted “Tibet! Tibet!” during a performance in Shanghai in 2008, during “Declare In-dependence.” After her controversial actions, the Chi-nese Government has become more cautious when con-sidering music artists. Since 2010, all songs posted on music websites are required to receive prior approval, “in accordance with the Interim Provisions on Admin-istration 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 Phono-graphic Industry, music pirating is so prevalent in Chi-na that 95% of music sales are of pirated copies.

Modified Ecstasy holds promise as blood cancer treatment

Ecstasy, the illegal psychoactive drug, which was popular-ized 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-engi-neered MDMA -the scientific name for Ecstasy- adding different molecular groups to increase its tumor-fighting

properties. The modified version, attracted to the fats in the cell walls of blood-cancer cells, was found to be 100-fold 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 im-provement in treatments in years to come.”

from east to West By Gianni Skaragas


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 gov-ernment 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-coloniza-tion 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 de-struction and anarchy which has descended on the Lib-yan 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 West-ern 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 in-dependent 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 qual-ity 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 divi-sions, Goldman Sachs, JPMorgan, Citigroup, Barclays, Nomura Holdings, Société Générale S.A, HSBC Hold-ings, Credit Suisse and Deutsche Bank.“Defendants falsely represented that the underlying mort-gage 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 can-not function if sellers of securities fail to fulfill a legal responsibility to accurately represent the characteristics of certain investments.

LAST PAGE


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 Com-merciales (AIESEC) or the Erasmus Student Network (ESN). The atmosphere of the whole event was both serious and easy-go-ing. 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 ac-tivities 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 re-served 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 ex-pressed their desire for the event to be organized next year in an-other 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 impor-tant 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 citi-zens together for a brighter future! Let’s Think Young!

The 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 peo-ple 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”. Ap-plied 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 activi-

ties in Turin are not that revolutionary. The goal was to gather 500 young people, allow them to in-teract with one another and discuss various Eu-ropean 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 accommoda-tion, 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-

haPPy BirthDay italy, a multicultural youth event

By Agnès Quatrevaux*

* Agnès Quatrevaux is project manager of the think tank THINK YOUNG www.thinkyoung.eu

Note: 1) Massimo d’Azeglio’s quote

EBR September - October 2011

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