Professor François Heisbourg
Thank you very much Igor, and particular thanks for having remind us at the very end about the speed of which old ways can resume. Let me take a first round of questions. I will have to recognise Carl Bildt as I have primed him.
Fleur de Villiers, Chairman of the IISS Board of Trustees
My question is really directed to Dr Kampeter. There is an old English phrase that states that he who pays the piper calls the tune. We know that German was probably the largest payer – and I began to discern in what Dr Kampeter had to say some of the notes of the emerging tune. We have all acknowledged that Europe looked into the abyss and contemplated the end of the eurozone. Then, lead by Germany, paid the ransom for its continued life. However, there was another price that had to be paid, and as I say, I heard some of the notes of this tune in Dr Kampeter’s address. Defaulting states. You made clear political integration is a very short step from economic integration that obviously segueing into policy integration. I believe that Robert Skidelsky quite rightly pointed out the difficulties this poses when still faced by a huge democratic deficit in Europe. He warned of a peasant revolt – which, whether by the leaders of those states or by its people, still remains moot. To get back to my question, will those that cannot or will not pay their bar bill either leave the club or be asked to do so? If so, what will happen to the future of the EU then?
Richard Cooper, Maurits C Boas Professor of International Economics, Harvard University
I want to make an observation which is prompted by one of the many interesting things that Dr Kampeter said. If I understood him correctly, he endorsed with approval the newly agreed G20 mutual assessment with respect to global balances and their reduction. In a way it has become a cliché that global imbalances – meaning current account imbalances – need to be reduced. I would just like to offer my judgement that there is a deep inconsistency between a globalised financial market – which most people in the financial community say they want – and under control lower global current account imbalances. I think we need to work through the analysis of that much more carefully. My own view is that with a truly globalised financial market we are going to see large and sometimes ongoing imbalances much larger than we are historically used to. We need to either get used to that idea or if we do not like it, review in a way that, though there are hints of it in the staff papers of the IMF, no one has suggested so far. That is breaking up the globalised capital market. To return to Dr Kampeter’s statement, I think that the G20 needs to get analysis right before they give us what otherwise may be incoherent guidelines.
Khalid Ibrahim ElSaied Emara, Deputy-Assistant Foreign Minister for International Economic Relations, Egypt
The history of the EU and integration in Europe has actually been a series of crises that has lead to deeper integration among member states. Obviously this time, it is the economic crisis that is unveiling itself in Europe. My question goes to Dr Kampeter and Lord Skidelsky. Is there going to be a real political fallout from this very deep crisis? We basically have 23 out of 27 member states beyond the growth and stability pact guidelines in terms of deficit, so everybody is running beyond what has been agreed in terms of monetary union allowed deficits. To me there is a democratic issue of accountability. As we have seen in Greece. And may see in other places, citizens are questioning whether their confidence was in the right place, having politicians run, what I would call, an unsustainable economic policy for a long time. We are coming to realise that many of the books have been cooked in much the same way as happened in companies and lead to the deep financial and economic crisis that the World has seen in the last few years. The political price for all of this is paid by the democratic systems - that are themselves an important tool of economic and political integration in Europe. Thank you.
Nader Mousavizadeh, Managing Director, Archipelago Partners; former Executive Director, Goldman Sachs International; Consulting Senior Fellow, IISS
Thank you. This is a question for both Dr Kampeter and also Lord Skidelsky. It relates simply to the phrase being bandied about which is, “too big to bail” – with specific reference to Spain. My question is not so much in terms of economic ability or capacity, because with Germany going in and expecting to bail Greece out at 60 and coming out at 750, it is very hard to know what the ultimate number is – either there or for Spain or any other country. Really my question is whether it is politically possible - from a democratic deficit perspective - of the North-South divide in Europe and what is a price that is too high to pay for saving the eurozone? When will Germany and other northern European countries say it is not worth it.
Carl Bildt, Minister for Foreign Affairs, Sweden
I did not have a question so much as a couple of comments for Lord Skidelsky who had a brilliant but rather provocative view of Europe. I think it was meant to be provocative. I was interested by diving Europe up into different parts, which I think is relevant because they are somewhat different. I was somewhat irritated that northern Europe ceased to exist because that is where I come from and of course if you look at economic performance and the European economy - if you take the northern European economies and add them together we are combined the ninth biggest economy in the world. If you take any of the indices of competitiveness or networks and so on, we are top of the world as well as top of Europe. As such, it is a part of Europe that cannot be taken out of Europe when discussing the future of Europe. My second remark is the lack of military power. I do not think this is the subject here, but also not entirely irrelevant. As you said, we are no longer a fighting machine, which I do not think is necessarily a bad thing. We stopped fighting each other. Mr Yurgen’s county no longer remains large divisions in the heart of Europe and we no longer have to have the mass armies of the past in order to defend ourselves against the possibility of a Soviet invasion. I would argue that we still have force enough to defend ourselves against any conceivable threat and if you add the modern tactical firepower of the Eurofighters, the Rafales and the Gripens, we probably have more than we need in order to defend ourselves. Perhaps we do not have enough expeditionary forces, but we do have some and things are going in the right direction.
On the Euro, which is the issue of the day, the motive for creating it was different in different cases. Sweden is not a member of the Euro, but we benefit from it. The main benefit from the Euro, and why it will be preserved, is that I believe it to be the pre-condition for preserving the single market. What we faced in the 1980s and early 1990s was the risk of competitive of forced or evaluations de facto, unravelling the single market. That would have been devastating. During the crisis we have seen a reserved currency stability in Europe. This is something we did not have in the past, which I believe, is the basis for both political integration and competitiveness in the future. Of course, what has happened is that we have had a mismanagement, a cooking of the books as someone said, Enron-type activities in a couple of countries of the south. Well, the US economy dealt with its Enron and we will deal with ours. I fail to see that this will, in essence, unravel the motives, the foundation, or the political support for the Euro.
Professor François Heisbourg
I will now return to the panel before doing a second round from the floor. Steffen would you like to go first as many of the questions were addressed to you.
Steffen Kampeter
First of all, thank you to Carl Bildt who has saved some time. I would like to answer some misinterpretations. First of all, Europe is not only an economic, but also a political concept. In my statement I pointed out the basic ideas of Europe: freedom, respect for the rule of law, solidarity and competitiveness. These are the driving forces of the European political and economic integration, for which the Euro is an instrument. We are not building this instrument for economic reasons. A good story is Helmut Kohl, one of the architects of the Euro and a historian. When you came to him with economic arguments – which are of course, in favour of a common currency – he was not so interested. For him, the Euro was a political instrument to make European integration irreversible. Without the Euro, some would have said let us throw Greece out. However, Greece is a member of the European family because of the values they are representing. Therefore, if you misunderstand the Euro to be a fundamentally economic concept, you misunderstand the European idea of integration. Many of these questions showed that I had to make that clear.
Secondly, regarding the democratic deficit within Europe. Carl Bildt may contradict me, but we are in the Lisbon Treaty regime now. Most of the criticism I hear against the democratic deficit is based on an analysis made before the Lisbon Treaty. We now have a further development of political and democratic participation in the EU. Under the new regime of the Lisbon Treaty, I would not accept without contradiction that there is a democratic deficit. I will leave that to a European politician, but I see a large amount of progress – including international representation of the Eurozone. There may be some across the Atlantic who do not accept this new regime at present, nut nevertheless, Europe has improved and is more democratic than it was before the Lisbon Treaty. We now have an effective parliament, but I admit we did not have sound principles for fiscal policies. Therefore, I believe the last weekend was okay – we formed something like a European stability agency. Germany and France were the driving forces. And the principles are that we give aid to the weaker countries that is much stronger and intense than the actual Stability and Growth Pact (SGP) regime. We are fighting with stronger means, for the stability and sound fiscal policies, than we have before.
We have to improve this. Wolfgang Schäuble, the German Finance Minister, made some proposals that included an international state insolvency regime. I do not see the possibility of letting dozens of states fail now because we do not have an insolvency regime for states. Some members of states that have experienced that may give some hints on whether it is a positive development to represent a default state, so please comment on it. We need an orderly structure. We have to react to the crisis we have today with the regimes that we have now. However, I see further necessities.
There was one more misunderstanding. Germany is not the paycheque of Europe, we are the one most profiting from Europe. The German population thinks that we are always paying Europe. That is ridiculous. Germany exports on third of its economic capacity. The majority of it within the eurozone and the EU. One third of German employment is based on exports so, the country that profits most of the European economic integration is Germany. Sometimes, if you want to profit, you have to invest if you want to have a stabilised political or economic development. I do not want to change that. I do not wish to become a smaller economy in Europe and tell my population that I am less important. It may sound cheaper but I want to remain strong economic power within Europe with partners with whom I try to solve the problem.
Those are some of the issues I was addressing and I hope that some misinterpretations of Europe have been answered.
Robert Skidelsky
I have three comments. Will the financial crisis give the EU the necessary political push? Well, that has been the official doctrine all the way through. That you start with flawed systems and when they are revealed they produce an impetus for further development. It used to be called the Functional Theory of European Integration, but there is a limit to that. The push does not always come because the divisions are too big and there is no will to create a European state. I appears that nations in the EU are too jealous of their sovereignty. As a result, there comes a limit to how much you can push and these crises may not be overcome by incremental political pushing. That is the position I start from.
Secondly – and I think this was Mr Mousavizadeh’s question – when will Germany stop paying? Well, Germany is not the only paymaster and it will. No paymaster is going to go on pouring money down a bottomless pit. At some point they will stop paying and when they do, if there are more demands for them to pay, and no real remedies to the situation - whether it be Greece or another country in that situation – they will have to default. However, this will be a default without a devaluation possibly. Most defaults go together with devaluations, but here there will not be a devaluation. If this happens the people who have been financing the deficit will make huge losses. I do not know whether Greece will actually take the steps or whether there is enough political will in the country. I would say that for Greece in particular, and some other countries, the best chance of taking the necessary steps would be to have a national government – an all party agreement on a programme rather like we have recently gained in the UK.
Carl Bildt made three points, and I am very sorry to have left out Scandinavia. I did actually include it in the arc of pacifism, but it deserved much closer attention for its success – the huge success of the social model which is something that I would have referred to in more extended way. Yes, we have no need for a fighting machine for the challenges we face. I agree with that. However, in the context of Europe’s aspiration to be a global power – one of the poles – the military forces, which are sufficient for regional means, are not enough for World missions. In fact, the weakness of Europe is revealed in its highly inadequate, very small contributions to American efforts. This is not just in terms of manpower, but also in quality of the technology of fighting. There is no adequate procurement policy. The functions of Mars in the World is just going to be completed by Americans with very little European support. However, that is not to say that other challenges cannot be met, with the forces we have.
Finally, on the eurozone being the main condition for preserving the single market. I agree that it has played a very important part. Unlike in the 1930s there have been no currency devaluations and competitive currency depreciation was one of the factors that increased the severity of the 1930s crisis. However, the fact remains that if you do not have an optimal currency area, you need a treasury that can conduct both a stimulus and redistribution policy. You need a central bank which can act as a lender as a last resort and also do the unorthodox monetary policy which has been completed in Britain and the United States: quantative easing. That has actually gone far beyond lend of last resort functions. We do not have those central institutions if we do not develop them. Even though the single market is a pre-condition for the euozone, the Euro may fail and then the single market would fail. I am not saying that this is a good thing. It would be a very bad thing but these failures have happened. It is not automatic, the political will exists to overcome the challenges. That was the only point I wanted to make in that context.
Igor Yurgens
There were no questions addressed to me on the Russian angle, but I would like to contribute to the discussion between two of my colleagues. I am more on Robert Skidelsky’s side. You first bent the economic rules by integrating unequal partners in economic development, while the first rule of integration is that it is only successful if economic parts of the integration are more or less of the same level of economic development. This was the case with the narrow common market, but then the decision was taken to take on board new democracies and protect them from, for example, the Russian or other threats, and doing so showed a political will to violate economic laws. This was done, so from this point forward, you have to keep the political will to keep integrating the weaker parts of Europe into Europe.
The conclusion of this logical integration is you changed Greeks by imposing stricter rules on them and they are not Greeks anymore; they are more like Swedes. If that is the case, it is fantastic. The project of integrating Europe has succeeded. In a much more diplomatic way than I ,Robert Skidelsky expressed some doubts about that. I express them too. I was part of the largest post‑war integration, the Warsaw Pact and Comecon. We had the same thing. We failed for different reasons, but we failed just the same. Either you integrate equal partners or you help them, but do not call it integration. You assist the weaker members to become a little wealthier.
Robert Skidelsky said that you probably have to get rid of some of the weaker links in the chain. You cannot run the European Union as a company, although that would be ideal. Some parts of the company and some subsidiaries are failing, so you cut them off, write off the losses and that is it. Nations cannot be cut off and the losses written off. Greek national pride will not allow this to happen. Greece is only one example; there will be further hiccups on the way with Bulgarians, Romanians and other people, who are less developed historically. It is a difficult process.
I applaud this process. Russia is very interested in the great success of this integration, because otherwise could you imagine the madness we would have trying to sell our gas or oil to all those little entities, which will fight for all those pipelines. Of course we are very interested that the grown‑ups such as Great Britain, Germany and France will take everybody on board and will create a shiny kingdom of freedom, democracy and good economic governance. Of course we are interested in that, but there is a question mark over whether it will happen.
Oksana Antonenko, Senior Fellow for Russia and Eurasia, IISS
Igor Yurgens mentioned in his presentation this very successful EU/Russia summit, which took place in Stockholm and which heralded this new era of the EU/Russia partnership for modernisation. I am just wondering if it more than a statement and if there is anything real behind it. What are the real benchmarks at which we should be looking to measure its success? Is it just one summit to another summit? There will be another summit in Rostov soon, which will pronounce another success. In reality we have seen little progress since the summit.
The next EU/Russia summit will be in Rostov, which is very close to the north Caucuses. Could the north Caucuses, which potentially represents the biggest security challenge to both Russia and Europe in the longer term, be the area in which Russia can forge a partnership or is it still outside the limits of the
EU/Russia cooperation?
Mahmoud Gebril Elwarfally, Director General, Libyan Economic Development Board
How does Lord Skidelsky react to the future demographic structure of Europe vis-à-vis Africa? Europe today has a population of 472 million; by 2050 it is going to be 55 million lower. By 2025 Europe will need 110 million skilled workers just to maintain economic productivity. The structure of the European population will be more heterogeneous taking into account the immigrant communities in Europe.
Against this picture Africa today has a population of 900,258 million, by 2025 it will be 1,258,000,000 and by 2050 it will be almost 2 billion. By 2025 329 million Africans aged 15 to 39 will be marching north looking for jobs. I want to know what the reaction to this will be and how the structure of the European economy will be maintained vis-à-vis those demographic changes.
Technology is accessible to almost everybody today. Groups, individuals and multinational companies are all active on the stage of the global economy. There are also informal economies such as drug trafficking and money laundering. I think all of these are missing from the picture and if they were included a different picture could be painted.
In 25 years’ time, the young generation, the generation of global culture will be our decision makers. Will they be making the same decisions within the same frame of reference as we are?
Bill Emmott, Independent writer; former Editor, The Economist; IISS Trustee
What advice would you give to the GCC Monetary Council about the creation of a monetary union and a single currency given that it is modelled on the Euro?
Professor François Heisbourg
I am glad someone finally asked that question.
Ala'a Al Yusuf, Chief Economist, Gulf Finance House
It seems to me that a European doctrine is to try to export the way the EU does business within its own communities to as many countries as possible, at least those in its vicinity and in the process there might be a danger of mixing up the two doctrines that have been alluded to and pretend that a multi‑polar world will by definition be a multilateral world, which is does not have to be. Maybe the EU is not well equipped to deal with the multi‑polar world that may be less multilateral than it wishes or hopes.
In relation to Russia, it seems to me that this buzz phrase ‘modernisation partnership’ of which we have heard quite a lot recently is pretty much an empty shell. I wondered whether Dr Kampeter might be able to tell about the kind of ideas the German government has about breathing life into this modernisation partnership between the EU and Russia.
Dr John Llewellyn, Partner, Llewellyn Consulting
I want to come back to the question of mapping between economic size and power. Both Richard Cooper and Lord Skidelsky have said that it is not obvious and it is not. One way of defining power would be to be able to project force anywhere in the world and if you were to define it that way, the US has it; Europe does not. Another way is to define it as an ability to defend yourself against any likely aggressor and if that is the definition then Europe has it probably in sufficiency. I think there is a reason for this and this is why I make the point.
Europe is a macrocosm of its constituent parts; Europe itself is a coalition like all but three of its member countries. In a coalition it would be hard to get a constituency going for foreign adventurism, but it would not, I suggest, be hard to get an agreement to defend yourself from attack from outside. That is why I think you have this fundamental difference in military stance, which I thought Lord Skidelsky slightly lamented, but I am not so sure I am against.
I ask myself the question why do Americans and Brits in particular lament this inability of Europe to project force. I think it is because they have grown up in countries that have always had majority governments until the last few days in the United Kingdom. In that situation you can more easily engage in military adventurism than if you have a coalition, which is hard to convince. Lord Skidelsky also said it was wonderful that no country in Europe had devalued in a competitive way like they did in the 1930, but, of course, one has – the United Kingdom by about 25%.
Jean-Pierre Lehmann, Director, The Evian Group; Professor, International Political Economy, International Institute for Management Development
Transparency International, which is a German NGO, has placed Greece on the corruption index at about 90, 10 places even behind Italy. Is it possible to have a union without trust?
In the Europe that Lord Skidelsky described, Turkey was omitted. Where does Turkey fit, particularly bearing in mind where we are at the moment?
Dr Sanjaya Baru, Consulting Senior Fellow for Geo-Economics and Strategy, IISS-Middle East; Editor, Business Standard; former Spokesman and Media Adviser to the Prime Minister, India
Russia has always had this dilemma of being European and Asian and I see from Mr Yurgens comments today that once again there is this ambiguity. Are you European or Asian? Do you think Russia now has the capability to handle both of these relationships as they evolve?
As an Indian, when I look at what has happened in Europe, I realise that basically Europe’s project was the same one we started in 1947, a common constitution, currency, market, legislature and judiciary. In the movement from being a market to a union, you have to pass this important political point, where some parts of the country are willing to take on the burden of the backwardness of others. We have this dilemma every year in India, where there are developed and backward states and you have federal institutions. Is Europe ready for those federal institutions, which are required for the real integration of Europe?
Dr Alexander Dynkin, Director, Institute of World Economy and International Relations
Does Dr Kampeter’s inclusive growth warning mean the end of the famous social market economy in Europe? Are there any legal instruments for macroeconomic discipline and enforcement in the light of last weekend’s events?
Igor Yurgens
The EU/Russia summit in Stockholm was a good one. Regarding benchmarks, if we enter the WTO by the end of this year; if we form a customs union with Belarus and Kazakhstan according to the blueprints of the WTO and the European Union, which we promised to do if we enter the WTO; if we enter OECD in two or three years’ time and we finish our negotiations on the cooperation and partnership agreement, which is the big agreement between Russia and the European Union, then I think we are close to forming a common economic space with Europe and we can then consider the option of joining the European Union, which will probably be changed by that time in view of all those discussions that took place today.
Modernisation is not an empty shell. There are three modernisations and I cannot cover them all even in 15 minutes, but so‑called vertical modernisation of five branches of Russian industry is happening and hopefully one of the successful projects will be this Russian Silicon Valley, which is called Skolkovo. Europeans are participating fully, offering great expertise and with a great benefit for Russia.
Are we more European or more Asian? It would be absolutely ideal for Russian foreign policy to navigate adroitly and in a civilised manner between three super powers on our border – the European Union, the United States and China, but we do not have the all the capabilities to do that, so we have to make difficult choices. I tend to favour Russia entering both the European Union and NATO under certain conditions and not tomorrow. Being of European origin, I think we should be in that European family with one security system and one economic system. Russia, however, has options. Trade between Russia and Turkey equals that between Russia and the United States. Our contacts with India are good and will probably get even better. We have joint ventures with the Chinese. Europe should pay attention to the fact that Russia has options.
Robert Skidelsky
The very important question of demography was raised. It was pointed out that there were fewer than 500 million Europeans and that may well decline, certainly in terms of natural increase and there are 900 million Africans and that population will grow. It was also noted that the Africans might start marching north. If that is true and they try to march north on any scale, they will be denied entry.
How do you deal with that growing demographic imbalance? There is certainly some capacity for absorption. There are two other solutions. Firstly, changes to European pension legislation are needed, and France is a good example of where it does need changing, to enable people to work longer. As they grow older they do not suddenly lose all their productivity just because they are past the age of 65. People have to be able to work longer and changes to the pension systems are needed to make that possible.
Secondly, a principle of foreign policy needs to be the economic development of Africa. It has to be given very high priority and it is not going to be easy, because people do not enough about how to enable countries to develop. It requires a lot of good governance and we do not know how to get it. That is a very pertinent and difficult problem.
In relation to the prospects for a monetary council and a single currency in this area, the first thing is to avoid the mistakes of the Euro. Do not set up a structure, which is targeted to fail if things go wrong. It has to be more than a fair weather system. There is no reason why one should not use sovereign wealth funds to develop a Middle East monetary fund. The point about these monetary funds is not that they will render assistance that otherwise would not be rendered, but they would render it under agreed rules and they would be reliable helpers of countries in temporary difficulties. It does not solve all problems, but it gives you some stability of expectation. As an aside, we have not discussed China’s proposal, and I do not know how seriously China meant it, to establish a super sovereign reserve currency as a way of dealing with the problems that arise from having national reserve currencies.
I agree completely with the comment that a multi‑polar world does not necessarily mean a multilateral world. In fact a multi‑polar world suggests something like the old balance of power world and although that was a principle of order in the world, it was a rather insecure one, because it actually led to several rather major wars. The point I am making is we do not have a balance of power world; there are no centres of power that are equal in any way to the United States however you add up the different measures.
I agree with John Llewellyn, but all I was saying was the Europe has the capacity to deal with the challenges it will face; it does not have the capacity to project power on a world scale. That is the only point I was making. I do not regret the decline of Europe as a major military power; it was too costly to itself and the whole world.
Where does Turkey fit in? The corollary is where does Europe stop? I think that is a problem. Some people have argued that Europe is a model; the whole of the world will become a gigantic Europe, but that is unrealistic. Europe should actually start to think seriously about how it defines its borders and it has not really done so yet. The assumption has been that anyone who qualifies somewhere in the area and meets the entry conditions will be allowed to join, but you cannot go on expanding it indefinitely at the same time that you want to increase its political cohesion. We are way off a world federal system; we are off a federal system in Europe itself.
I do think the social market economy has been a very successful way of managing economic change and giving European populations security and I am afraid it has been rather endangered by the Euro crisis.
Steffen Kampeter
As a member of a foreign government I cannot give you advice, but I have three messages. The Euro is a success story. We started at 1.21 I think. The low was about 80 cents to the dollar and the high was about 1.52. We are now wandering between 1.20 and 1.30 and I feel quite comfortable despite what the newspapers say.
Secondly, do not believe false friends when you form a currency union, because they may have other economic interests than the members of the union. They might be the alternative anchor currency or something like that. Thirdly, you need to have a sound fiscal policy, but beware ‑ a currency union is give and take. If you do not show solidarity within a currency you might see the same thing as has happened to the British pound, when it was speculated out of European monetary integration some years ago.
On the Greek question, is Greece weak because of corruption? Firstly it is not only Greece that is under pressure. Spain and Portugal are also under pressure. Three different cultures have a common problem. They are paying the price for irresponsible deficit spending and lack of competitiveness. That is the hard core problem. They are not under pressure from speculators, because they consume too little and export too much; they have big deficits. They are paying a big price for a misguided economic philosophy. It is completely wrong to suggest the Eurozone members are paying for them. The Greek people themselves are paying for their problem. Corruption is not the core of the problem; it is fiscal indiscipline.
Professor François Heisbourg
I want to pay homage to our panellist and the questioners. This was an absolutely fantastic discussion, so thank you all.
