societies in transition: economic, political and security transformations in contemporary europe

Savvas Katsikides · Pavlos I. Koktsidis Editors

Societies in TransitionEconomic, Political and Security Transformations in Contemporary Europe

Societies in Transition

ThiS is a FM Blank Page

Savvas Katsikides • Pavlos I. KoktsidisEditors

Societies in TransitionEconomic, Political and SecurityTransformations in ContemporaryEurope

EditorsSavvas KatsikidesDepartment of Social andPolitical Sciences

University of CyprusNicosiaCyprus

Pavlos I. KoktsidisDepartment of Social andPolitical Sciences

University of CyprusNicosiaCyprus

ISBN 978-3-319-13813-8 ISBN 978-3-319-13814-5 (eBook)DOI 10.1007/978-3-319-13814-5

Library of Congress Control Number: 2015936345

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Contents

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Pavlos I. Koktsidis and Savvas Katsikides

Part I Economics

2 EMU and the Process of European Integration: Southern

Europe’s Economic Challenges and the Need for Revisiting

EMU’s Institutional Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Eleftherios Thalassinos and Georgios Dafnos

3 Unemployment in Mediterranean EU Countries: Fighting

Youth Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Hardy Hanappi

4 The Impact of the Eurozone Crisis on a Periphery Country:

The Case of Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Franco Praussello

5 Economic Transition in Romania: A Completed Process? . . . . . . . 87

Luminița Șoproni and Ioan Horga

6 Impact on European Union Studies of the Developing EU

Comprehensive Economic and Trade Agreements with Third

Countries: The Case of Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

Tatjana Muravska, Alexandre Berlin, and Don Sparling

Part II Politics and Security

7 Transitions of Democracy: An Evolutionary Political Economy

Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

Manuel Wackerle

8 Crisis and Transition of NGOs in Europe: The Case of Greece . . . 159

Sotiris Petropoulos and Anastasios Valvis

v

9 Energy Security and the Transformation of Regional Securitization

Relations in the Eastern Mediterranean . . . . . . . . . . . . . . . . . . . . . 189

Constantinos Adamides and Odysseas Christou

10 Terrorism in Transition: The Implications of Cyber-Terrorism . . . 207

Trevor Calafato and Paul Caruana

11 Economic Consequences of Military Expenditure:

Evidence from Southern Europe and Turkey . . . . . . . . . . . . . . . . . 221

Darshana Udayanganie and Evangelos N. Charos

vi Contents

Introduction 1Pavlos I. Koktsidis and Savvas Katsikides

Amidst a period of increased risk and uncertainty, we ventured to produce a

compilation of works on the manifold implications, lessons and new directions

raised by the unfolding of the post-2009 crisis in Europe. For the first time since the

end of the Second World War, European societies are being confronted with the

consequences of a critical economic downturn shaking the established socio-

political order. Europe is facing a number of important social, economic and

political challenges, as much of the European continent continues suffering from

sluggish economic growth or stagnation, difficulties to effectively implement

structural reforms and widespread political reactions towards the established polit-

ical order. In varying ways, the crisis has strongly impacted societies across Europe.

Many people lost their jobs or part of their income as a result of salary cuts, while

uncertainty about the future has risen. European citizens demonstrate an increasing

lack of confidence and trust in relation to the governance of financial institutions,

and the free market overall, but also in relation to democratic institutions and

politics at European, national or local levels.

Europe’s economic downturn has exposed an unprecedented dichotomy between

the ‘disciplined’ European North and the ‘unruly’ European periphery within the

EU. Greece, Portugal, Spain, Italy and Cyprus have gone through a painful process

of fiscal readjustment with the introduction of austerity measures in return for

receiving large European and IMF financial rescue funds and averting the

implications of economic collapse. Rescue appeals were made by the EU to the

wealthy Euro zone members. The strict bail out conditions that were put in place for

the disposal of large rescue funds to the drowning European economies of the South

have ultimately triggered major social resentment. At the same time, stereotypical

attempts on the causes of the South’s economic unruliness and underperformance

have similarly dominated popular narratives across the European North. The

P.I. Koktsidis (*) • S. Katsikides

Department of Social and Political Sciences, University of Cyprus, Nicosia, Cyprus

e-mail: [email protected]; [email protected]

# Springer International Publishing Switzerland 2015

S. Katsikides, P.I. Koktsidis (eds.), Societies in Transition,DOI 10.1007/978-3-319-13814-5_1

1

mailto:[email protected]


addition of this new European dichotomy in discussions about European integration

comes to complement previous but still largely resilient dichotomies between the

industrial North and the agrarian South, the efficient North and the inefficient

South, the ‘reasonable’ North and the ‘excessive’ South. Last but not least, Eastern

European states have remained particularly vulnerable to the fluctuations and

shocks of the international economic system despite variable efforts to align their

economies to match with EU standards. Despite entry into the EU, a majority of

Eastern European states struggle with low productivity levels, poor welfare systems

and high unemployment, and present a markedly lower standard of living to the

European average. Therefore, this collection of works does not simply focus on the

processes within the EU but takes a much broader view of problems and themes

affecting European security and welfare as a whole.

Moving beyond cliche narratives, we invited a number of distinguished

academics to provide us with novel insights into the nexus of economic, political

and security repercussions on social transformation, following a period of

European-wide recession, and with a view to conceptualize the influence recent

economic changes have on traditional political perceptions, organizational pro-

cesses, and of course on security and social change in the European periphery.

We are delighted to have drawn together important contributions from researchers

and academics from across the spectrum of social sciences offering a penetrative

account of the speedily evolving European state of affairs. The central idea is to

compile research devoted to key questions and aspects of the relationship between

various and widely discussed social, political and security rearrangements in order

to produce knowledge that encapsulates a range of interrelated subjects. A selected

number of authors from research-oriented universities across Europe (Austria, Italy,

Greece, Cyprus, Romania, Latvia, Malta, and the US) examine the possibilities of

coping with contemporary concerns of political and economic stability, security,

growth, governance and integration from different scientific perspectives, and

assess their social implications while taking into account the deepening humanitar-

ian misfortunes on a country and regional level.

The book’s objective is to build a concise picture of responses to major eco-

nomic, political and security challenges affecting the European continent, and

explore the impact of a distinctly fundamental phase of transition. Drawing from

a carefully selected array of contemporary academic research, this collection of

chapters allows for the development of fresh insights into the social repercussions

of transition from traditionally established organizational practices and political

perceptions to new forms of collaboration, integration and governance. In this

respect, it is hoped that our collection of studies will be of key interest to those

involved in inner and interdisciplinary research in diverse fields of social, economic

and political studies.

2 P.I. Koktsidis and S. Katsikides

1.1 The Origins of Transition

The trans-national repercussions of the US credit crunch crisis in Europe exposed

the inadequacy of dominant perceptions with regards to the endurance and agility of

the international financial system and the banking sector. The spiralling effect of the

2008 credit crunch in the US has marked the opening of a Pandora’s Box for

Europe’s most vulnerable economies. Within the EU, Ireland was the first Eurozone

country to encounter the financial rumblings caused by a long-swelling bubble burst

in the real estate sector. When the housing bubble burst, Ireland’s government

requested for a European rescue package to be delivered in order to recapitalize

banks with taxpayers assuming private debts. In a rather different way, Greece and

Portugal were devastated by the recession of economic activity, as they were overly

exposed to external market borrowing and home-grown structural deficiencies.

Inability to borrow from international capital markets and the need to sustain the

growing disequilibrium between revenues and expenditures threatened the

economies of Greece and Portugal with collapse.

Both countries faced a critical dilemma, as they were called to choose between a

tough spend-cutting programme with socially devastating consequences in return

for subsistence loans from a consortium of rescue mechanisms, or face the sweep-

ing consequences of economic default. Spain and Italy formed a sufficient political

consensus to implement demanding fiscal discipline policies to their economies in

return for lax bail-out packages. The dreadful puzzle of Euro-zone failures

expanded to include Cyprus. Faced with significant liquidity shortages and exposed

to the toxic Greek market finances, Cyprus endured an unprecedented ‘haircut’ of

private savings followed by a complete restructuring of its national banking system.

The outbreak of the sovereign debt crisis in the European South is the result of a

composite mixture of external and internal conditions. Surely, international capital

markets stalled as a result of the US financial contraction and mortgage crisis of

2008. Yet the freezing of funds by international capital markets collided with the

intrinsic fragility of indebted economies due to their excessive borrowing practices

and poor defences against the repercussions of an increasingly interdependent

financial system, which accelerated the likelihood of systemic failure. States that

were overly exposed to external borrowing and with a low capacity to respond

effectively in the event of major systemic imbalances in global financial activity

were most vulnerable to the consequences of global financial contraction and

collapse.

Demands by the EU and the IMF to rectify the deficiencies embedded in the

internal economic systems of the endangered Euro-zone members became part and

parcel of the rescue package conditions for Greece, Portugal and Cyprus. Funds

were transferred to the countries on conditions of implementing drastic public

expenditure cuts, reducing public sector workforce, accelerating privatizations

and rationalizing the management and distribution of public revenues. The process

of reforming the state has given way to an ‘in-between’ socio-economic vacuum of

deepening recession, shrinking public provisions and skyrocketing unemployment,

1 Introduction 3

causing a dramatic drop in the standard of living that is reminiscent of a humani-

tarian crisis.

Mediterranean states were hardest hit by the consequences of economic crisis.

Nonetheless, the rumblings of the economic crisis in Europe had first appeared in

Central and Eastern Europe. Apart from Eurozone’s profound economic rumblings,

recession, stagnation and overall sluggishness were evident throughout Europe,

especially in the most vulnerable regions of the East and South East of the

continent. South East Europe is marred with troublesome ethnic divisions, extraor-

dinary structural deficiencies, widespread corruption and economic misery, even in

countries that have recently made it to the EU.

Popular frustration quickly grew against the austerity policies introduced by

governments, since most citizens accused governments, bankers and economic

elites for the existing economic fallout. The Irish were forced to pay off the

government’s assumed financial burdens created by a mixture of irresponsible

bankers, entrepreneurs and government officials. The Greeks have reacted, often

violently, against austerity measures. Yet the nature and intensity of public

reactions have significantly differed from country to country. Reactions were

most severe in states where citizens held governments responsible for the economic

fallout, whereas in states suffering from bank sector malpractice reactions were

considerably milder. For example, in Ireland people are certainly embittered with

the collective sharing of bank losses, which burdened banks with non-serviceable

loans granted to development enterprises, but they have largely abstained from

mass-scale protest, anti-systemic rhetoric and extremism. Contrary to Ireland,

Greece has encountered a tense period of frequent public unrest, demonstrations,

rioting, and harsh anti-systemic rhetoric, extreme lack of confidence in the political

system and recurring levels of violence. At the same time, an ever increasing

portion of citizens in countries of the affluent European North are clearly frustrated

with the perceived share of rewards granted to them as members of the EU.

Inevitably, the consequences of crisis and the ensuing period of transition have

produced a contemporary state of social deregulation; a transition from an old set of

established values, perceptions and behaviours to a new, yet unknown, order.

Transition periods following the collapse of an elapsed order of things are usually

marked by uncertainty and loss of direction in all spheres of public and social

organization. The legitimacy of formerly established systems of governance is put

into question, the utility and efficacy of the existing economic order anguishes

while dominant social norms and beliefs lose their grip on the collective conscious-

ness. The lack of a readily available political and economic framework to replace

the collapsing order sustained a prolonged period of grief, doubt and uncertainty.

The economic and social pressures undermine national consensus and weaken

collective trust in established institutions. Even more so, trust and confidence in

national politics, politicians and political parties, in general, has also fallen consid-

erably across Europe resulting in growing nationalism and populism. The fall of

trust and confidence caused various antagonisms to (re-)emerge, both between

European nations and ethnic groups, as inter alia evidenced by the rise of populist

movements and parties. The crisis has raised questions about the capacities of


political leadership at the EU and national levels to manage the crisis and formulate

adequate solutions. This has highlighted the urgency to find “Unity in Diversity”,

posing a challenge, which requires apart from innovative political and governmen-

tal responses, a reflective reappraisal of Europe’s intellectual foundation. Whilst the

EU celebrates its (cultural) diversity as a defining feature, this very diversity is also

frequently regarded as an impediment to the formation of a meaningful European

identity as well as a European public sphere. Britain and Spain are faced with

renewed demands for secession by the Scots and Catalans, Cyprus has entered

negotiations for the unification of the divided island, albeit with little enthusiasm

over a prospect of an imminent solution. Italy, Spain and Greece are faced with

additional pressures created by the urgencies of illegal immigration. Italy’s long-

established socio-economic North–south divide has remained largely unchanged.

The political vacuum created by an extended period of crisis and economic

contraction has given rise to a state of social deregulation i.e. the diminishing of

established values and the transition to a new order which is still on the making.

According to classical sociological accounts, the fluidization of social values, bonds

and affairs is largely the result of significant economic changes in society. Anomie

exists as a result of a significant discrepancy between commonly professed and

widespread ideological beliefs and what is achievable in everyday life. A period of

transition is one in which the credibility of major ideological foundations and

behavioural norms, essential to providing legitimacy to the previous type of social

and political organization, are put into question, and to which all current

misfortunes are attributed. On the one hand, the gradual retreat of an old system

of values threatens society with increased apathy and detachment, one the other

hand, the profound lack of trust in the failing political system, and a strong sense of

injustice and victimization, has encouraged the fountaining and adoption of radical

frames in political action and practices that were previously considered by the

majority as reactionary and anti-social. The unprecedented political and electoral

rise of dissident political forces in Europe (Hungary, Greece, France, Finland,

Netherlands, Norway, Denmark, and Britain) is today becoming a serious source

of concern. Not only such political forces resist the dominant national and EU-led

policies, but they also wish to strike against the very heart of the European

construct. The erosion of Europe’s cornerstone democratic and humanitarian

principles, upon which the entire European construct was built, has accentuated

the demystification of Europe’s socio-liberal narrative.

A distorted variant of euro-capitalism in southern Europe, comprised by a

mixture of free market proceedings and a bountiful welfare state, is today giving

its place to another, equally distorted and largely alien form of economic liberalism

misfit to European egalitarian tradition. The state remains, again, at the epicentre of

economic activity but in ways that are non-reciprocating to the public. Prior to the

sovereign debt crisis a large portion of citizens in south European societies relied,

often exceedingly, on state employment and provisions, overstretching the capacity

of the state and forcing governments to external borrowing. With the advent of the

debt crisis, and given the global contraction of economic activity, active liberaliza-

tion, capital investments and the free market have done little to yield the expected

1 Introduction 5

revenues for repaying debts. Conversely, in a strange turn of events, and driven by

sheer necessity, the liberal nomenclature of the IMF and Brussels pressed for

raising direct income and property taxes, drastically reducing wages, suspending

labour rights, and banishing state provisions. Contrary to orthodox economic

notions, economic recovery and the pay off of debt was now dependent on the

capacity of the state to raise and collect taxes by a shrinking pool of wealth-bearing

citizens due to rampant wage reductions, capital flees, business relocations and low

export productivity, creating thus a socially asphyxiating condition.

The implications of the economic crisis are equally severe on matters regarding

human and national security. Some direct consequences on human security

resulting from the economic meltdown and the demise of the old social fabric

include the abrupt increase in poverty levels, criminality, group strife, migration

flows, ghetoization, xenophobia and racism. The likelihood of poverty has again

become one of the most imminent threats in Europe. Significant portions of the

population in the south of Europe face an intense risk of poverty. By 2012, 24.8 %

of European-wide population (approx. 125 millions) crossed the EU poverty

threshold (below 60 % of the European average income) and social exclusion,

including chronic unemployment. In other words, approximately 2.5 in every

10 Europeans are either faced with the danger of poverty (17 %), or severely

deprived of basic human needs (9.9 %), or live in families with very low work

intensity levels (10 %). Poverty refers to people with difficulty to satisfy their basic

human needs (food, shelter, health), as well as those with trouble covering the most

substantial routine transactions (rents, bills etc.). The picture becomes particularly

bleak when it comes to assessing the indicators of poverty for the states of the

European South; 34.6 % of Greeks belong to one of the three categories of poverty

and exclusion, calculated to reach a staggering 39.0 % in 2014. Italy has 29.9 % of

its population under the spectre of poverty and exclusion, Spain 28.2 %, Cyprus

23.7 %, and Portugal 25.3 %.1 Furthermore, Greece, Spain, Portugal and Cyprus

have the highest rates of unemployment in Europe (bottom four).2

South East European states struggle against their ethnic divisions and endemic

corruption. Prospective EU candidates in the Balkans have varyingly committed

themselves to addressing the criteria of accession in the absence of a more credible

alternative, but are increasingly becoming more sceptical and reserved as to the

opportunities for collective and interdependent growth within Europe. Being

1 “Household composition, Poverty and Hardship”, Eurostat Report 2013 Edition, pp. 9–33.

See: http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-TC-13-008/EN/KS-TC-13-008-

EN.PDF

“Eurostat Regional Yearbook 2013”, General and Regional Statistics, European Union 201 ,

pp. 3–275, See: http://www.naftemporiki.gr/documents/712144/eurostat-regional-yearbook-20132Ann Leahy, Sean Healy and Michelle Murphy, “The European Crisis and its Human Cost: A Call

for Fair Alternatives and Solutions2, A study of the impact of the crisis and austerity on people

with a special focus on: Cyprus, Greece, Ireland, Italy, Portugal, Romania and Spain. Crisis

monitoring Report 2014, Caritas Europa. pp, 9–105, See: http://www.caritas.eu/sites/default/

files/caritascrisisreport_2013_chypre_0.pdf


http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-TC-13-008/EN/KS-TC-13-008-EN.PDF

http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-TC-13-008/EN/KS-TC-13-008-EN.PDF

http://www.naftemporiki.gr/documents/712144/eurostat-regional-yearbook-2013

http://www.caritas.eu/sites/default/files/caritascrisisreport_2013_chypre_0.pdf

http://www.caritas.eu/sites/default/files/caritascrisisreport_2013_chypre_0.pdf

particularly weak themselves, fears of getting eventually drawn into Europe’s

current turmoil have become stronger. Moreover, existing perspectives on the

nexus between transition, state-building, and inter-communal conflict have so far

failed to capture the dynamic influence of economic stakes on human security.

1.2 Towards a New Economic Paradigm?

Since 2009 Europe has entered a protracted period of political and economic

transition. Wallerstein argued that in the next years we will experience a vast

political confrontation, not for the survival of capitalism, but for the kind of system

we need to collectively choose to replace capitalism. The emergence and develop-

ment of the ‘great recession’ have sparked fresh discussions about the future of

capitalism. Traditional Marxists claim they have accurately predicted the endoge-

nous and self-destructive mechanism inherent in the capitalistic system, reflected

on the recessive percentage of profits born out of increasing inequalities and the

concentration of wealth in the hands of the few. Marx predicted that capitalism, in

its late phase, will inevitably lead to an overconcentration of capital, producing thus

more inequality. Yet despite the ever increasing inequality and economic polariza-

tion created by the concentration of wealth in fewer hands and the gradual demise

of the middle class, there has been no evident sign of a widespread social demand

pressing for a radically new economic paradigm to replace capitalism, or of any

significant behavioural change within the existing capitalist system whatsoever.

European societies have traditionally relied on trade, processing and production,

i.e. the centrepiece of the capitalist economy. However, the capitalist mode of

production, trade and investment has given way to a financialized system of

transactions driven by a largely speculative investment mentality and operating

within an expendable and non-reciprocating consumerist culture, producing thus an

unsustainable mode of social relations, one in which few people produce while

many consume. This period of transition creates new imbalances, result of the

consequences of an increasingly shrinking share of wealth and participation in the

production process.

Joseph Schumpeter encapsulated the essence of capitalism’s evolutionary pro-

cess in a circle of continuous innovation and ‘creative destruction’. The old ways of

doing things in the economy are endogenously destroyed by the capitalist system

itself, and replaced by new ways. For Schumpeter, technological innovation is the

centrepiece of economic change. Advancing on the Schumpeterian hypothesis,

contemporary social demands seem to relate more to the availability of

opportunities for individual creativity and freedom of initiative, improving access

to knowledge and self-reliance and allowing for the sustainable and controlled

utilization of financial structures and natural resources in the service of collective

welfare. Societies envisage the regaining of capitalism’s primal causa nobilis; areturn to the fundamental socio-centric values of free human progress. Continuing

the critical revisiting of liberal economics may eventually lead up to a fresh

synthesizing of ethics and rationality. The second aim is to foster the development

1 Introduction 7

of innovative societies and policies in Europe through the engagement of citizens,

civil society organisations, enterprises and users in research and innovation and the

promotion of coordinated research and innovation policies. This. . . specificallyaddresses the development of new forms of innovation that can play a big role in

overcoming the crisis and creating opportunities for growth. Such efforts include

innovation in the public sector, where new and creative ways of delivering public

services can improve efficiency, effectiveness and quality, while reducing costs and

lessening the burden on citizens and enterprises. They also involve enterprises,

young entrepreneurs, incubators, universities and innovation centres and other

relevant actors through support to open innovation, business model innovation,

public sector innovation and social innovation.

Wishing to make a meaningful contribution to current debates on the question of

how to respond effectively to the emerging challenges, we must consider the

following dilemma: Should the EU continue to promote integrated top-down

policies or support bottom-up initiatives suitable to the distinct needs and

characteristics of local societies? Although we accept that political systems are

inherently formed through processes of social interaction, driven by social

necessities and constant re-adjustments, we nevertheless believe that some general

principles pointing to a desired policy direction are essential for averting the

repetition of previous faults. A major prerequisite is to consider the most efficient

ways for addressing and reversing the deepening consequences of recession. How is

unemployment to be reduced? What needs to be done to tackle rising poverty and

social tensions? How do we deal with the dangerous mixture of economic hardship

and security threats such as terrorism and regional conflicts?

1.3 Synopsis

The book is divided in two subject areas. The first section focuses on socio-

economic research with a range of works reflecting the economic implications of

crisis on European societies, the reform of the EU economic governance structure

to better secure financial and economic stability, social disparities, convergence and

the suggested national and EU-level responses.

With the current fiscal difficulties across Europe in mind, Eleftherios

Thalassinos and Georgios Dafnos examine the future development of European

Monetary Policy. The EU has been experiencing over the last few years an

unprecedented crisis that really touches on its core characteristics and values. The

EMU project was structured on political foundations and expectations, bearing,

however, an immense socio-economic impact. The main aims of this chapter

contribution is to identify the main driving forces that influence the future develop-

ment of the Economic and Monetary Union and to examine the present situation

that the EU faces, the priorities of the ECB and the challenges that EU’s Southern

member-states face. Moreover, the paper contemplates four realistic scenarios of

the future development of the EMU and how each one of them may influence the

EU’s final destination and the EMUs Institutional Framework. Finally, the paper


takes note of the challenges that the EU will face in the immediate future both on

the institutional/political level as well on the core-periphery relations level.

Hardy Hanappi deals with probably the most dramatic problem of European

economic policy: the exploding unemployment rates in the EU-Mediterranean

countries. This chapter sets out to explain the causal links leading to this major

bottleneck in Europe’s economic dynamics. In the first part, the causal chain is

described in detail as follows: Unemployment is increased by austerity policy of

governments, and austerity policy is enforced by rapidly rising government debt.

Government debt has been rising due to bailout of banks and speculative interest

rate attacks on countries while banking crisis and aggressive interest rate policy are

a consequence of exploding demand for (uncovered) financial promises at global

financial markets. Uncovered financial promises are the only remaining channel for

capital accumulation if increases in (real) labour productivity are dying away on a

global scale. Thus, the phenomenon of European unemployment is explained by the

impasse of the dominant global mode of production, which had surfaced first as the

financial crisis in 2008. The second part of the chapter uses the insights of the first

part to study the contours of a possible EU employment policy, which can keep

welfare levels in Mediterranean EU-countries as high as possible. It is evident that

welfare mainly is determined by income, which for the majority of EU-households

in turn depends on employment. Employment decisions can be divided into three

sets: (1) Employment decisions of public institutions (2) Employment decisions of

small and medium size enterprises (3) Employment decisions of transnational

corporations. In all three areas special attention will be on youth unemployment

and the inevitable consequences that changes in retirement age will have. In a

concluding section it is discussed how far a specific European economic policy that

differs from other policies followed in other parts of the world economy is feasible

and can be embedded in the global context.

Franco Praussello describes the long path that allowed Italy to give up the

traditional policy of high wages-high inflation-devaluation of the national currency

(the Lira) and accept a stability oriented policy inspired by the Bundesbank, till the

final outcome of taking part in the euro launch in 1999. The present work is equally

concerned with the difficulties experienced by the different Italian governments in

producing the necessary reforms required by the euro zone membership. The

central topic of the paper will address the positive and negative consequences of

the adhesion to the Euro zone, stressing the widening gaps with the core countries

economic conditions and the costs of the double dip recession which Italy suffered

in the period 2008–2013. A last point focuses on the present day challenges facing

the Italian economy, where a long required process of fiscal consolidation in a

possible deflationary framework will hamper the reduction of the huge public debt,

whose weight is second only to the Greek one.

Luminita Soproni and Ioan Horga offer a critique of post-socialist economies

in transition and investigate the prospects of Romania’s economic recovery and

integration. The concept of “transition economy” emerged two decades ago, with

the changes in political regimes in Central and Eastern Europe. It has generated a

number of analysis and investigations in all fields, while people have associated it

1 Introduction 9

with the economic and social difficulties which had to be faced in order to reach a

better standard of living, offered by the “saving” market economy. According to the

experts from EBRD, the transition to the market economy is not only an intermedi-

ate goal contributing to economic development, but it is an end in itself. It involves

changing and creating institutions and fundamentally different governmental

institutions. Although everyone—experts and laymen—hoped it would be a short

transition, the social, economic and political events, both domestic and interna-

tional, have extended the period of uncertainty, the spectacular changes of eco-

nomic pace and the institutional reforms. All these have prompted us to seek the

answer to the question: When will Romania’s transition to a truly functioning and

wealth generating market economy will be completed?

In the closing chapter, Alexander Berlin and Tatjana Muravska analyze the

prospects of expanding EU trade agreements as a means to overcome the

implications of economic recession. In October 2013, the EU signed a Comprehen-

sive Economic and Trade Agreement with Canada, expected to enter into force in

2015, and has initiated negotiations with the USA. The agreement with Canada has

major implications on the EU-Canada relations, broadening considerably their

scope. The agreement beyond the classical trade relations agreements related to

customs tariffs and technical matters covers also the provision of services, public

procurement at most levels of government and the freer movement of people. For

the EU and its citizens to benefit from the agreements with third countries requires a

much more in-depth knowledge of those countries and their population.

The second section addresses a series of contemporary issues relevant to the

security implications of economic crisis and transition on democratic governance,

energy, terrorism, and human security. Manuel Wackerle offers a fundamental

criticism of the antagonistic processes and distortions of democratic regimes within

the context of contemporary conditions determined by political economy. The

article emphasizes the fact that democracy is a non-static principle, rather it is a

dynamic, evolving and context-dependent principle influenced by conditions relat-

ing to historical processes. Wackerle reminds us of the necessity to reinvent

political philosophy, and in extension consider new forms of democratic gover-

nance, by developing a thorough understanding of the implications economic

patterns have on the nature of democratic governance and transition.

Anastasios Valvis and Sotiris Petropoulos offer a critique of NGO functioning

and adaptability to the new economic conditions. The ongoing financial crisis has a

global impact affecting almost every national economy in the world. Although

initial effects were concentrated in the pure financial sector, the rising economic

turbulence has gradually diffused in most sectors of social activities, the civil

society and NGOs sector included. One basic consequence has been the retransfor-

mation of the development assistance environment due to a decrease on available

funding from the usual “suspects”, known as “old donors”, and a parallel increase

from the so called “new donors” such as China and Brazil. Moreover, as many of

these “new donors” are negatively predisposed to the notion of NGOs as they do not

enclose an enhanced civil society inside their borders, available funding to the latter

seems to be decreasing. A focus on the national level also reveals a similar case:


countries that were strongly affected by the aftermath of the crisis, such as Greece,

have sharply decreased available public funding to NGOs. This paper explores the

effect of these developments with initial findings suggesting that the “western

model” of NGOs expansion is less viable than before. The accusation of NGOs

losing their fundamental values and working mostly as a ‘walking stick’ covering

states’ inefficiencies in specific sectors, thus functioning as an unofficial public

sector is being challenged. In practice, the gradual transformation of many NGOs to

dedicated contractors of national and international public agencies with no or

limited real interconnection with society is being rendered incompatible to the

new environment as available contracts are becoming less or at least less lucrative.

To this end, many NGOs are rediscovering their idealistic past while new—less

formal—civil society actors are being born to cover the multiple needs created by

the crisis. Focusing mainly on the Greek case, this paper presents a yet understudied

effect of the financial crisis, in essence a transformation of NGOs sector with

informal networks overlapping the inability of “old school” NGOs to adjust to the

new economic situation, while, simultaneously challenging their existence and

importance.

In a period when natural gas exploitation is crucial to the economic recovery of

states, Constantinos Adamides and Odysseas Christou analyze the exploitation

of energy resources through the lens of securitization theory, and provide an

integrated analysis with a view to improve our understanding of the barriers

posed against natural gas exploitation. The authors use the theoretical frameworks

of securitization and regional security complex in order to analyse the discovery of

natural gas resources by a number of states in the Eastern Mediterranean region.

They use the developments in the trilateral relations among Turkey, Israel and

Cyprus as empirical tests of the theories; and identify the under-exploration of

energy securitization in the literature and the need for a cross- sectoral approach for

the referent object of energy in the widened security agenda by analyzing the effects

of energy-related developments on existing securitization relations. By compara-

tively assessing state dynamics prior to and following the discovery of significant

quantities of natural gas reserves in the region, the paper analyzes the introduction

and effect of energy as an exogenous parameter on the securitization relations

among the three countries. The paper ultimately illustrates that energy as a referent

object introduces a multiplier effect to the level of securitization in existing state

relations both in the positive and negative directions.

Trevor Calafato and Paul Caruana explore the new risks and threats of our

times, focusing on the drastic evolution of cyber-terrorism and the need to provide

security in times of increased political fluidity and social dissatisfaction. Terrorism

is one of the main fears that influence the transformations of contemporary social

implications of economy, politics and transformations. The problem of terrorism

and its effects on society is traced back to ancient Greece and evolved en par withthe progress of society. Anarchists delineated a drastic change in their terrorist

actions, as they moved from the rudimentary forms of attacks used by Hashashin,

Sicarii and Thugs to the use of bombs. Terrorist attacks became less personalised

and spread more fear because everyone could become a victims. Anarchist attacks

1 Introduction 11

may have had minimal effect of the politics of those days however their ‘propa-

ganda by deed’ kept on spreading with other movements later on in history where

skyjackings and seizures ships marked the 1970s and 1980s. Further attacks in the

last decade show further developments where in the 9/11 even skyjackings were

only a means to acquire a plane and use it as a kind of guided missile. So the

question remains, so now what’s next? Terrorists have found a natural habitat in the

internet. The services provided by the Internet allow terrorists to adopt an entrepre-

neur approach to their business. New products are quickly sought and customized to

achieve defined goals like any other enterprise. The Internet therefore allows

terrorist activities in a simpler way but to a far wider audience than that permitted

by other non-internet environments. The terrorist use the Internet as a tool for

recruitment, radicalization, propaganda and fund acquisition. However, cyber-

terrorism has evolved from being the support infrastructure necessary to commit

an attack, to the attack itself. The influences acquired through internet interactions,

bring together passive lurkers, wannabe terrorists and experienced aggressors,

which form flexible, non-structured and unpredictable clusters. Anyone of the

estimated 2.7 billion internet users has the key to cause havoc and destruction.

The cocktail is lethal and allows for a multitude of flavours. It is this coming of age

that needs a rethinking of the economic, political and security strategies in order to

mitigate the effects of this cyber warfare.

In the final chapter, Evangelos N. Charos and Darshana Udayanganie present

an empirical evaluation of national economic growth and military expenditures. A

model that includes military spending and economic growth indicators is used to

analyze a panel of countries in the Southern European region and Turkey from 1988

to 2012. Data was obtained from the Stockholm International Peace Research

Institute (SIPRI), the World Bank and the Heidelberg Institute for International

Conflict Research (HIIK). The article investigates the increases in military

expenditures in the region in relation to GDP growth rates and population growth

rates. This paper also focuses on investigating whether military spending is detri-

mental to developing countries’ economic growth.


Part I

Economics

EMU and the Process of EuropeanIntegration: Southern Europe’s EconomicChallenges and the Need for RevisitingEMU’s Institutional Framework

2

Eleftherios Thalassinos and Georgios Dafnos

Abstract

The EU has been experiencing over the last few years an unprecedented crisis

that really touches on its core characteristics and values. The EMU project was

structured on political foundations and expectations, bearing, however, immense

socio-economic impact. The main aims of this paper is to identify the main

driving forces that influence the future development of the Economic and

Monetary Union and to examine the present situation that the EU faces, the

priorities of the ECB and the challenges that EU’s Southern member-states face.

Moreover, the paper contemplates four realistic scenarios of the future devel-

opment of the EMU and how each one of them may influence EU’s final

destination and EMU’s Institutional Framework.

Finally, the paper takes note of the challenges that the EU will face in the

immediate future both on the institutional/political level as well on the core-

periphery relations level.

2.1 EU: A History of Pursuing Political Goals ThroughEconomic Integration

Since the end of WWII Western Europe has been characterized, conditioned and

shaped by the emergence of a pioneering project, that of regional integration. As

M. Cini has accurately pointed out “. . .there is no historical precedent for the

creation of a multinational, multicultural, and multilingual federation of states

Paper presented at the 10th N.E.W.S. Conference- Global University network, held by Megatrend

University from 10th to 14th September 2013

E. Thalassinos (*) • G. Dafnos

Department of Maritime Studies, University of Piraeus, Gr. Lambraki 21, 18533 Piraeus,

Greece

e-mail: [email protected]; [email protected]; [email protected]



15




with mature social, economic, political and legal systems. In this regard the EU is a

colossal and original enterprise.”1 One could trace many incentives, depending on

the level of analysis (individual, state, international) he/she applies, for the devel-

opment of an entity that started as an international organization of pooling

resources and has resulted to being an international actor with state-like attributes.

Still, even though the break out of the Cold War may explain a great deal about the

historical roots of the EU,2 the initial drive behind the idea of European integration

remains that of overcoming once and for all the animosities that existed between the

relations of major European powers and tantalized the European continent for more

than 50 years (since 1870 that signposts a fundamental restructuring of balance of

powers in Europe), if not for centuries.

First and foremost, European integration comprises the most successful peace

project in history leading to the longest period of peaceful coexistence between

leading European powers (60 years). The EU has resulted to a Pax Europaeamanaging to abolish the idea of war between its member states as the means of

solving inter-state problems and promoting cooperation and joint management.

Indeed, the EU represents an answer to the perennial question of European unifica-

tion. This goal was repeatedly pursued in the past through the use of force or by

projection and imposition of a certain ideology over other nations (Roman Empire,

Carolignian Dynasty, Holly Roman Empire, Habsburg Monarchy, Napoleonic

France, National-socialist Germany). The EU stands as a watershed to this legacy

of violence championing sharing sovereignty and joint management of capitalist

economies.3 It comprises a formative influence on economic, political, social,

cultural, technological and environmental developments that since 1950s has fos-

tered the revival and transformation of European economies and societies, the

extension and reinforcement of democratic government and the rule of law and

the attainment of unprecedented general level of economic prosperity in European

history. This achievement was realized through a painstaking progress, applying a

careful incremental approach to the expansion of EU competencies, many times by

performing a qualitative leap forward for breaking the mould and lifting a deadlock.

There are not few those cases in EU’s history that a potential deadlock gave the

impetus for brave decision making opening the path to EU’s further integration.

Even from its inception, the EU has demonstrated this “leap forward” culture

championing economic cooperation in order to surmount political problems. The

Treaty of Paris (1951) and the establishment of the European Coal and Steel

Community (E.C.S.C) may be seen under this light. The new entity aimed to put

under common European control the coal and steel mines of Ruhr and Saar region.

The core idea was to establish a common market on those raw materials that are

1 Cini (2003), p. 732 European Union (EU) that succeeded the European Communities and thus this term is used rather

than its previous titles as Common Market, European Economic Community (EEC) or European

Community (EC).3 Tsoukalis (2003), Ch. 1.

16 E. Thalassinos and G. Dafnos

fundamental for waging war and to setup European supranational institutions

promoting shared sovereignty.

As the fear of German aggression remained in Western European countries and

the rise of the Cold War increased US pressures on Britain and France for

Germany’s rearmament, the proposal for the establishment of a European Defense

Community was put forward, in order to put new German troops under European

control. However, the idea of sharing sovereignty on such a sensitive field as

national defense, that touches the core of the nation-state, resulted in the rejection

of this plan, oddly enough, by those who proposed it in the first place, the French

side. In fear of watching the infant project of European cooperation falling apart,

the Treaty of Rome (1957) and the establishment of the European Communities was

advanced, which was restricted to vague references to political cooperation focus-

ing more on the field of economic cooperation.

The history of the EU is fraught with similar examples of failure of political

cooperation and redemption through the advancement of further economic cooper-

ation, the two most important being:

• The clash (1965) between France and other member states on the supranational

or intergovernmental nature of the EU that had as a consequence the withdrawal

of France from EU institutions for 9 months (empty chair crisis) and the

Luxembourg Compromise, later on, resulting in the Merger Treaty of Brussels

(1967) and merging the European Communities into a single institutional

structure.

• The rather unsuccessful fate of the Fouchet Proposals (1970s-European Political

Cooperation) that resulted in the acceleration of the Single Market.4

EU’s historical development stands as an unquestionable testament to its politi-

cal nature and its initial raison d’etre. Whenever Europeans reached a dead end in

the field of political cooperation they resorted to further cooperation and coordina-

tion on economy, trade and secondary fields of state policies anticipating that the

development of supranational institutional bonds and interests would bend hard

core sovereignty interests converging 1 day to a political union. Hence, the integra-

tion process has not always been smooth and economically or politically costless.

Yet, it has brought the European continent in the eve of a post-modern era that bears

both gains and challenges; on the one hand, war between EU member states has

become quite unthinkable but on the other hand EU nation states are called to

surrender more and more layers of their sovereignty if they want to steer the boat in

the harbor of enhanced integration and some kind of federalism.

4 Tsakaloyannis (2000).

2 EMU and the Process of European Integration: Southern Europe’s. . . 17

2.2 Theorizing the EU and Its Policies: Deepening, Enlargingand the Changing Nature of the EU

The EU’s incremental approach is incarnated best in its major treaties. The mid

1980s and early 1990s signposted the revival of the EU, as it took the leap forward

for the realization of the Single Market and the establishment of the Economic and

Monetary Union (EMU). The EU accelerated further integration through a number

of treaties such as the Single European Act (1986) and the treaties of Maastricht

(1992), Amsterdam (1997) and Nice (2001). Those Treaties expanded EU

competencies over a number of policy areas that shaped the acquis communautaire,whilst EU law increasingly took precedence over that of member states. While the

EU deepening process was launched, it was accompanied, at the same period, by

EU’s membership expansion. Over the last 20 years the EU family has reached the

number of 28 member states from 15 in early 1990s. The impact of those two

parallel processes on the EU’s functionality and operations was an issue that was

puzzling every interested party, from EU officials to academics.

Several theoretical concepts over the EU’s future modus vivendi have emerged

over the span of time. Prominent figures such as Winston Churchill and Richard

Nikolaus von Coudenhove-Kalergi had articulated the notion of a united Europe as

early as the 1930s–1940s. On the theoretical front, economic thinkers such as

Friedrich Von Hayek and Jean Monnet influenced fundamentally the conceptuali-

zation of European integration process. The former was immensely concerned over

the solution of the “German Problem” advocating the advancement of a political

market-based union that would result in the development of functions to a regional

or local level, thus delineating the liberal integration project.5 The latter is consid-

ered to be the founding father of supranationalism. From an economic standpoint,

his main focus was to promote deconcentration and decartelization. He showed no

great confidence to the unregulated free market, placing his faith in supranational

institutions and common economic policies. Jean Monnet’s pivotal contribution to

the European project was his notion of an international form of organization that

would be robust, capable of reaching agreement by means of compromise and

consensus. Monnet claimed that such an entity would foster economic cooperation

and such levels of interdependent relations that would eventually lead to political

federation and secure peace (functional federalism).6

Both these theoretical concepts served as points of reference to the development

of integration theories that followed and enriched the perception of the state in the

international system. Federalism and Functionalism proposed the containment of

the nation-state, while Transactionalism sought to theorize the conditions for the

stabilization of the nation-state system. In view of further enlargements and deeper

cooperation, integration theories evolved into new theoretical schemes. The two

competing theories that dominated the debate over EU integration were

5Gillingham (2003), Ch. 1.6 Rosamond (2000), Ch. 1, Gillingham (2003), Ch. 2, Monnet (1962), pp. 203–211.


Neofunctionalism (Lindberg 1963) and Intergovernmentalism (Hoffman 1964,

1966) while Constructivism came to enrich the debate.7 (See Annex 1).

As much as this debate dominated not only the theoretical realm but also the

structure of EU policies and every day practice, contemporary developments within

the EU and the international environment rendered the aforementioned duality

somewhat outdated. So, while before 1992 the focus was on the form of integration,on the normative practices of EU institutions (henceforth, “euro-polity”) as an

dependent variable and on the reasons that integration occurs, the 2000s surfaceda new perspective on European integration focusing more on the spill-over effectsthat it has, on Euro-polity as an independent variable and on the process ofintegration.

The two last decades we witnessed the empowerment of EU institutions com-

pared to previous phases of integration and the increasing significance they have on

member-sates’ domestic and foreign affairs. Despite the fact that the EU engulfs

distinct institutional cultures with balance of power fluctuating between intergov-

ernmental and supranational jurisdiction over time, it has managed to reach amodusoperandi of multilevel governance (MLG), which though is stretched to its limits as

the number of member-states expands.8 MLG is best described as a system of

overlapping competencies among multiple levels of governments and the interac-

tion of political actors across those levels. Member states executives are only one

set of actors in the European polity. States are not an exclusive link between

domestic politics and intergovernmental bargaining in the EU as those are the

result of multi-level policy networks contacts and policy. The structure of political

control is variable, dynamic and not constant, across policy areas.9

Today, the EU is the culmination of 60 years of evolution exhibiting many state-

like attributes, such as an executive (European Council), civil service (European

Commission), parliament, court of justice, single currency and single market, but

not being a unitary state. At the same time, it sustains a mix of intergovernmental

and supranational institutions, with common economic, environmental, foreign,

military, social and transport policies, without being a confederation or federation.

Instead, the EU is best described as a unique system of multilevel governance,

which Kleinman (2002) described as ‘incomplete federalism’.10

7 Rosamond (2000), Ch. 18 Rosamond (2000).9Marks et al. (1996), p. 41.10Mullen (2005)and Kleinman (2002).


2.3 The EMU and Its Politico-Economic Significance: Touchingthe Core of the Nation-State Once Again

In this context of EU’s unique nature, the EMU represents the crown’s jewel, the

most ambitious integration policy that the EU ever embarked on; it represents thepivotal policy of economic and monetary cooperation which was deemed as

necessary for completing the Single Market. At the same time, it touches on the

heart of the nation state arriving from a different departure than the one that was

firstly attempted in early 1950s, fostering or even demanding further integration for

its smooth operation.

On a more practical level, a monetary system represents a crucial factor for

national, regional or global economy. It facilitates international trade, foreign

investments and economic interdependence and is considered as a prerequisite for

a growing economy. The basic goals of a monetary system are to provide liquidity,

to be adaptable and to ensure trustworthiness and credibility.11

Additionally, there can be little doubt on the politico-economic significance of

the existence of a monetary system, let it be regional or global. A monetary system

is not a neutral factor as regards the balances of power and the relations that are

formulated between states. It affects with direct and indirect way states’ interests.

History has shown that the rise or the demise even of empires has strong correlation

to the emergence or the decline of a monetary system or to the access gained to

valuable raw materials that equaled to the issuance of more—but not inflationary—

money. David Hume was one of the first economic philosophers that had accurately

underlined the significance of money and its correlation to balance of payments and

trade balance while Robert Triffin framed the issue within a more contemporary

perspective. Even on an existential level, currency alone has increased political

significance since it is:

• an expression of political existence in the International Community, closely

related to concepts such as sovereignty and state,

• a symbol of political belonging to a community (society, country, region),

• a form of social bond within a community (society, country, region)

At the same time, the international environment within which the EU operates

was fundamentally changed since 1990s resulting in a shifting of balance within the

EU. Germany has emerged as the undeniable economic steam engine of Europe

claiming a respective political role in EU politics. This development coupled with

the pride that Germans took on the central role of the DM, played a significant role

on EMU’s structuring and Germany’s influence. Even geography played its part as

successive enlargements shifted EU’s epicentre to central Europe.

All the aforementioned were reflected on EU’s attempts to gradually advance a

Monetary Union. Past experience had resulted in the establishment of the European

11Krugman and Obstfeld (2011), Chs. 18, 19, 20.


Monetary System in 1979. The first attempt to coordinate EU exchange had as an

outcome the Exchange Rate Mechanism 1 which collapsed de facto in 1992 and dejure in August 1993 (Brussels compromise). However, its aftermath was valuable in

two respects; first, it highlighted Germany’s dominant economic and monetary role,

which had dissatisfied many countries and was considered by many to be part of the

problem and second, it created a culture of monetary discipline and monetary

institutions (European Monetary Institute that superseded the European Monetary

Cooperation Fund and TARGET) that laid the foundation for and were succeeded

by those of the EMU.

The Maastricht Treaty provided a new vision on Monetary Integration making

reference to the creation of a Monetary Union based on the establishment of a

Common Currency that would be managed by a common and independent Euro-

pean Central Bank. The model reflected, to a great extent, Germany’s monetary

structures and attitudes while it laid down the rules of this arrangement (Maastricht

criteria). Still, contrasting views on EMU’s future development had surfaced, the

two main being the economist versus the monetary. Economists believed that the

EMU is a political project that demanded supranational structures and

harmonization of member states’ economies before its establishment. On the

other hand, monetarists sustained that the EMU is an economic project of technical

nature that should not bear political implications and should be subjected to

intergovernmental checks. Those checks should be applied on the process of

EMU implementation, thus letting the institutionalization of this process to forge

the economic convergence between its member states. Which one of those views

was vindicated is still open to debate.

The motives for establishing the Monetary Union were the following:

1. Increase of Monetary stability & Economic Security against speculation.

2. Increase of Financial Credibility in International Markets.

3. Boosting of the Single Market that preceded the Monetary Union.

4. Increase of Economic power and independence in the International Political and

Economic arena.

According to economic theory (Optimum Currency Area-O.C.A.), the economic

rationale of a Monetary Union is:

1. Elimination of exchange rates fluctuations & devaluations

2. Greater price transparency

3. Reform of labor markets & opening up of economies to greater competition

which result in:

1. More efficient allocation of resources

2. Reduction of Cost of Capital

3. Price Stability

4. Boost of Productivity & Investments


5. Greater Prosperity: economic growth and development

6. Increase of Employment12

Whether the EMU has achieved these goals is still debatable. Some of those have

been attained while others are still missing. Yet, it is beyond any doubt that the

EMU still has to cover some distance for being considered an O.C.A. Today, the EU

seems as a stateless economy, an entity that has state-like competencies on the

economic field which though lacks the necessary system of political governance.

The gap between politics and economics has always been tantalizing the EU and

comprises the challenge to be answered ahead. The problem this time is that the

EMU project has raised the stakes high as it influences the well being of millions of

people testing the breakpoints of numerous European societies and their level of

commitment to the European ideal. At the same time, EU’s further development

and EMU’s effectiveness demand greater economic convergence and further inte-

gration on fields like fiscal policy, tax, social policy, banking and debt management,

all of which imply the emergence of centralized government competencies. This is

a multilevel and multi-actor puzzle to be solved, which poses demandingly enough

the question of future EU economic and political governance fuelling scenarios of

multispeed or core-periphery levels of integration.

2.4 The EMU and the Challenges Ahead: Four FutureScenarios13

The EU and the Eurozone are standing at a crossroads, facing the biggest challenges

in its history. The systemic crisis and the political attempts to overcome it have

far-reaching consequences for the future of the Economic and Monetary Union,

European integration and Europe in the world. By identifying, so far in this paper,

the main driving forces that influence the future development of the Economic and

Monetary Union, we may contemplate a number of different scenarios to show what

the Eurozone will look like in the year 2020.

1. Muddling through the Crisis. The Eurozone remains a house without a

protecting roof.

2. Break-up of the Eurozone. The Euro house falls apart.

3. Core Europe: Evolution of two-level integration with a smaller and stable, but

exclusionary Euro house.

12 On O.C.A. theory, its economic rationale and effects: De Grauwe (2012), Demopoulos

et al. (2001), Mousis (2005), Ch.7, Tsoukalis (2003), Krugman (1993), pp. 241–261, McKinnon

(1963), pp. 717–725, Mundell (1961), pp. 657–665, (1968).13 Analysis based on the report produced by Friedrich Ebert Stiftung Institute, Scenario Team

Eurozone 2020 (March 2013): Future Scenarios for the Eurozone: 15 Perspectives on the EuroCrisis.


4. Completion of the Monetary Union by a fiscal and political union. The roof is

repaired and construction completed.

2.4.1 Scenario 1: Mudddling Through the Crisis: The EurozoneRemains a House Without a Protecting Roof

According to this scenario, most of the Southern European countries still need

rescue packages and the European Central Bank keeps on buying their public

bonds, as the borrowing costs for them are too high. Given the increased needs in

capital, the resources of the European Stability Mechanism are still inadequate and

thus there is always the possibility of sovereign default.

The Economic and Monetary Union remains incomplete, unable to ensure

growth and employment and, even less, a transition to a new growth model that is

greener, smarter and more inclusive. Globally, Europe remains a weak player,

whereas the United States and other big powers, such as China, have managed to

overcome the crisis. As a result, the EU’s dependence on financial support from

external partners increases.

After many unsuccessful attempts the crisis management of the Eurozone

continues basically as a muddling-through policy. Even with a stronger emphasis

on growth and a certain relaxation of the rigid austerity policy after the German

elections in autumn 2013, the basic principles of the crisis management

implemented so far continue to prevail. The revised Stability and Growth Pact

still exerts pressure towards regular reduction of the public debt and the structural

public deficit and left little room for supporting public and private investment.

Fiscal consolidation remains difficult in many Member States because the

growth rate is too low. The long-term sustainability of welfare systems is eroded.

The Euro Plus Pact and all other attempts committing the Member States to further

convergence of corporate taxation and social contributions/benefits can not be

implemented. There are neither significant changes in the European instruments

for supporting investment nor macroeconomic coordination for growth. Nor is there

a European industrial policy to complement European trade policy. The European

strategy for growth remains limited to completing the Single Market and structural

reforms. In this context, the opportunities of the Single Market and of external

markets particularly benefit countries with public and private financial resources to

invest.

2.4.2 Scenario 2: Break-up of the Eurozone: The Euro HouseFalls Apart

According to this scenario, the EMU is split up into different blocs and some

countries have reintroduced their former currencies. The EU still exists, but is

reduced to a loose alliance in which even free trade is seriously hampered by

protectionist measures in many Member States. In some of these countries,


anti-European and nationalist-populist movements have come to power and pursue

a beggar-thy-neighbour policy. In the weakened economies, many strategic assets

are bought up by non-European countries, reducing Europe’s control over its own

production chains.

The crisis management within the EMU, which started in 2010, continues in

more or less the same way in the following years, leading to a worsening of the

situation. Access to financial resources remains subject to constant uncertainty.

Regulation of the financial system to reduce volatility and undue pressure is

confronted with substantial resistance and disagreements. The European financial

supervisory bodies are weak and there is a number of bottlenecks in interbank

lending across the Member States, which can not be reduced by last-resort

provisions of liquidity from the European Central Bank. A chronic credit crunch

prevails, deepening the recession in several countries. Differences in borrowing

costs across the Member States are too high and, since the resources of the

European Stability Mechanism are too low, sovereign default or severe and disor-

derly debt restructuring become a reality in some countries, with contagion effects

on sovereign debt and banks.

Even a new Stability and Growth Pact will put pressure on Member States to

systematically reduce public debt and structural public deficits, leaving little room

for promoting public and private investment. Fiscal consolidation becomes impos-

sible in several countries because they remain mired in recession over a longer

period. Welfare systems are still undermined and, in some Member States, partially

dismantled, leading to a major increase in poverty.

2.4.3 Scenario 3: Core Europe: Evolution of Two-Level Integrationwith a Smaller and Stable, but Exclusionary Euro House

According to the 3rd scenario, the EMU is completed by a smaller core group of

Member States within the framework of a new full-fledged Treaty outside the EU

treaties and excludes the non-Eurozone Members and even some Eurozone

Members (2 level Europe). The EU still exists, but is mainly reduced to a huge

free-trade zone which even can accept new members hostile to closer political

integration (for example, Turkey). The core group has implemented fiscal union

and is moving towards a real political union, while some EU members on the

periphery fall far behind these developments. Member States trapped in a recession/

stagnation with high unemployment and strong emigration flows, anti-European

and populist parties come to power pursuing protectionist policies and thus resisting

closer coordination of national budgets and programmes at European level.

Divergences across Member States regarding growth, investment and employ-

ment rates increases, even with the use of structural funds. There is a growing

conviction that the crisis can be solved only by stronger cooperation and the

implementation of a fiscal union in a smaller group of states in order to save the

common currency. This latter movement would probably be led by the new German

government following the 2013 elections, including France and some smaller


member states (core countries). Fiscal consolidation remains difficult in the

countries outside the core group because their growth is too low. The long-term

sustainability of welfare systems is strengthened in the core group but is also

weakened outside it.

The Euro Plus Pact, with its commitments to further convergence of corporate

taxation and social contributions/benefits, is implemented, but only in the core

group. New financial resources for investment, combined with a European indus-

trial policy, the Single Market and appropriate structural reforms, foster the transi-

tion to a greener, smarter and more inclusive economy in the core group. More

organised and competitive European production chains under the leadership of the

core group are better able to reap the potentials of the European Single Market and

global markets. The downside of these effects is growing inequalities between core

and periphery, to be seen in growth rate divergences and increasing current account

imbalances.

2.4.4 Scenario 4: Completion of the Monetary Union by a Fiscaland Political Union: The Roof Is Repaired and ConstructionCompleted

The Eurozone, is built on a more consistent Economic and Monetary Union,

coordinates its external position and there is a single Eurozone representation in

the Bretton Woods institutions. The Euro becomes a reference currency attracting

financial resources from all over the world. On the way to political union, a

two-speed Europe emerges, in which the Eurozone as a vanguard of states explores

closer integration. Non-members of the Eurozone are encouraged and assisted by

the vanguard to meet the preconditions for integration, which encompass more than

the Maastricht Criteria.

Different attempts to solve the crisis proved to be insufficient. The situation

constantly worsens, with massive social unrest and anti-European movements

gaining ground. Countries such as Germany and the Netherlands are now affected

by the crisis and ensuing social discontent. Led by France and following the

German elections of 2013, political leaders come to the conclusion that only a

leap forward can solve the problems. Closer involvement of the Member States and

European citizens in decision-making also strengthen popular support for European

integration, weakening the influence of anti-European and populist parties.

A revised Stability and Growth Pact puts pressure on Member States to con-

stantly reduce their public debt and structural public deficits, but leaves room for

promoting smart public and private investment. Balanced budgets pave the way for

more credible fiscal consolidation. The long-term sustainability of welfare systems

is also strengthened. The Euro Plus Pact, with its commitments to further conver-

gence of corporate taxation and social contributions/benefits, becomes easier to

implement. A European debt agency ensures joint issuance of public bonds as a last

resort, when issuance at national level reaches unreasonable levels. This favoures

lower and more reasonable borrowing costs in general.


The European Stability Mechanism is equipped to provide financial assistance

with a clear but balanced conditionality, deploying more effective and rapid

rebalancing and recovery programmes. Investment, growth and job creation are

supported by stronger European instruments, notably Community Programmes,

mobilising Community budget resources. EIB loans, guarantees and bonds, private

project bonds and other available financing sources are issued, such as pension

funds or taxation sources, including a financial transaction tax. These new resources

for investment, combined with a European industrial policy, the Single Market and

appropriate structural reforms, foster the transition to a greener, smarter and more

inclusive economy.

More organised and competitive European production chains are able to better

reap the potential of the European Single Market and global markets. The macro-

economic surveillance process is also used to improve macroeconomic coordina-

tion in the European economy, taking positive advantage of spillover effects.

Macroeconomic surveillance is coupled with stronger resources for catching up:

not only swifter implementation of the structural funds but also a European Fund

for Economic Stabilisation to deal with asymmetric shocks.

Social dialogue and bargaining are also encouraged at national and European

level to better align wages and productivity. Differences with regard to investment,

growth and employment rates decrease and regions lagging behind can more

realistically catch up in terms of competitiveness, social and environmental

standards, as well as reduce their external economic and financial deficits. Alto-

gether, the European Union is well on the road towards real (also political)

integration.

2.5 The Road Ahead and Challenges for the EU

The euro area’s ambitious reform agenda includes a battle on three fronts:

• Fire-fighting actions to keep the crisis economies’ (Southern Europe) adjustment

Programmes on track;

• Establishment of closer institutional ties to shore up the footings of the single

currency;

• Supporting a broadening and deepening recession by demanding more by way of

monetary support.

In this context the European Commission issued a “blueprint for a deep and

genuine economic and monetary union that includes the following two proposals:

1. To establish a euro area budget;

2. To issue common public debt.

Thus, consistent to its legacy of historical development through qualitative leaps

forward, the EU is called over the next 6–18 months to proceed to:


1. the implementation of the “six pack” agreement (3 regulations relating to

budgetary surveillance, 2 procedures for monitoring macroeconomic imbalances

and 1 directive imposing minimum standards for national budgetary

frameworks) and to

2. the implementation of the “two pack” agreement (tools for budgetary surveil-

lance and for dealing with financial instability and the establishment of the

Single Supervisory Mechanism to break the links between banks and individual

governments).

In the meantime, economic cyclical indicators in the euro area remain depressed

portraying an unfavorable picture. The unemployment rate has been rising for the

past year and a half while GDP growth for the currency bloc remains very weak and

economic growth differences across countries are remain significant (positive

growth in Q2 13 but below trend, probably until the end of 2014-See Annex 2).

The slide in activity is likely to cause a fresh headache for the ECB as it seeks to

meet its inflation mandate. With the refi rate at 0.75 % and the deposit rate at zero,

the scope for cutting short-term rates further is highly limited, implying the need for

quantitative monetary support via asset purchases.

Given this rather troublesome economic environment the priorities of the ECB in

the near future seem to be the following with the issuance of the Eurobond waiting

at the end of this course:

1. To restart the financing of peripheral economies;

2. To launch the Outright Monetary Transaction (OMT) programme before con-

sidering additional measures;

3. To cut the refi rate and look at possible additional unconventional measures to

restart the financing of SMEs.

4. To be harnessed to avert insolvency with or without the EFSF;

5. To intervene in some markets to prevent insolvency;

6. Some degree of expansionary policy on the part of the ECB is necessary for a

solution to Europe;

7. The ECB should issue ECB bonds to maintain the right track of monetary policy;

8. Eventually, those ECB bonds could be retired in exchange for Eurobonds.

Eurobonds could follow.

Still, the risks of this highly complex situation remain as the business sentiment

is bottoming in most euro area countries, while remaining well below the historical

average and economic activity remains driven down by the ongoing fiscal tighten-

ing, credit restraints in peripheral countries and private sector deleveraging. Despite

the impressive improvement in financial markets following ECB’s OMT, there is

little transmission to the real economy. The double-dip recession could have been

avoided if euro area governments had reacted more swiftly and more efficiently to

renewed tensions in sovereign debt markets which is still in existence. The decision

to launch an enhanced integration of the euro area shortly is an important milestone

in the crisis resolution and should gradually restore sound financial conditions


across the board. Discussions about the architecture of EMU are likely to be

chaotic, and tensions could resume temporarily in the meantime.

With significant progress in 2013 and the structural reform agenda gaining

momentum, it is likely to have 1.4 % GDP expansion in 2014, which though is

not sufficient to restart job creation. In this respect, unemployment is expected

reach a record high in peripheral countries, peaking at double-digit record highs.

As for the Greek conundrum, the Eurogroup’s Greek package buys time, but

does not deal conclusively with the funding gap (it falls well short of a complete

solution). On the positive side, the release of funds that the deal facilitates means an

outright default will be avoided for the time being. The disbursed funds should

allow important progress to be made with bank recapitalization. In effect, time has

been bought for the government to demonstrate a renewed willingness to undertake

reform, and it might be in a position to report a primary surplus in 2014, which

would be a striking achievement. On the downside, it remains unclear whether new

funds will be committed to the programme. The program is likely to have to be

reviewed within the next couple of years (possibly after next September’s German

elections). An outright haircut on EU loans of at least 20 % is likely to be needed if

Greece’s public debt trajectory is to be put on a convincing downward path.

2.6 Conclusions

There is no doubt that the EU comprises the most successful peace project in history

which in the course of time developed such economic and policy competencies that

transformed it to a unique international actor. The EU stands as a colossal and

unique enterprise that has succeeded in reviving European societies and economies

from the ruins of WWII and secured the most long-lived period of peaceful

coexistence in Western Europe.

The integration process has not always been smooth and economically or

politically costless. This achievement was realized through a painstaking progress,

applying a careful incremental approach to the expansion of EU competencies,

many times by performing a qualitative leap forward for breaking the mould and

lifting a deadlock. Today, the EU has been evolved into an international entity

bearing state-like attributes and a developed system of multilevel governance that

entails overlapping competencies among multiple levels of governments and the

interaction of political actors across those levels.

The expansion of its competencies was bound to push the boundaries of national

sovereignty challenging the role of the state. This development has not come

unanswered; rather it has created many frictions on international, economic, politi-

cal and social level. The EMU represents one of those policies that touch on the

heart of the notion of the nation state influencing, at the same time, the social and

economic reality of millions of people.

While the EMU is far from being characterized a complete Optimum Currency

Area, it has managed to tackle the outbursts of the Euroarea crisis, while setting up

institutions and regimes that are necessary for its effective management. Still, for

the EU to realize the completion of the EMU and a form of political union, it would


take once more a qualitative leap forward to be taken that will break the mould and

refresh the vision of European integration. This would entail:

• Closer involvement of the Member States and European citizens in decision-

making

• A revised Stability and Growth Pact that leaves room for promoting smart public

and private investment.

• A European debt agency that ensures joint issuance of public bonds as a last resort

• The furnishment of the European Stability Mechanism with tools to provide

financial assistance with a clear but balanced conditionality.

• New sources of investment such as the issuance of EIB loans, guarantees and

bonds, private project bonds and other available financing sources (pension fund,

financial transaction tax).

• Effective and coordinated macroeconomic surveillance process coupled with

stronger resources for facilitating weaker states to catch up.

• Encouragement of social dialogue and bargaining at national and European level

to better align wages and productivity.

In the context of this strategic plan, pivotal actors as the European Commission

and the ECB are called to take bold steps towards the resolution of this crisis taking

the integration process to the next level. Actions that would encourage such

development are:

• the establishment of a Euroarea budget,

• the issuance of common public debt (Eurobonds).

Today, the EU stands at a crossroad. Past EU experience has shown that such a

situation represents more of an opportunity to move forward and less a threat to its

existence. Those who are brave enough to abide to the new framework that is setup

are those who get onboard EU’s future progress. All that is needed is bold political

will, effective decision making, vision on EU’s finalite, closer involvement of the

European citizens in EU activities and solidarity to EU societies.

Annexes

Annex 1: Theorizing EU Integration14

Federalism It draws its theoretical basis to the writings of Coudenhove-Kallergi15

and Alterio Spinelli.16 Its aim was to make a new post-war start on a radically

different basis from the Europe of national states. It aimed to achieve a complete

14 See Rosamond (2000) and Dinan (2000, 2010).15 Coudenhove-Kallergi (1926).16 Spinelli (1972).


break from the old order of nation states, and to create a federation of European

states. Its guiding principle is the study of federal systems in designing an adequate

European modus opreandi putting institutions first.

Functionalism It was particularly associated with the writings of David Mitrany.17

It was a theory of how to achieve world peace, rather than a theory of regional

integration. It took a very different approach to the question from the European

federalists, who wanted to subordinate national governments to an overarching

federal authority.

He opposed the idea of a single world government or the creation of regional

federations, believing that this would simply reproduce national rivalries on a larger

scale. Instead, he proposed the creation of a whole series of separate international

functional agencies, each having authority over one specific area of human life. His

scheme was to take individual technical tasks out of the control of governments and

to hand them over to these functional agencies. He believed that governments

would be prepared to surrender control because they would not feel threatened by

the loss of sovereignty over, say, health care or the co-ordination of railway

timetables, and they would be able to appreciate the advantages of such tasks

being performed at the regional or world level.

Transactionalism It is founded on Karl Deutsch’s theoretical constructions.18 It

refers to the build up of security communities (Ferdinand T€onnies: “Gemein-

schaft”) as entities where the component governments either retain their separate

legal identities or form an institutional fusion. Its main hypothesis is founded on the

existence of a sense of community among states that serves as a critical link on the

level of communication between them.

Neofunctionalism This theory draws on the works of Mitrany and Monnet in

particular. The main figures in this school of thought are Haas (1968), Leon

Lindberg (1963, 1966), and Philippe Schmitter (1970).19

Neofunctionalism sought to explain how and why the states voluntarily interact

closely with their neighbours blurring the boundaries of their sovereignty while

acquiring new techniques for resolving conflict between themselves.

Neofunctionalists were pluralists in the sense that they argued that the international

activities of states were the outcome of a pluralistic political process in which

government decisions were influenced by pressures from various interest groups

and bureaucratic actors.

Using the concepts that were later called ‘transnationalism’ and ‘transgovern-mentalism’, neofunctionalists expected nationally based interest groups to make

contact with similar groups in other countries (transnationalism) and departments

17Mitrany (1966).18 Deutsch (1966, 1968).19 Haas (1968), Lindberg (1963), Schmitter (1970).


of state to forge links with their counterparts in other states, unregulated by their

respective foreign offices (transgovernmentalism).The advocate integration in areas of “low politics” which are at the same time

“strategic economic sectors” under the auspices of a high authority to promote the

integration process. According to their theoretical framework, the integration of

particular economic sectors across nations would create functional pressures thus

gradual entangling the national economies. Deepening economic integration will

create the need for further European institutionalization as social interests would

put faith to the new supranational center. Political integration and supranational

institutionalization would result as side-effects of economic integration.

Intergovernmentalism In response to the neofunctionalist analysis of European

integration, a counter-argument was put forward by Stanley Hoffmann (1964,

1966).20 This argument drew heavily on realist assumptions about the central role

of the government of states in the international arena.

European integration should be seen in a global context. This is characterized by

an international system ruled by anarchy (in the sense of the absence of a global

regulating authority of international relations), composed of the states (sovereign

entities that are formally and functionally equal). The key variable is the distribu-

tion of capabilities and power across states. Anarchy can produce order, but

cooperation between states is always limited by the nation state’s strive to survival.

Rational states seek to maximize the possibilities for their survival. Interests and

actions of the most powerful states constitute the nature of the international system

creating patterns/norms and shaping its limits.

This framework conditions the European Union as well, despite the existence of

supranational structure of authority. As a result, European Integration progresses

only as long as national interests coincide. Only then governments accept further

integration in technical functional sectors and low policy areas. Integration fails to

spread to areas of high politics that touch on the core of nation state sovereignty

(be it national security, defence or other that challenge the nation state’s existence).

Liberal Integrovernmentalism came to enrich this school of thought rounding up

some of its approaches based on A. Moravcik’s work.21 This theory claimed that

Theories of European integration had to be supplemented by more general theories

of national responses to international interdependence. It was sustained that the

unitary approach to state behaviour failed to explain the transfer to authority to

supranational institutions. Moravcik focused on domestic politics and how they

influence governments in international negotiations, as the latter try to balance

between economic interests in the domestic arena and national interests in the

international arena.

20 Hoffman (1964, 1966).21Moravcsik (1993) and Moravcsik (1998).


Social Constructivism This school of thought draws on the works of Alexander

Wendt Antje Wiener, Thomas Diez, Thomas Risse and Peter Katzenstein.22

Constructivists hold the view that the building blocks of international reality are

not only material but also ideational. Ideas matter and have normative as well as

instrumental dimensions, that they express not only individual but also collective

intentionality. Moreover, the meaning and significance of ideas are not independent

of time and place.

In turn, other factors shape the international system as well such as the social

interaction of states on the inter-national system, national norms on international

politics, the impact of European norms on changes in domestic politics, the type of

governance and their impact (cooperation of states, federal state, Economic Com-

munity, network) on political actors in Europe.

Annex 2: Tables

22 Indicative reference: Wiener and Diez (2009).


Table

2.1

RealGDPandconsumer

pricesin

majorglobal

economies

RealGDP

RealGDP

Consumer

prices

Consumer

prices

%over

previousperiod,saar

%annual

chg

%over

ayearago

%annual

chg

3Q12

4Q12

1Q13

2Q13

2011

2012

2013

2014

3Q12

4Q12

1Q13

2011

2012

2013

2014

Global

3.1

3.3

3.3

3.3

3.8

3.1

3.3

4.0

2.6

2.9

2.9

3.9

2.9

3.0

3.2

Developed

1.0

0.6

1.1

1.4

1.4

1.2

1.2

1.9

1.7

1.8

1.6

2.5

1.9

1.7

2.1

Emerging

5.3

6.0

5.6

5.2

6.5

5.0

5.5

6.0

4.4

4.8

5.3

6.4

4.8

5.2

5.0

BRIC

6.6

7.6

6.7

5.8

7.6

6.0

6.5

7.0

3.6

#4.4

5.1

6.7

4.2

4.8

4.6

America

2.8

2.6

2.0

2.6

2.6

2.4

2.4

2.8

3.0

3.3

3.1

4.3

3.3

3.4

3.8

United

States

2.7

"2.5

1.5

2.0

1.8

2.3

2.1

2.5

1.7

2.0

1.7

3.2

2.1

2.0

2.5

Canada

0.6

#2.0

#2.0

2.0

2.4

1.8

#1.9

#2.2

1.2

1.5

1.4

2.9

1.6

1.8

2.4

Brazil

2.4

#1.7

#3.3

4.1

2.7

0.9

#3.0

#3.6

5.2

5.4

5.4

6.6

5.4

5.5

#5.8

Japan

�3.5

�1.8

1.2

0.6

�0.7

1.6

0.1

0.9

�0.2

0.0

�0.1

�0.3

�0.1

0.1

1.6

Australia

2.4

2.4

3.3

2.8

2.1

3.6

2.8

2.0

2.0

3.0

3.6

3.3

2.0

3.3

2.5

China

8.4

8.5

7.4

7.4

9.3

7.6

7.6

8.1

1.9

2.4

3.4

5.4

2.7

3.5

3.9

India

4.2

6.8

10.0

5.6

7.4

5.5

6.7

7.4

7.8

8.2

8.0

9.5

7.8

7.0

5.7

Sou

rce:

IMFGlobal

Economic

Outlook


Table

2.2

RealGDPandconsumer

pricesin

majorEuropeaneconomies

RealGDP

RealGDP

Consumer

prices

Consumer

prices

%over

previousperiod,saar

%annual

chg

%over

ayearago

%annual

chg

3Q12

4Q12

1Q13

2Q13

2011

2012

2013

2014

3Q12

4Q12

1Q13

2011

2012

2013

2014

Euro

area

�0.1

�1.1

0.1

#0.7

1.5

�0.4

0.1

#1.4

2.5

2.3

2.0

2.7

2.5

1.8

1.7

Belgium

�0.1

�1.0

0.5

1.3

1.7

0.1

0.4

1.6

2.3

1.9

1.4

2.3

2.3

1.4

#1.5

France

0.9

�0.5

0.2

0.5

#1.8

�0.2

0.3

#1.7

2.4

2.3

2.2

3.5

2.6

2.0

"1.4

Germany

0.9

�0.7

1.4

#2.3

3.1

1.0

1.2

#1.8

2.1

2.0

1.9

"2.5

2.1

2.0

"2.5

Greece

�3.2

�5.3

�5.0

�4.3

�3.2

�5.3

�5.0

"�4

.3�7

.2�5

.9�4

.1"

3.1

1.1

0.1

#�0

.5

Ireland

2.4

"0.6

"1.1

"1.5

"1.4

0.4

1.3

#2.4

2.3

2.1

1.5

1.2

2.0

1.0

1.3

Italy

�0.7

�2.0

�0.8

#0.2

#0.6

�2.1

�0.8

#1.0

3.4

2.6

2.0

2.9

3.3

2.0

2.0

Netherlands

�4.1

�1.8

#�0

.3#

0.4

1.1

�1.0

�0.6

#1.2

2.6

3.3

3.1

2.5

2.8

2.6

1.3

Portugal

�3.3

�3.1

"�1

.9#

�0.3

�1.7

�3.0

�1.7

�0.8

3.0

2.0

1.2

3.6

2.8

0.9

0.4

Spain

�1.1

�2.5

"�1

.9�1

.1#

0.4

�1.4

�1.5

0.8

2.8

3.2

2.6

#3.1

2.5

1.9

#1.1

United

Kingdom

3.9

�0.2

#1.6

1.9

0.9

�0.1

1.4

#2.1

2.4

2.6

2.5

4.5

2.8

2.8

2.4

Switzerland

2.3

0.8

1.2

1.2

1.9

1.0

1.2

1.5

�0.5

�0.2

0.5

0.2

�0.7

0.9

1.5

Sweden

0.8

�1.2

2.0

2.2

3.9

0.9

1.3

2.4

1.0

1.8

2.0

1.2

3.0

0.9

0.8

Norw

ay

(mainland)

2.1

2.6

2.8

2.8

2.4

3.4

2.8

3.0

0.4

1.2

1.3

1.2

0.6

1.5

1.7

Denmark

�0.4

0.8

1.2

1.6

0.8

�0.1

0.9

1.8

2.5

2.3

1.7

2.8

2.4

1.9

1.8

Russia

6.2

10.9

�0.1

�0.2

4.3

3.7

3.6

3.6

4.5

#7.5

"8.8

"8.9

"5.4

"7.7

"5.3

Sou

rce:

IMFGlobal

Economic

Outlook


ProfessorEleftheriosThalassinosProject leader(Greece)

Ph.D. in Quantitative Methods, University of Illinois Chicago, 1983

M.B.A., in International Business, De-Paul University Chicago, 1979

B.A., in Economics University of Athens, 1976

Editor and Founder European Research Studies Journal since 1998 a

refereed international publication accepted by JEL indexed in EconLit,

SSRN Library, the American Economic Association, RePec Wharton

School, Copernicus, EUAgenda and Thompson Index (under evaluation)

while it is distributed by EBSCO Publishing, MA USA.; Chair Jean

Monnet; Former Jean Monnet Module; Chairman International

Conference on Applied Business and Economics (2007-2008-2009-2010-

2011-2012-2013); Chairman International Conference on Applied

Economics, 1996, 1993; Editorial board member: The Global Journal of

Optimization, and the International Journal of Computational Economics

and Econometrics; International Advisory Board Member: Public

Administration and Regional Studies Journal; former Department

Chairman (1998–2000, 2002–2004, 2004–2006) and Director of Graduate

Studies (2003–2005, 2005–2008, 2009–Present Time); Elected Member

of the University of Piraeus Board of Directors-External Relations; 2013:

Doctor Honorius Cauca, Danubius University of Galati; Visiting Professor

on numerous foreign and local institutions such as Hellenic Open

University, University of Craiova, Universite Paris X, University of

Finance and Administration (Prague), Danubius University of Galati,

University of Nis; Director of Numerous Projects the most recent being

Director of Jean Monnet Multilateral Research Project on the Political

Economy of the EMU (www.jeanmonnet-emu.eu); Director of Jean

Monnet Centre of Excellence on Shipping, Trade and Transport (www.

jmce-piraeus.eu); Director of several other local and international projects

(Please see attached CV in the relevant email)

Relevant Publications:• Thalassinos E., Stamatopoulos Th., Thalassinos P. (2014), “The

European Sovereign Debt Crisis and the Role of Credit Swaps”,

Chapter book in The WSPC Handbook of Futures Markets (eds) W. T.

Ziemba and A. G. Malliaris, World Scientific handbook in Financial

Economic Series Vol. 5, forthcoming

• Thalassinos E., Liapis K., Thalassinos J. (2013), “The Role of the Rating

Companies in the Recent Financial Crisis in the Balkan and Black Sea

Area”, Book Chapter in A. Karasavvoglou and P. Polychronidou (eds.),

Economic Crisis in Europe and the Balkans, Contributions to Economics,

2013, Springer International Publishing, Switzerland

• Thalassinos E., Thalassinos P. (2013), “CDS and Financial Crisis in

Europe”, 39th Annual Conference Eastern Economic Association, Session

F16, 911, May, 2013, New York, NY, USA

• Thalassinos E., Dafnos G. (2013), EMU and the Process of European

Integration: Southern Europe’s Economic Challenges and the Need for

Revisiting EMU’s Institutional Framework,Megatrend Review 2013, vol.

10, iss. 4, pp. 59–82

• Thalassinos E. (2012) “Country Risk and Financial Crisis”, Kirkareli

University, Economic Papers Edition• Thalassinos E. (2008) Trends and Developments in the European

Financial Sector, European Financial and Accounting Journal, Vol. 3Relevant Projects:• Director, Jean Monnet Centre of Excellence on Shipping, Trade and

Transport (www.jmce-piraeus.eu)

• Director, European Research Studies Group on the Political Economy of

the EMU (www.jeanmonnet-emu.eu)


http://www.jeanmonnet-emu.eu

http://www.jmce-piraeus.eu



http://www.jeanmonnet-emu.eu

References

Cini, M. (2003). European Union politics (p. 73). Oxford, NY: Oxford University Press.

Coudenhove-Kallergi, R. (1926). Pan-Europe. New York, NY: Knopf.

De Grauwe, P. (2012). The economics of monetary union (9th ed.). Oxford, NY: Oxford UniversityPress.

Demopoulos, G., Baltas, N., & Hassis, I. (Eds.). (2001). Introduction to European studies:Economic integration and policies (Vol. 2). Athens: Sideris. Part 3.

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Institutions

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IMF Global Economic Outlook.


Unemployment in Mediterranean EUCountries: Fighting Youth Unemployment 3Hardy Hanappi

Abstract

The most dramatic problem of European economic policy is the exploding

unemployment rate in the Mediterranean EU-countries. This chapter sets out

to explain the causal links leading to this major bottleneck in Europe’s economic

dynamics. In the first part the causal chain is described in detail as follows:

Unemployment is increased by austerity policy of governments—austerity pol-

icy is enforced by rapidly rising government debt—government debt has been

rising due to bailout of banks and speculative interest rate attacks on countries—

banking crisis and aggressive interest rate policy are a consequence of exploding

demand for (uncovered) financial promises at global financial markets—uncov-

ered financial promises are the only remaining channel for capital accumulation

if increases in (real) labour productivity are dying away on a global scale. The

phenomenon of European unemployment thus is explained by the impasse of the

dominant global mode of production, which had surfaced first as the financial

crisis in 2008.

The second part of the chapter uses the insights of part 1 to study the contours

of a possible EU employment policy, which can keep welfare levels in Mediter-

ranean EU-countries as high as possible. It is evident that welfare mainly is

determined by income, which for the majority of EU-households in turn depends

on employment. Employment decisions can be divided into three sets:

1. Employment decisions of public institutions (e.g. reversing austerity policy?)

2. Employment decisions of small and medium size enterprises (e.g. changing

work-time regimes?)

H. Hanappi (*)

Institute for Mathematical Methods in Economics, Vienna University of Technology,

Argentinierstraße 8, A-1040 Vienna, Austria

e-mail: [email protected]



39


3. Employment decisions of transnational corporations (e.g. EU regulation and

incentive structures transcending national boundaries?)

I all three areas special attention will be on youth unemployment and the

inevitable consequences that changes in retirement age will have. In a conclud-

ing section it is discussed how far a specific European economic policy [a ‘Pilot

Project Europe’, see (Hanappi, H. (2013). Can Europe survive? TenCommandments for Europe’s next ten years. In A. P. Balcerzak (Ed.), Growthperspectives in Europe?. Torun, Poland: Polish Economic Society.)] that differs

from other policies followed in other parts of the world economy is feasible and

can be embedded in the global context.

3.1 Why Is Unemployment Exploding?

There is no doubt that during the last 5 years unemployment, in particular youth

unemployment in Mediterranean EU countries is by far the most dramatic eco-

nomic disaster since the end of World War 2. It is sufficient to take a look at Fig. 3.1

to get an impression of the human tragedies that are summarized by these simple

lines.

The reason for being unemployed can be formulated rather profane: It is

equivalent to the fact that a firm or public institution has fired its employee, or

there never has been a firm or public employer that wanted to employ this individ-

ual. In capitalist countries the means of production which are necessary to trans-

form an unemployed individual into an employed worker are either in the hands of

private owners or are state owned.

For the world of private firms the decisions to reduce wage cost were straight

forward: When in September 2008 they got the news of a global financial crisis this

0

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Fig. 3.1 Unemployment in Mediterranean EU countries (Source Eurostat, AMECO)

40 H. Hanappi

immediately influenced their expectations concerning future sales. An expected

decrease in demand even with constant or slightly reduced prices had to lead to a

drop in expected revenues. And since profits are just the difference between

revenues and total cost, the level of profits could only be maintained by reducing

cost. Within a few years the omnipresent shibboleth of business was cost reduction,

or streamlining of production processes—to use a more optimistic sounding word.

Since in most firms wage cost constitute the largest part of total cost it is clear that

wage cuts and reduction of the work force were the consequence.1 Depending on

the relative difficulties either to reduce wages or to get rid of employees, as well as

some other country-specific institutional details, private firms tried to maximize

their profits by reducing their total payments to workers. Of course, this strategy

made the expected decrease in sales a self-fulfilling prophecy, the demand of

unemployed is always lower than that of a workforce in employment. So far

these processes might nevertheless have remained within the usual bandwidth of

capitalist business cycles: There is a countervailing force to the downward move-

ment that can become stronger the deeper the economy falls; the basis for this force

is the diversity of private firms. As weaker firms go bankrupt new market shares

become available for the survivors. If only few firms are left and the conditions for

the workers have deteriorated enough, then it only needs a strong export market and

recovery is in sight. But in the crisis from 2008 to 2009 this did not work.

First, the crisis had a more global character than anything that had happened

before. There was no outside saving demand. China kept its exchange rate low and

kept its domestic markets closed, and also the other possible candidate, Germany,

felt itself so frightened by the crisis that it kept its wages low.

The second element that this time was different in Europe was the fact that on the

one hand public employment had become a substantial part of total employment

while on the other hand the ideological force of the conservative ‘war for

privatization’ had influenced governments strong enough to make them imitate

firm behaviour. This was the source of what was called austerity policy.2 Instead of

profits the state had another difference to optimize, the difference between total

government revenues and total government expenditure. In this case optimization

meant to minimize budget deficit by firing public employees (cost reduction) and

increasing government income by selling or closing state-owned production units—

usually leading to further unemployment. An important consequence was the

deterioration of infrastructure (education, health systems, pensions, public trans-

port, etc.) that previously was provided by state institutions.

And this explains to a large extent why young people were hit by unemployment

particularly hard: It is much more difficult to find a first job than to defend ones

1As a side effect for those who remained employed their labour intensity, i.e. the tasks to be

performed in one unit of time, increased tremendously.2 The malicious influence of inappropriate economic theory, i.e. neoclassical theory, probably has

been less important than economists believe. For a state representative of the ruling class to act like

the CEO of a large transnational corporation had become attractive enough anyway, both types of

leaders despised complicated economic science.

3 Unemployment in Mediterranean EU Countries: Fighting Youth Unemployment 41

position in a firm, once the number of employees has been reduced enough those

who remain are relatively save—but no new workers will be hired still. To survive,

young people will stay with their parents and (if this is possible and affordable) will

continue to go to schools or universities—but this does not improve their labour

market position much. Youth unemployment is exploding (compare Fig. 3.2). In

particular the young in Mediterranean EU-countries are in a terrible situation, many

of those who could achieve a better education leave their countries; and this will put

these countries in an even more disadvantageous position in the mid-run.

The content of austerity policy thus is a set of policy measures which has

emerged as a mix of short-cuts based on conclusions drawn from inadequate

macroeconomic models and some even lessen scientific rules of thumb copied

from the behaviour of private firms. The latter behavioural maxim had been

propagated by conservative politicians as the need for privatization of state

institutions to return to the ‘natural’ capitalist mode of behaviour since the early

1980s. Austerity policy therefore has no sound and consistent theoretical basis and

best can be understood as a political agenda of class struggle from above; a bundle

of actions aiming to increase exploitation of Europe’s working population.3

Percentage of total youth labour force (15–24).

Nevertheless—and despite the difficulties that the split-up that the profit

achieved from stronger exploitation brought about—the fractions of the ruling

class had to agree on a common goal that could be used as a signal in ideological

warfare. This common denominator has been determined to be government debt.

And there is a good reason why the reduction of government debt could serve as a

common goal of all parts of the ruling class. Since the end of World War 2 the

European labour movement to an overwhelming extent (including the short

Fig. 3.2 Youth unemployment rates in OECD countries, December 2007 to March 2012 (SourceOECD)

3 It is not always easy to determine the borderline between exploited and exploiters. In the case of

one-person-firms and small firms in general the phenomenon of self-exploitation often lets this

borderline run right through individual physical persons. Moreover the amount of exchange-rate-

exploitation is haunting European class analysis since more than hundred years.

42 H. Hanappi

intermezzo of Euro-communism) had been under the influence of a social-

democratic strategy that tried to gain influence on social dynamics via conquering

positions in state institutions. A central element in this sublimated class-struggle

had been the installation of a social net (for health, pensions, education, and the

like) that was financed by running government deficits. A modestly growing stock

of government debt was also acceptable for the ruling class since interest paid on

this stock did feed the fraction of financial intermediaries (banks and insurances)

anyway; and its collateral, namely the guarantee of political stability without actual

class-struggle, seemed to be worth the exercise. Over the decades since 1945 the

amount of money parked in public funds by the government fraction of the ruling

class had led to the surprising result that these funds—fed by the payments of the

currently working population—constituted the majority of capital available for

global finance. It was this type of ‘surrogate profit’ that made the finance fraction

of the ruling class (with the help of the state fraction) so much stronger than the

original fraction of firm-owners. The counterpart of this enormously amassed

amount of public funds, of course, was the implicit promise—often secured by

national law—that they could be used as finance for the social net. The hidden tenet

of austerity policy, of the class-struggle from above, is to break this promise.

Conservative governments started this fight in the early 1980s, as can easily be

documented by rising inequality in income and wealth, e.g. measured by Gini-

coefficients. But the continuous economic warfare within OECD countries was

moderate enough to be compensated counter-movements of rising exchange-rate

exploitation and export of exploitative working conditions to the periphery of a

quickly globalizing world economy. Good old division of labour of the politicaleconomy of the world made it possible that capitalism survived another two

decades.

It is important to note that the implosion of the USSR as well as the surge of

China was falling in this period. A closer look shows that there is a sequence: First

came the high hopes of the West that with the defeat of the arch enemy USSR the

‘natural’ superiority of a capitalist mode of production will quickly incorporate the

whole world. This expectation proved to be at least premature in 1993. But then the

combination of China’s still Stalinist command structure of production with its

willingness to integrate itself in global trade, turned out to be quite compatible with

the needs of global finance capital. It was this strange mixture of a politically strong

Chinese government (with a long-run strategic time horizon) and US located big

money (with an ultra-short non-strategic time horizon) that shaped global dynamics

from 1993 till 2008.4 This coincidence of global forces led to an unprecedented

surge of capital accumulation, which was built on a landslide in the division of

labour as well as a mediatized swarming of (contract-secured) high expectations in

the world of international finance. Under this umbrella local national economic

4 In this context it has to be mentioned that the state fraction of the US ruling class since 1980 has

focussed on extending its military dominance in the world. In this fraction there is a deeply rooted

believe that in the end all economic problems can be resolved by direct coercive intervention.


policy remained a rather negligible procedure. Even the continuous increase of

government debt levels seemed to be manageable, in Europe the Maastricht Treaty5

typically played the role of a good advice that could be followed—or not.

The definite trigger event that led to the sudden burst of radical austerity policy,

of course, was the bail-out of banks by national governments. And this radical

austerity policy evidently was the kick-off for exploding unemployment rates in the

Mediterranean EU countries. It is clear that the bail-outs were a rapid political

reaction on the burst of the financial bubble on 15th of September 2008. It was the

US Federal Reserve Bank, which paved the way for this radically new policy

reaction. To understand its rationale the US context has to be kept in mind. Two

elements of this context are particularly important: (1) The USA (New York) was

the centre of international finance which is the only economic force that already was

completely global, and (2) the US Dollar, managed by the Fed, was the dominant

world currency. These two facts made it possible for the Fed to ply the role of a

global political counterpart to an unbound global capitalist force—in a sense the

role of a substitute for a global government. Note that both players in this game

were fractions of the ruling class in the USA, the finance fraction and the gover-

nance fraction, and moreover it is noteworthy that this quick policy reaction was

carried out by a new administration, the Obama administration, which had just been

elected and immediately had to prove that capitalism can be saved by state

intervention.

The European state fractions of the national ruling classes followed the US

example with a considerable delay. The more fragmented political processes and

time-consuming strategic games played between national elites postponed a com-

mon assault on the European labour movements’ achievements for several months.

Nevertheless in 2009 the crisis symptoms had become so severe that most

governments took over the debt of the most endangered financial intermediaries,

proposing implicitly to use their fiscal authority with respect to future incomes of

their population as collateral. To demonstrate that this is a credible promise an

immediate reduction in all social transfers and an effort to sell state-owned property

has been either pushed through parliaments or has been carried out by

circumventing to much democratic control.6

Radical austerity policy in European countries had a momentous and lasting

effect on unemployment rates in Europe in 2009 (compare again Fig. 3.1). But note

also that this effect was modified considerably by the structure of firms in Europe as

well as by the specific national institutional settings. Large transnational

5 To let the yearly budget deficit not exceed 3 % of GDP (one of the Maastricht criteria from 1992)

was just reformulating the wish that any such disequilibrium in flows (yearly government

expenditure minus yearly government income) should be possibly be covered by the yearly growth

of another flow (GDP). The 3 % of GDP growth was the rather optimistic guess of the average

post-war growth rate of real GDP.6 In that respect recent years have been an outstanding example to show that a law system is an

epiphenomenon of a social power structure. Law follows and legitimizes ex post what currently

prevails as dominant power structure—and not vice versa. Law accommodates power.

44 H. Hanappi

corporations (TNCs), in particular German transnational corporations, closed down

affiliates outside their home country, in particular those in Mediterranean countries,

while small and medium sized enterprises (SMEs) first were a bit more robust with

respect to employment, but then were hurt indirectly but permanently due to their

inevitable links to TNCs. As the first shock of 2009 was over TNCs recovered

faster—but not by re-opening their affiliates in Southern Europe, they rather

preferred to move production chains to the East: Eastern Europe, China,

Vietnam, etc.

With respect to the special role of national institutional structures a whole set of

arguments for the different experiences in Southern Europe can easily be found.

And since institutions are man-made and can be changed as soon as the necessary

quorum in parliament is given, these specific elements are the first to address

particular national sources of unemployment. In Germany, where the traditional

corporatist governance system had led to a dominance of representatives of finan-

cial intermediaries even in the boards of TNCs and in government bodies, a

controlled and continuously freezing of the nominal wage sum combined with an

aggressive export strategy (to non-European consumers, e.g. rich elites in China

and Brazil) enabled a less dramatic development of unemployment. To misinterpret

these special circumstances as a role model for all EU-states is the core mistake of

the famous Troika specialists that regularly visit and consult Mediterranean

countries. They usually point at the development of the (aggregate) labour produc-

tivity index of Germany and compare it to the one in the Mediterranean country. A

lower index then is interpreted as economic backwardness and by the use of some—

usually obscure—macroeconomic pseudo-model increases in government debt are

shown to be caused by too high consumption of the Southern population. Too high,

of course, with respect to the lower productivity index which is taken as an

indication for an unfinished European convergence process. A convergence,

which—needless to say—is meant to be a convergence towards the German

model. Examples of this kind of arguments are numerous and come in all kind of

formats, from simple polemics in everyday language to mathematical metaphors.

At a first level of critique of the view it is sufficient to take the concept of labour

productivity serious. Aggregate labour productivity is defined as the ratio between

total output (measured in Euro7) and total labour input (first measured in labour

time, but then usually transformed into money paid for these inputs8); productivity

thus is a derived scalar—and not an immediate technical property of the social

7 Since the quantities of the diverse output commodities and services are measured in qualitatively

different physical units, aggregation makes the use of their monetary value indispensable. Note

that this implies that all elements of market processes that determine prices therefore co-determine

aggregate output. Moreover, total output carries all the deficiencies that GDP measurement has

been criticised for (neglect of non-market mediated work, neglect of several reporting biases, etc.).8 As in the case of output different types of labour time input (e.g. simple versus educated work)

will make the use of the mirror image of monetary values necessary to be able to sum-up inputs.

But now not only distortions of market peculiarities are interfering, there also is the basic difficulty

that any type of hold-up cost and the whole exploding sector of financial services (with its

‘imputed’ cost) make the measurement highly dubious.


production process. Using less workers for the same output, i.e. increasing unem-

ployment and labour intensity of employed workers, is reported as an increase in

labour productivity. Producing a higher output with the same number of workers

and exporting the surplus (e.g. luxury cars) to non-European countries (because the

constant wage-sum of domestic workers is insufficient to buy this additional

supply) does not necessarily lead to additional unemployment, but certainly

increases labour intensity. In both cases the increase in productivity implies

increased exploitation of the European labour force; class struggle from above

fiercely returns to Europe.

At a second level the homogeneity of output across different countries has to be

questioned. In 1776 Adam Smith already considered the division of labour as the

source of the wealth of nations. A few decades later the division of labour between

countries was the topic of David Ricardo’s famous theorem of the importance of

relative advantages in productivity in two trading countries. Again the fact that the

two countries differed in their production capabilities was the starting point for

mutual welfare enhancement via trade. Much later any close investigation of the

sources of welfare gains in Europe after WW2 reveals that the most important

source has been the division of labour between European countries and their

respective, different output vectors. Compare for a moment how these welfare

gains derived from the division of labour typically are organized: In a private

firm the organization is determined hierarchically with firm owner(s) on top.9 In

David Ricardo’s comparative-advantage argument the result is brought about by a

very specific monetary-market-mechanism.10 In the case of European reconstruc-

tion after World-War 2 a considerable part of the organizational background was

started by Marshall-plan aid and carried on by efforts in all Western governments to

prove to the eastern hemisphere that capitalism works and can even pacify the

labourers. The kick-start of renewed activities of European unification that started

in the 1980s has just been a political response to renewed US dominance under

Ronald Reagan: Europe had to install an overarching political umbrella to provide

free room for its firms. This policy enabled the greater flexibility of firms in

applying Europe-wide division of labour, the division of the firm structure in

TNCs and SMEs was spurred. The major organizational effort thus came from

(government supported) large firms, SMEs had to adapt. But to be sure: all these

forms of division of labour—and as a consequence division of products and

services—resulted in an overall increase of output. The important point, of course,

is that it makes no sense to compare labour productivity changes in one part of the

divided work with changes in another part of the divided work.11

9 This productive contradiction between ‘Markets and Hierarchies’ has been studied in detail by

Oliver Williamson and his followers (Williamson 1975).10 See Shaikh (1980) for an interesting assessment.11 If the labor productivity of growing oranges in Spain changes at a different speed than the labor

productivity of the coal industry in Poland, then this does not give any hint on the quality of the

division of labor in Europe. To evaluate the latter it is always the overall situation that has to be

considered, and not just a comparison of two unrelated scalars.

46 H. Hanappi

The sudden turn to austerity policy that kicked European countries into deep

crisis in 2009 in the case of Greece was amplified by speculative attacks. This type

of behaviour of some agents at financial markets has to be briefly described, since it

recently occurs more often and with larger amounts of money at stake. First,

consider a large firm and its top manager. Next assume that the reputation of the

firm is good enough to enable a substantial build-up of debt. Now assume that the

top manager is able to earn (e.g. via options) a larger sum of money, often

proportional to the sum of transactions initiated by going into debt. Then, at a

certain point the firm goes bankrupt, its bonds fall dramatically. At that point the

previous top manager (eventually hidden behind a wall of straw men) buys back the

most profitable parts of his old firm at a very low price. And that is the algorithm

that, of course, has to be kept at the legal side of the law system by a team of

specialized lawyers. Playing this game with large firms in the US is not too different

from playing a similar game with a small country like Greece. For somebody living

outside the world of speculative finance it nevertheless is clear that it is possible to

shut down a large firm (say Lehman Brothers), while it needs a lot of imagination to

see how a country can be simply closed (say Greece). The comparison ends with the

huge unemployment that is produced in both cases. But what might look possible

with government bonds of a small country, like Greece, is not conceivable with

respect to a much larger country, like Italy. And this can explain differences in

crisis dynamics in Europe’s countries.

The final step in the line of argument presented so far is to provide a tentative

explanation why the global financial crisis did occur at all. Without such a hypoth-

esis any proposal for a remedy would be built on sand. The best interpretation of

what had happened at financial markets—first with the ITC bubble in 2001 and then

with the housing bubble in 2007—is probably rather trivial: The total amount of

capital looking for productive investment at a certain point in time had become too

large to find places that promised a high enough expected profit rate. At this point it

suddenly becomes more promising to kill your competitor and to increase your

market share than to bet on the success of some innovative projects. What had been

underestimated was how strongly interwoven the world of finance already was in

2007. To let Lehman Brothers fall fired back on the whole finance community.

Nevertheless quickly some groups recovered earlier and these financial sharks soon

looked for new prey on a global scale; and they are also looking at European

countries. This does not mean that the financially weak parts of Europe are only in

trouble due to speculative finance; there are numerous endogenous reasons calling

for mid-run adjustments (compare (Hanappi 2013)). But these global financial

agents certainly will act as destabilizing amplifiers as soon as they see a chance

to influence markets.12

12With the help of modern media technology in a milieu of media concentration, market manipu-

lation has become one of the most flourishing activities. For good reasons this is in stark contrast to

the propaganda of the agents active in this field, who emphasize the objectivity of financial

markets: They are mystified as a kind of ‘weather condition’, exempt from any human influence

or manipulation.


European politicians will have to defend Europe’s specific social models, its

welfare state aspirations. And defence will have to start where economic problems

hurt hardest. This is the fight against unemployment.

3.2 The Employment Policy of the European Union

The historical emergence of the European unification process, as briefly sketched

above, owes most of its energy to the attempt of large European firms (the

‘Copenhagen Round’) to create a common European political agent that was

needed to survive in a world economy that was dominated by the USA. In the

beginning this creature was thought to be a mirror image of the United States, some

called it a USB instead of a USA. And following this logic a first generation of

enthusiasts replaced the ‘American Dream’ in the brains of US citizens by a

‘European Vision’ to be implanted in Europe’s brains. After 30 years this type of

vision looks more like a caricature. Several elements that had helped to consolidate

a European vision have fallen apart.

The big and bad enemy in the East, the USSR, with which every European

citizen could compare the own type of government has moved further away and has

changed its physiognomy a bit. The favourable contrast with which social-

democratic politicians could easily prove their superiority with respect to workers’

welfare are now usually replaced by the failure to lead the newly joined eastern

European EU members to comparable welfare levels. Moreover the social net that

once was an outstanding feature of the European social model has been steadily

eroded. The property that indeed more and more resembles the pendant in the USA

is increasing inequality, inequality in income, in wealth, and inequality due to

geographical location. Given these circumstances it is impossible to convince

European citizens with the same type of European vision that was created

30 years ago.

In what follows 13 points, a line of argument, is presented that starts with exactly

this problem of a European vision and finally leads to a concise policy proposal that

could help to implement it.13

1. The further evolution of the political economy of Europe—of the emergence ofa continental political entity—is currently in a most critical situation. Thestakes are high. To keep the process of integration going a profound newimpetus is needed.

2. To create such an impetus it needs more than just the rational appeal to consider

economic advantages of further division of labour, or the implementation of a

13 This line of arguments was also sent as an ‘Open Letter’ to president Barroso answering his

request for policy proposals at the Global Jean Monnet Meeting in Brussels in December 2013.

48 H. Hanappi

‘new European spirit’ in the brains of European citizens engineered by the EU

marketing department. What it needs is a vision of Europe that unites its

population because it promises to solve its most pressing problem, a vision

that proposes a plan how to free Europe from its most dangerous enemy.3. The biggest problem that Europe is confronted with is how to fight unemploy-

ment. Every European citizen—employed as well as unemployed, firm owner

as well as worker and public employee—is confronted and fully aware that this

is the danger that threatens his/her living standard. The fight against this

common enemy thus is the key issue that can unite an overwhelming majority

of Europeans.

4. To achieve this goal, to show how to fight unemployment, the European Unionhas to provide an example in those countries where the problem is worst: in the

Mediterranean countries. The successful fight against this common enemy is

the foundation of the implementation of a new vision of Europe that will be

immediately recognized and acknowledged by the population.

5. In a first step to develop a solution—and to establish itself as a problem-solving political entity—the European Union has to analyse why the eco-nomic policies pursued in the last 6 years failed so dramatically.

6. It is immediately evident that such an analysis has to distinguish between at

least three levels of agents: (1) Unemployment is effectuated at the firm level

(bankruptcy, layoffs) and the level of certain public institutions (closing public

services); (2) it is modified by national economic employment policies

(national labour laws, employment programs, etc.); (3) it is only observed at

the European level, where then just some theoretical recommendations for the

lower levels are issued (by ECFIN, some DGs, etc.). This structure of agentsand corresponding activities has proved to be unable to fight unemployment.

7. The policy stance that the European Union can use to generate the new profileof a problem-solver has to start with a change of this failed decision structureof agents. Neither have low interest rates induced firms to increase employ-

ment, nor have higher national budget deficits (and accompanying higher

interest on government debt) allowed for higher public employment. For

firms the shrinking expected demand was the decisive element to reduce

employment and for nation states the focus on the budget led to reduction in

government expenditure (mainly by layoffs)—both processes leading to a

downward self-amplifying spiral.8. Economic policy of the EU necessarily has to run from the top level down to

the lowest levels that organize the actual economic labour relation. This inverts

the direction of the just mentioned sequence of actions, which start at the

lowest level. And this is the pivotal source for the current inability of the EU to

fight unemployment: The relevant decision power runs from the bottom to the

top, while money (and regulatory advice) runs in the opposite direction. At any

point on its journey from the top to the bottom the money stream is reduced

(in economic terms: bureaucratic hold-up cost) and the regulatory advice is


re-interpreted (adjustments to locally ruling practice). In the end EU-policy

had no impact on the still rising unemployment.

9. To implement an effective EU policy fighting unemployment in the Mediter-

ranean EU countries it is mandatory to circumvent the interrupting and

diverting intermediating levels on national and on firm level as far as

possible.

10. To achieve this goal it is proposed to found European Employment Agencies

(EEAs) in Lisbon, Madrid, Rome, and Athens. These EEAs are run directly

by the European Union and only a minority of their staff is recruited in the

respective host country. Their task is to provide work for the unemployed in

the area of local infrastructural improvements. To do so they organize

procurement processes that link local production units to local infrastruc-

tural needs (public health, public transport, housing utilities, education, etc.).

Furthermore they arrange payment of the newly employed as well as of local

production units. With respect to the latter they implement a strict control of

reimbursement of cost (including entrepreneurial wages) only.

11. The finance of the EEAs is provided directly by the European Central Bank.

It includes all internal cost of the EEAs as well as the cost incurred by the

payments it arranges. The success of an EEA is measured in direct relation to

the reduction of the national unemployment rate.

12. The activities of the EEAs are supported by a newly founded Labour Organi-

zation Task Force (LOTF). This group of economists elaborates three impor-

tant elements necessary for the matching of economic activities to

infrastructural deficiencies. (1) It identifies the characteristics of the unem-

ployed in the Mediterranean countries (age structure, gender, skill structure,

immigration-emigration flows, etc.); (2) it identifies which infrastructural

necessities are most urgent and provide a most durable welfare benefit for

the local population; (3) it surveys the different national institutional settings

concerning labour organization. Besides these more empirically oriented tasks

it also comprises of a more theoretically-oriented group, which works on the

design of anti-bureaucracy measures and mechanisms of democratic deci-

sion making.

13. The LOTF is a centrally located group whose work on the one (empirically-

oriented) side is tightly linked to Eurostat and ECFIN. On the other

(theoretically-oriented) side close cooperation with the group of European

Jean-Monnet Professors and EAECE in general has to be envisaged. Finance

of the LOTF again has to be provided by the ECB.

These 13 points clearly are only compressed statements of a rather broad

research and policy program that might be specified in more detail in the future.

It will be useful to specify such refinements in the form of a tree-structure, going

deeper into these questions with every additional step. To demonstrate this proce-

dure some first branches of the next level are proposed below:

First level of refinements

50 H. Hanappi

1.1 Unification has hit bottlenecks in several dimensions: With respect to eco-

nomics the political cleat binding countries with different public debt levels is

most important; with respect to the political (and in the background military)

expansion of the EU (and in the background NATO) towards East and

Southeast—this has come to a halt. Internally standard neo-classical as well

as Keynesian economic policy has finally lost all credibility to be able solve

the unemployment problem. Europe’s population feels this multi-dimen-sional stagnation and either is reluctant to participate in politics at all, or

even turns to nationalist right-wing movements. To wake-up Europe’s

citizens again a strong wake-up call is needed.

2.1 As history shows it is much easier to unite a diverse community against a

common enemy than it is to find and to promote a commonly shared posi-

tively connoted goal. Of course, most of the time this feature has been

misused: anti-Semitism, religious civil wars and other atrocities have played

on this piano. Since we can already observe how such misuse starts to develop

again with respect to immigrants and general xenophobia it is particularlyimportant to fix another—welfare-enhancing—common enemy:Unemployment!

3.1 An immediate difficulty arises from the fact that unemployment is a macro-economic social fact and not a visible property of a material carrier (e.g. thecolour of the skin of certain people). Nevertheless it is personally experi-enced: either by the restrictions on consumption of already unemployed

individuals, or as fear to become unemployed by those still employed. Leav-

ing the explanation of the causal structure of this rising danger to

demagogues is most dangerous, and thus has to be replaced by countervailingaction: The implementation of a program to fight unemployment.

3.2 This task unites Europeans of all countries! In its general form it implies a

re-organization of labour relationships all across Europe. Starting point for

such a redesign has to be the enhancement of welfare at the household level,

i.e. family income has to provide a sustainable level of income to financesocial reproduction. In Europe this is an ambitious, but achievable task,

which naturally implies a certain amount of re-distribution of income andwealth.

4.1 The step from a general goal (point 3) to an actually envisaged exemplaryaction (point 4) is pivotal to overcome the usual scepticism in face of ‘grand

rhetoric’. Only with a feasible short-run action plan in sight European citizens

will follow the vision of EU politicians.5.1 Any development of a problem solutions has to start with an analysis of the

roots of the problem. In the current case there exists a dominance of mistakenanalysis which led to erroneous proposals for remedies in the last 6 years.

Some of these misconceptions will have to be made visible to derive moresensible policies—though no time should be wasted to lead unnecessary

theoretical and ideological battles.


6.1 Here a possible stringent line of analysis of the roots of current difficulties issketched. It is specific to the European context and tries to incorporate aspects

that often have been experienced by European citizens.

7.1 This is a side-step to a mild critique following the standard Keynesian

investment function and the role of expectations in the accelerator princi-

ple—as these elements in their vulgar form often occur in public discourses.

In this context it is meant to take some already existing pieces of explanation

for self-amplifying disasters (in more informed minds) to lead the laymen to

some deeper levels of explanations.8.1 This then is the radical turn to be taken: To initiate an anti-bureaucratic policy

stance that empowers a benevolent central bureaucracy! This difficult

(in ancient Greece: dialectical) policy in plain economic jargon has been

called the fight against hold-up cost.8.2 Note that it is the distance between the source of money (the ECB) and the

final purpose of this money (namely the establishment of a work contract with

a currently unemployed worker) measured in the number of intermediate

nodes (possibilities of leaking) shall be minimized.8.3 Note also that an adjustment of the direction of action stream and money

stream—both shall flow in the same direction—makes a mutual controlmechanism much easier and less time consuming. But remark that this effect

reduces the power of (bureaucratic) federalist agencies and therefore needs

strong decisions from the top to overcome their resistance.

9.1 To start this strong type of European policy an appropriate small and at the

same time most acute set of countries has to be focussed on. These evidently

can only be the Mediterranean EU members.9.2 As unemployment is spreading across the continent, a process that will not

be stopped in the next 5 years, it can be anticipated that similar measures will

have to be envisaged in other EU member countries too. Typical candidateswould be Eastern European members, though their special types of problems

will need some specialized design features for such a policy.

10.1 This is a very detailed description of a set of specific actions that can be

immediately implemented. As any such proposal its detail can be debated and

modified. Nevertheless it is extremely important to nail down action as

something that leads to a material (physical) change of the problem at

hand. It is not just another expression of hot air.

10.2 At this point implementation details will have to be made even much morespecific to become operational. In particular the individual country specifics

will have to be taken into account.

11.1 Since the European Union is in a position to produce the money Eurozone

countries use, there is no direct limit to the increase of money supply (credit).

Of course, the indirect effects have to be observed. The overall impact of the

finance of EEAs on the money supply will be rather small, and might lead

only tominor deprecation effects on the Euro (rather for reputational reasonsthan for any other mechanism). Furthermore this will imply some help for

52 H. Hanappi

European international exporters and will (mildly) hurt importing households

and firms—it remains to be seen if there is a net effect at all.11.2 The expected generalization of unemployment and the fight against it implies

a further extension of the Eurozone to keep its finance on track. The bankingunion as well as other steps towards a better democratically controlled

monetary system are steps in the correct direction.12.1 The Labour Organization Task Force should not duplicate efforts that are

already taken care of by other parts of EU institutions. But it should organize,bundle and focus its staff on these very specific questions.

12.2 The LOTF will have to be structured into a more theoretically oriented groupand a more empirically oriented group, which have to be institutionallyforced to permanent interaction. The core group of scientists should be

political economists (economists), helped by sociologists, lawyers, game

theorists (e.g. for voting theory), media experts (for spreading ideas), etc.

13.1 To embed the LOTF in the currently existing network of EU institutions isof ultimate importance. This has to be carried out by top level decision makers

of the EU and cannot be delegated to lower levels. The backbone of LOTF

with respect to its personnel should come from existing think tanks, from

selected academic backgrounds and from existing EU institutions. To start it a

small group of a few board members (3–5 persons) could be directly assigned

by the European Commission, which then shall actively and rapidly set up the

organization.

13.2 Before this action of assignment is started a preliminary discussion roundshall be quickly announced (and selected invitations sent) to prepare this step

in Brussels.

3.3 Conclusions

The discussion of the problem of unemployment in Mediterranean European

countries put forward in this chapter emphasis two important aspects. First, it

underlines that a theoretical understanding of this phenomenon has to start with a

broad, history-rich approach; but second this sophisticated and time-consuming

work should not prevent economists to produce immediately proposals for an

economic policy that can be operationalized and helps the European unification

process to survive in the short-run.

With respect to the first task the difficulties mainly arise due to the tremendously

increased interaction between the different parts of the global political economy

and its accommodating communication networks. Yesterday’s analytical device

called ceteris-paribus assumption that allowed to deal with problems one after the

other and thus—via theoretical division of labour—produced isolated specialists for

different theoretical fields, this device has proved to be an impasse for theorizing

today’s society. Dealing with unemployment immediately implies a debate on state

functions, on pension systems, on global trade and productivity patterns, on the role

of cultural differences, etc.


The final element highlighted here is that the role of the historical mission of

capitalism, namely the increase of labour productivity by innovative entrepreneur-

ship, in the most advanced parts of the world has reached its goal so perfectly that

further accumulation (driven by profit rate expectations) only leads to ever more

disastrous financial bubbles. A glance at the development of labour productivity

growth (adjusted by hours actually worked and the increase in human education)

since 1974 shows that entrepreneurial activity has run out of steam.14 As Fig. 3.3

shows the long-run vanishing of growth (below 1%) not only occurs in the four

Mediterranean EU countries but follows a very similar development in Germany.15

-4,0%

-3,0%

-2,0%

-1,0%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

8,0%19

7419

7519

7619

7719

7819

7919

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

11

perc

ent

Growth of Labor Produc�vity

4 Med Ctys Germany Log. (4 Med Ctys) Log. (Germany)

Fig. 3.3 Growth of labour productivity in 4 Mediterranean Countries (ITA, ESP, GRE, PRT) and

in Germany (Source [Feenstra et al. 2013])

14 The year 1974 has been chosen as starting point because a marked turn in the world economy

followed the breakdown of the fixed-exchange rate system (Bretton Woods) in 1971. This was

immediately followed by the turmoil at crude oil markets, which it initiated (oil crisis of 1973).

Only with 1974 the new system started to consolidate itself.15While this disappearance of investment opportunities in Europe is a sign of stagnated entre-

preneurship, there were different reasons for the same difficulty in other parts of the world,

e.g. China, India, Russia, Latin America, and Africa. The cumulative effect of these different

impacts at some point (September 15 of 2007) led to a sudden switch of strategy of some big

players in international finance.

54 H. Hanappi

If entrepreneurs cease to offer innovation opportunities, then investors are seduced

to believe in the empty promises of stock exchange charlatans—bubbles are

growing.

With a short delay these bubbles surface—inter alia—as exploding unemploy-

ment rates in those countries of Europe which seem to be easiest to be transformed

into a regime of substantially increased exploitation. The set of policies to achieve

that (disguising themselves as ‘austerity policies’) currently are changing labour

laws and other institutional elements providing a social net for populations, but in

some countries they might even be topped by more authoritarian (military)

solutions that promise to organize coercively advanced exploitation. This danger

for European welfare increase hopefully will stimulate theoretical work proposing a

pilot project Europe that can provide a blueprint for the European political

economy.

For the second aspect, on a much more modest line of argument—since long-run

visions16 can only come alive if the carrier system survives in the short-run—it is

insisted that there has to be immediate economic action based only on a preliminary

understanding of the object of investigation. It is within this range of issues that first

successes will have to be achieved.

References

Feenstra, R. C., Inklaar, R., & Timmer, M. (2013). The next generation of the Penn world table.Available for download at www.ggdc.net/pwt

Hanappi, H. (2012). Shangri-La Governance. A sketch of an integral solution for EuropeanEconomic Policy based on a synthesis of Europe’s problems. Updated version of a paper

presented at an EU COST meeting in Stockholm 2010, published in COST working papers

series. Available on the Web: http://www.econ.tuwien.ac.at/hanappi/Papers/Hanappi_2012s.

pdf

Hanappi, H. (2013). Can Europe survive? Ten Commandments for Europe’s next ten years. InA. P. Balcerzak (Ed.), Growth perspectives in Europe?. Torun, Poland: Polish Economic

Society.

Shaikh, A. (1980). On the laws of international exchange, in [Nell, 1980].

Williamson, O. (1975). Markets and hierarchies. London: The Free Press.

16 Compare Hanappi (2012) for a sketch of such a vision.


http://www.ggdc.net/pwt

http://www.econ.tuwien.ac.at/hanappi/Papers/Hanappi_2012s.pdf

http://www.econ.tuwien.ac.at/hanappi/Papers/Hanappi_2012s.pdf

The Impact of the Eurozone Crisison a Periphery Country: The Case of Italy 4Franco Praussello

Abstract

This study describes the long path that allowed Italy to give up the traditional

policy of high wages-high inflation-devaluation of the national currency (the

Lira) and accept a stability oriented policy inspired by the Bundesbank, till the

final outcome of taking part in the euro launch in 1999. The central topic of the

paper addresses the positive and negative consequences of the adhesion to the

eurozone, stressing the widening gaps with the core countries economic

conditions and the costs of the double dip recession which Italy suffered in the

period 2008–2013. The analysis examines the difficulties experienced by the

different Italian governments in producing the necessary reforms required by the

euro zone membership. The study also examines the present day challenges

facing the Italian economy, where a long required process of fiscal consolidation

in a possible deflationary framework will hamper the reduction of the huge

public debt, whose weight is second only to the Greek one. Introduction and

conclusions stress the main goals and results of the study.

4.1 Introduction

Italy has been a starting member of the European integration journey since the very

beginning and even before that, since in the interwar period some of its citizens

were amongst the warmest promoters of continental unification, as it is shown by

the overall tribute currently paid to Altiero Spinelli, who in the antifascist prison of

the Ventotene isle with its manifesto in the early 1940s dared to propose the

objective of a European Federation as a viable political goal. All that, long before

F. Praussello (*)

DISP University of Genoa, 16124 Genoa, Italy




57


the action of the post war governmental founding fathers such as Adenauer, De

Gasperi, Schuman.

At the same time, after the tragic fascist parenthesis, Italy’s political class was at

the forefront of the integration process considered as a powerful means to modern-

ise its social and economic structures. And indeed, one of the outcomes of the

integration process at the European level was the upgrading of its economy to a

fully industrialised stage, allowing the country to enter the world Ivy league of most

industrialised powers. As a result, Italy’s economic elites have been for long

passionately Europhile, while public opinion espoused what was called a wide-

spread Europeanism.1

However, what we have just described changed all of a sudden in recent times,

when the eurozone crisis broke out and governments, in a vain attempt to fix it,

decided to deliver the bitter medicine of austerity to Italy and other periphery

countries. Thus, after having enthusiastically accepted to join the eurozone in

1999, the economic costs caused by austerity measures that its public opinion

considered as imposed by Germany had the effect to alter the mood, paving the

way to a widespread euroscepticism. As a consequence, real difficulties experi-

enced by Italy in reforming its economy in order to accept the single-currency rules

and the decreasing political acceptance of the latter could in the future put at risk its

participation in the eurozone.

The present note aims at describing the costs implied in the adhesion of Italy to

the single currency, omitting to underscore the huge benefits derived from it, which

do not form a specific subject of the inquiry but are surely overwhelming. The paper

is organised as follows. In next section the long path followed by the country for

importing financial credibility is scrutinised, from the initial attempt to link the

national currency to the rest of the European monies in the aftermath of the collapse

of Bretton Woods agreements, to the troubled qualification for entering the first

wave of eurozone participants. In Sects. 4.3 and 4.4 the early impacts of the

adhesion to an area characterised by a low-growth bias are analysed, together

with initial doubts as to the capacity of Italy’s economy to bear the eurozone

constraints. Section 4.5 focuses on the high costs caused by the eurozone sovereign

debt crisis, while Sect. 4.6 identifies a possible way ahead allowing Italy not to cut

its links with the single currency area thanks to pro-growth policies at the European

level. The note is concluded by some final considerations summarising the main

results of the research.

1 As a case in point showing the early attachment to European values, we can cite the success of a

nationwide referendum held in 1989, where 88 % of Italian public expressed consent to attribute

constitutional powers to the European parliament.

58 F. Praussello

4.2 A Long Way to Financial Stability

The choice made by Italy to take part in the long process of European integration

after World War II, playing a role of founding country of the European Community

and later on of the European Union (EU), besides being surely the most far-reaching

decision taken by its government leadership during the second part of last century,

helped radically change its political, social, and economic real foundations. As far

as the latter are concerned, European integration has been an outstanding driver of

the modernisation of its economic and social setups, from the period of the “Italian

boom” which transformed a backward country living primarily on agriculture into

one of the main world industrial powers, to a stability-oriented market economy in

most recent years. During the long time span stretching from the first liberalisation

measures brought into being by the European Economic Community (EEC) to the

achievement of Economic and Monetary Union (EMU) through the launch of the

single currency, Italy had to adapt its industrial basis and government superstruc-

ture to the needs of the internal market and further of the world globalisation,

changing progressively its monetary constitution as well.

For a country which used to rely on a politically-prone central bank, capital

controls, and a regular business cycle based on a vicious circle where high cost

inflation in sectors exposed to foreign competition was followed by balance-of-

payment difficulties and a devaluation of the local currency, the Lira, with further

inflationary tensions, it was not an easy task. The challenge which Italy had to

assume was dramatic, but inescapable. Monetary stability was indeed a prerequisite

for a continuing economic integration and when the first European currency, in fact

the US dollar within the Bretton Woods system, failed, market integration had to be

necessarily accompanied not only by monetary stability, but also by monetary

unification, which in reality was enshrined in European agreements. Thus Italy,

like other member countries, accepted the “divorce” with its central bank, for sake

of the latter’s independence, and the following institutional constraints laid down

initially in the European Monetary System (EMS) arrangement and later on in the

Maastricht treaty in view of establishing the eurozone.

However, the path leading from the Lira to the euro was a bumpy one (Praussello

2012). Not to speak of the first attempt by the EEC to ensure exchange rate stability

in Europe in the immediate aftermath of the Bretton Woods collapse with the

creation of the “Snake”, a target zone experience among the European currencies,

which Italy was obliged to abandon in the year following its inception, the main

stumbling block encountered by the country in the road to monetary stability

occurred after the early stage of EMS, when the latter was functioning as a crawling

peg device, which allowed Italy to adhere to its growth-cum-inflation model,

requiring a progressive devaluation of the Lira.2 In 1987, following with a lag the

2During that stage the Lira was devalued by more than 20 %.

4 The Impact of the Eurozone Crisis on a Periphery Country: The Case of Italy 59

ruinous experience of France, where in 1984 President Mitterrand did not succeed

in managing an independent expansionary policy and was obliged to adopt the new

stance of “franc fort”, Italy decided to scrap its old accomodative monetary stance

by accepting in full the EMS rules. As a matter of consequence, it entered the group

of loyalist countries, recognising the leadership of the Bundesbank’s conservative

policy. However, the new strong currency option proved to be too demanding for

the country. Indeed, in 1992 the failure of the Danish referendum on Maastricht

treaty revealed the excess of credibility by which in that time the EMS was

functioning, putting at risk the permanence within the fixed exchange rate scheme

of a number of participants. In short, international speculation could throw out of

the Exchange Rate Mechanism (ERM) both the UK and Italy. In fact, an attempt by

the Bank of Italy to shield the currency parity at the cost of losing a huge amount of

foreign reserves was unsuccessful and the Lira was obliged to leave the ERM.

Among possible factors explaining such a development, a crucial role was

played by two causes. First a built-in mechanism of the EMS itself, which penalised

past records of inflation, since according to the well known effect of “tying one’s

hands” (Giavazzi and Pagano 1990), every time that the Lira devalued, the new

parity agreed with the EMS partner countries could not entirely cover past inflation,

therefore letting a margin left, which progressively translated into a loss of compet-

itiveness for Italy’s exports, burdening its balance of payments. And second the

lifting of capital controls in the process of fully liberalising capital movements,

which allowed at the start the country to bear EMS constraints. From this stand-

point, the Lira crisis reminded us of the Mundell’s triangle of impossibility.

In the aftermath of the currency withdrawal from the ERM, Italy resumed its

policy of competitive devaluation or depreciation, which was at the origin of an

expansionary cycle, which however was on the wane when it reentered the EMS in

1996, for being able to qualify as founding member of the single currency. Yet, at

the same time Italy’s poor credentials in terms of stability records and commitments

levelled criticisms and doubts among its partners pushing them, under the lead of

Germany adopting the very conservative approach of ordoliberalism, to introduce

the financial conditions put forward in the Stability and Growth Pact (SGP), in order

to extend the Maastricht requirements to the working of the incoming eurozone.

4.3 Doubts on the Eurozone Constraints Sustainability

In the aftermath of a difficult qualification for the first wave of eurozone founders,3

Italy experienced the economic hard-peg constraints of the monetary union, which

had changed dramatically its monetary constitution. In the absence of the exchange

3 Italy could qualify to enter the monetary union only thanks to a temporary « Europe tax », which

allowed it the respect the 3 % limit of public deficit, a benevolent assessment by its partners, who

considered the high level of public debt as being on a decreasing path, and possibly, according to

some rumours, a financial window dressing helped by prominent international banks. In addition,

60 F. Praussello

rate tool, the adjustment variables of its economy became domestic costs, whose

markets required a high degree of flexibility.

After the single currency launch, Italy had to face the strong competition of

German labour costs, whose dynamics followed a path of wage deflation, thanks to

the labour market reforms previously carried out by the Schoeder’s government. As

a result, the loss of competiveness towards Germany by 2006 reached already a 15–

20 % wedge, whose negative impact on the balance-of-payment position could be

possibly offset by an internal devaluation, i.e. a wage contraction implying a decade

of very low inflation, which seemed out of reach in the absence of a wide plan of

structural reforms (De Grauwe 2006). The rightwing government of that period, led

by Mr. Berlusconi, proved to be unable to deliver the necessary labour market

flexibility and in fact, towards the middle of the 2000s, was nurturing doubts about

the benefits of remaining within the eurozone. To be sure, by 2005–2006 the junior

partner of the rightwing coalition, the Northern League, called for the reintroduc-

tion of the Lira, while Berlusconi himself defined the single currency as a disaster.

Furthermore, in that period a number of economists, such as Roubini (2006),

expressed concerns about a possible public debt crisis for Italy following a seces-

sion of the country from the euro area, whereas Mundell, when later on the

sovereign debt crisis erupted, maintained that the true sick country of the eurozone

which could produce a break up of the monetary union was not Greece but Italy,

whose bail out would prove to be unbearable (Wei 2010).

Such pessimistic assessments were vindicated some time later, when in 2011 the

sovereign debt predicament spread from Greece and other periphery countries to

Spain and Italy, exacerbating tensions on public securities yields, whose level rose

for including two intertwined risk premia: one for a potential country’s default and

one for a possible eurozone break up. Regarding Italy, in particular, developments

linked to the adoption of strong restrictive measures in order to put domestic finance

in order brought to a double-dip recession, whose outcomes in political terms

subdued the support to EU-inspired austerity measures. As a result, the number of

eurosceptic or even europhobic forces campaigning for a secession of Italy from the

eurozone increased to a dangerous level.4

However, the fact that the ECB has taken in 2012 the official commitment to

save the eurozone through the fresh Outright Monetary Transactions (OMT) tool,

with the following truce offered by international speculation against Italian bonds,

has been so far reducing the spreads on them in comparison with the German Bund,

giving new hopes that the country can bear the eurozone constraints at least for the

foreseeable future. All that, provided that the present flaws in the design of the

the government was initially doubtful whether to candidate at the start of the eurozone or to gain

additional time for putting in order Italy’s financial conditions.4 Besides two small parties, the Northern League and the rightwing party of former fascists, the

withdrawal from the euro area is currently advocated by the Five stars movement of Beppe Grillo

(with a strength of about 20 %), whilst the Forza Italia party of former prime minister Berlusconi

(25 %) is at best a lukewarm supporter of euro.


monetary union can be mended, as we are going to see in next sections. In fact,

should this not happen, new crisis events could resurface.

4.4 Impacts of Eurozone Membership

Two of the main consequences for Italy of the working of the monetary union and

its insufficient features of Optimum Currency Area (OCA) concern possible anti-

growth effects of its stability policies on the one hand and the divergence of

regional cycles within its boundaries and in the absence of an area-wide shock

absorbing device on the other (Praussello 2011).

As to the first issue, in accordance with a widespread belief, Italy participation in

the euro area could be considered as a relevant factor of the long record of the

country in terms of limited growth if not stagnation and high unemployment.

Indeed, according to a first group of scholars focusing on the subject on the eve

of the sovereign debt crisis suffered by the country after the end of the 2000s,

conservative economic policies carried out by Germany inspired by the old ideol-

ogy of ordoliberalism and the ECB created a low-growth bias framework hindering

the pursuit of expansionary measures by the more fragile members of EMU. Hence,

scholars such as Canale and Napolitano (2009), Dubois (2009), De Cecco (2007),

and Carlucci (2008) identify the inner working of the eurozone as the main culprit

of the dramatic fall in the medium-to-long-run rate of growth of the country, since

Italy’s GDP decreased from 5.7 to less than 1 % from the 1960s to the period 2001–

2007, as shown in Table 4.1. And in fact, if we compare GDP growth of the single

currency area as a whole on the one hand and of Italy on the other since its

inception, we find similar dynamics, even though after 2010 the performance of

the latter tends to be less satisfactory than the former’s.5

However, other studies point to factors different from the eurozone rules.

Accordingly, Faini and Sapir (2005) focus on the outdated model of specialisation

adopted by Italy, which suffers currently from the strong competition of emerging

countries, whilst Gros (2011) underlines the negative role played by its poor

political governance, and Russo (2008) underscores a mix of factors, where an

exchange rate appreciation goes along with a fall in tangible and human capital

investments together with negative productivity level dynamics.

As to the specific causes which explain the poor growth record experienced by

Italy within the framework of eurozone, further detailed studies focus on structural

factors such as the decrease in labour productivity and total factor productivity

(Daveri and Jona-Lasinio 2005), labour market reforms (Boeri and Garibaldi 2007),

or inadequate investment in R&D and innovation (Fachin and Gavosto 2010).

In addition, a recent paper by Orsi and Turino (2013) investigates on per capita

output growth. In their inquiry, covering the time span 1982–2008, these authors

identify two different periods, in which a jobless growth regime during the 1982–

5 For statistical data concerning the period after the launch of the single currency see Annex 1.

62 F. Praussello

1994 years was followed by stagnation associated with a significant rise in employ-

ment in the period 1995–2008 of growthless job creation. According to them, the

long-term stagnation characterising Italy’s economy since the mid-1990s is mainly

due to the efficiency wedge, with the caveat that labour market reforms starting in

the same time prevented the dynamics of per capita output growth to undergo an

even worse decline.

But of course, explanations based on negative structural factors, such as a long-

term decline in productivity levels due to subdued investments, are not necessarily

exclusive of the relevance of the more general anti-growth stance created by the

built-in austerity mechanisms which lie at the heart of the current EMU

management.

Regarding the divergence of regional cycles, the lack of shock-offsetting tools

such as a central budget endowed with enough resources at the eurozone level

caused different business cycles between the core and the periphery members

(Marani and Napolitano 2010), which later on engendered public debt crises in

the latter. In particular, countries such as Portugal and partially also Italy squan-

dered the main benefit obtained in terms of a wide access to international finance at

a limited cost, without reducing their competitive disadvantages (Blanchard 2006).

As a result, countries which had an excessive public debt such a Greece, but also

more public-finance conservative economies such as Ireland and Spain, were

involved through contagion effects in a general crisis of the eurozone periphery,

leading the core countries to launch a wave of austerity measures, whose

intertwined and multiplied results produced the great recession in which the euro

area as a whole fell. In the case of Italy, as mentioned, all that translated into a

double-dip recession with high costs in terms of unemployment and foregone

output.

4.5 Italy Membership Between Economic Crisis and FiscalConsolidation

As already highlighted, during 2011 the financial position of Italy in the framework

of the eurozone recorded a marked deterioration in conjunction with increasing

difficulties encountered by the Berlusconi government and the economy minister

Tremonti in the management of relations with the EU and the governments of the

area of the single currency. In fact, the Italian government, after having long

Table 4.1 Italy’s average

growth rates1960s 5.7

1970s 3.6

1980s 2.2

1990s 1.46

2001–2007 0.93

Source Russo (2008)


underestimated the magnitude of the economic crisis and having been helped by the

purchase of government securities by the ECB with the old operations of the

Securities Markets Programme6 (SMP), seemed to be aware of the need to establish

consolidation measures, but initially the latter were postponed to subsequent years,

causing the partner countries to suspect its lack of will to fulfil European

commitments. All this fed an explosion of the spread between the interests on

German Bunds and those required by subscribers of 10-year public debt securities

issued by the Italian government, which reached unparalleled levels higher than

550 basis points. With the caveat that this gap is by no means irrelevant to the

situation of the real economy as the Italian prime minister Berlusconi seemed to

believe, since a high spread translates into higher interests required to service the

public debt, and in general into an increase in the cost of investment and consump-

tion, with a recessionary effect on the economic system.

Now, it is public knowledge that when an interest paid on the outstanding debt is

higher than the rate of growth of the country issuing it, public debt becomes

unsustainable in the medium and long term and the risk of default becomes very

high. In Italy’s case the situation turned out to be particularly serious, given that in

the face of a reward required by investors in government bonds of the order of 4–

5 %,7 the growth rate of the country was negative, for Italy’s economy was already

stuck in a recession, with a decline of 7% since the beginning of the crisis (DeMizio

2013).

The worsening of the financial conditions of Italy and the loss of credibility of

the government, in the latter part of 2011, went so far as to suggest the imminent

default of the country, despite the commitment to bring forward to 2013 the

elimination of the budget deficit, originally planned for 2014. In November 2011

Berlusconi resigned as prime minister and a new government headed by the former

EU Commissioner Monti came to power, implementing, especially in the first few

months, a series of structural and financial reforms with an excessive cut in public

finance, that were at the origin of a recovery of international credibility, but also of

another deep recession into which the economy entered in the following year.

The repurchased international credibility allowed Italy to help stabilise, at least

temporarily, the eurozone. Between the summer and the autumn of 2012, in fact,

preconditions were laid down necessary to activate an instrument of common

intervention in favour of virtuous eurozone economies in troubles, i.e. countries

confronting financial speculation but willing to carry out structural reforms required

by eurozone rules. The hopes of the Italian government to take advantage of the

ECB’s support in order to contain the spread level were to some extent fulfilled. The

turning point of this story occurs in July of that year, when the ECB President Mario

Draghi unveiled the public commitment to do whatever is necessary (“whatever it

6 Out of a total of 218 billion euros of government bonds bought by the ECB by the end of 2012,

about half (103 billion) were Italian securities (Il Sole24ore 2013).7 The average cost of Italian public debt in 2012 was around 4 % (Banca d’Italia 2012), whereas in

the same year Italy’s GDP was negative (�2.1 %).

64 F. Praussello

takes”) to save the euro, providing an aid to those countries, such as Italy and Spain,

which were at that time in the focus of international speculation. As it was specified

after a few weeks, with the launch of the new instrument of OMT, if needed, the

ECB will be available to buy unlimited amounts of securities with maturities of up

to 3 years in order to keep within physiological limits the yield of government

bonds.

From that moment on the sovereign debt crisis in the eurozone, after 3 years of

unsuccessful interventions by governments, entered the new phase of stabilisation,

or rather a sort of freezing, since for its effective resolution it will be necessary, as

some governments have promised to do, to create a banking union, a fiscal union

and some form of political union in Europe. In short, the yields on Italian and

Spanish bonds, which were previously quite high, progressively decreased and until

the spring of 2014, even in the absence of an intervention by the ECB, the mere

commitment to carry it out was judged credible by the markets, giving rise to a sort

of honeymoon effect.

From a technical perspective, however, the support of the ECB, as well as being

connected to the operation of the European Stability Mechanism (ESM), will be

subject to an explicit request of the country in need, which should undertake to

make a series of reforms agreed on with the European authorities. Together with the

subdued financial speculation in the aftermath of the EBC commitment, the high

cost of such a political liability for governments that might be considered by the

respective public opinions as being under the direct rule of European authorities,

scrapping even the appearance of national sovereignty, explains why neither Italy

nor Spain, the countries that were believed to become the first OMT beneficiaries,

have advanced hitherto formal applications to be admitted to take advantage

from it.

The formal justification invoked by Draghi to launch the MTO regarded the need

to ensure the functioning of the transmission mechanisms of monetary policy

throughout the euro area as a whole. As mentioned, the risk of a collapse of the

eurozone in fact ends up resulting in higher spreads for countries in greatest need,

preventing the rates decided by the ECB to be the same in different parts of the

monetary union. Beyond this justification, however, it is clear that the ECB intends

to carry out in depth its function of euro single economic federal institution. In the

absence of some form of European government, the ECB from the technical point

of view tends to approach an institution that acts as a lender of last resort, which is

also going to play a role of political nature in view of the progress of the unification

process of the continent.

The most recent framework of the eurozone crisis and its relationship with

economic emergencies in Italy would not be complete if we disregarded the

approval by its Parliament of the fiscal compact treaty by inserting the latter into

the country’s constitution with the obligation to manage a zero deficit budget. On

the basis of such a commitment and the Six Pack rules, Italy’s government and

parliament will be prohibited from deciding for themselves the management of a

budget deficit, beyond a modest margin of 0.5 % and a possible correction for


taking into account the state of the economic cycle. In addition, Italy, as other

member countries having accepted the new obligations, will be asked to reduce by a

5 % per year the difference between the ratio of public debt to GDP (currently

around 133 %) and the limit of 60 %, initially forecast as a maximum by the

Maastricht rules for joining the euro area. All this, within the framework of national

budgetary procedures increasingly subject to EU rules, which implement a progres-

sive transfer of fiscal sovereignty to the European level (Trupiano 2012).

After the failure of the initial rules of the SGP, the troubles, and the bailouts of

peripheral countries of the eurozone, these are measures that constitute steps

towards a pooling of fiscal sovereignty in the European framework, i.e. a possible

fiscal union, with the possibility to handle in a unified way the debts of European

countries, through the future issuance of Eurobonds, as well as conditions needed to

take advantage of a European aid in the event of a financial crisis. However, in a

recession or stagnation environment,8 which is the one that seems going through the

euro area as a whole, fiscal consolidation measures dictated by the single currency

rules are destined to exacerbate the fall in income and employment, unless defla-

tionary pressures are not countered by counter-cyclical recovery policies.

It should be added that after the stabilisation of the sovereign debt crisis reflected

in the narrowing of spreads, in March of 2013 new signs of market stress came to

the fore following the rescue of Cyprus9 and the freezing of the political process in

Italy due to the inconclusive result of polls in February of the same year. In the first

case, after the mistakes of the past, the mismanagement and the possible default of

the Mediterranean island, whose economy has, however, a modest weight within

the euro area,10 has alarmed investors who now fear to be affected by new taxes on

their bank deposits,11 creating a dangerous precedent for future bail-out measures.

Indeed, after the Cyprus case the latter will be based on the bail-in principle, i.e. will

require a haircut to banks creditors. With regard to Italy, the political uncertainties

following the splitting of the poll outcome among three rival parties without a clear

governing majority have resulted in new increases in spreads with German bonds,

confirming the close relationship that now exists between the national and Euro-

pean policies.

In this context, the risk of a withdrawal of the country from the euro area became

significant again, not least because of widespread popular reactions against the

austerity associated with European rules, which has also encouraged requests for a

unilateral retreat expressed by political forces which so far are still in minority and

8On this point recently the old idea of secular stagnation has been relaunched by Larry Summers

(2013). Were the current low growth situation depend on long term factors beyond the medium-run

drivers of the sovereign debt crisis, the possible way out for the eurozone would be far more

difficult than previously thought.9 European aid granted to Cyprus amounted to 10 billion, following those given to Ireland in 2008

(85 billion), Greece (110 billion in 2010 and 130 billion in 2012), Portugal in 2011 (78 billion) and

Spain in 2012 (100 billion euro) (Spiegel 2013).10 Equal to 0.2 % of EU GDP.11 Deposits in Cyprus defaulting banks where hit by a haircut on credits in excess of 100,000 euros.

66 F. Praussello

some technicians, who do not seem to properly assess the enormous economic costs

associated with a defection from the eurozone, not to speak of political burdens for

a founder member of the EU like Italy (Bagnai 2012).

Concerning in particular monetary costs, the most reliable estimates by

institutions such as UBS or the Bertelsmann Foundation identify a loss of income

in the order of 40–50 % or 20–25 % for every citizen of the eurozone, belonging

respectively to peripheral countries or to core countries such as Germany, in its

capacity of main economic euro area power (Deo et al. 2011; Belke 2011; HSBC

2011).

For Italy the new Lira, which would be introduced after the defection, would

suffer from a depreciation of a magnitude estimated at around 50–60 %, with a

parallel explosion of domestic inflation, which would reduce to poverty a large

proportion of workers and retirees, or households of fixed-income earners. All that

in the presence of banks runs, capital flights, capital controls alongside a default of

the country for the part of public debt denominated in euro, a chain of bankruptcies

and a worsening of income concentration at the expense of wages and in favour of

the profit share. Not to mention that, even assuming that the process of European

integration continues to stay on the field, Italy could forego the benefits received

from Structural Funds and the growth opportunities emerging from access without

barriers to a large internal market, where Italian exports would be in danger of being

affected by countervailing duties, while its bargaining power with regard to Euro-

pean issues would be virtually destroyed during an unprecedented number of years.

4.6 The Way Ahead: Beyond Austerity Programmes

After the official resumption of growth in the final quarter of 2013,12 closing the

severest recession period ever experienced by Italy since last century’s Great

Depression, its economy is starting the new year with lacklustre prospects heading

to a GDP increase expected to reach a yearly 0.8–1 % at best, with a negative

backlog of unemployment alongside poverty and income concentration worsening.

Indeed, as a consequence of the strong austerity measures introduced by successive

governments since the public debt crisis extended to Italy in 2011, unemployment

was reaching the level of around 13 %, with an upper limit of more than 41 %

within the young age classes, whereas roughly a third of households were crossing

the poverty line and the Gini coefficient of market income inequality rose by about

2 percentage points between 2007 and 2010. In addition, by the end of 2013 the

industrial output was still 25 % below the pre-recession height and the GDP

destroyed since 2007 amounted to more than 9 percentage points. Other negative

outcomes were recorded in terms of a drastic fall in Italy’s GDP per capita, which is

currently lower than in 2000, alongside a decrease in disposable income after 2011,

12With a mere +0.1 % compared with the third quarter of 2013, whereas for the whole 2013 a

negative growth rate of �1.9 % was recorded. Such results have to be contrasted with those of the

eurozone, which achieved a +0.3 and a �0.4 % growth, respectively.


owing to the dramatic fiscal consolidation carried out since 2010. Furthermore the

productivity dynamics of the country was still unsatisfactory. By contrast, thanks to

a slight reduction in labour costs with a fall in real wages, a resumption of a current

account advance and the recent closure of the excessive deficit procedure, with a

deficit below the 3 % limit, spreads on public debt decreased to a manageable order

or 170–190 basis points.

The huge economic costs encountered by Italy and other peripheral countries

submitted to austerity policies decided by eurozone countries under the lead of

Germany, starting with Greece, whose social fabric was totally upset, have possibly

reached a political limit. Sure, Italy has not been officially supported by the

eurozone with measures managed by the troika of European and IMF experts, but

followed nominally autonomous policies, which were however inspired or even

dictated by ECB and eurozone governments.

The high costs of putting its finance in order, or doing parts of its “homework”,

was also due to forecast mistakes made by policy authorities, Italian governments

and international institutions (OECD 2014), which were not able to correctly assess

fiscal multipliers in a context, where monetary policy had almost exhausted its

regular tools. As De Grauwe and Ji (2013) have convincingly shown, fiscal

multipliers built in austerity programmes imposed on peripheral countries were

not of the order of 0.5 as initially thought (Blanchard and Leigh 2013), but of about

1.4, with the consequence that for improving government balances by 1 % they

were obliged to reduce their GDP by 2.8 %.

In addition, the same authors confirm that austerity programmes have not

increased the capacity to service their debt. In the case of Italy, the government

debt to GDP ratio rose from 120 to 133 % between 2011 and 2013. At the same time

the failure of fiscal consolidation measures to produce in such a case the

non-Keynesian effects expected in form of enhanced growth by authors such as

Reinhart and Rogoff’ (2010), alongside other neoliberist scholars, proves that the

hypothesis of expansionary fiscal contraction lacks sound scientific and empirical

bases (Herndon et al. 2013).

The picture of liabilities caused to Italy’s economy by the eurozone sovereign

debt crisis includes also two worrisome items emerged recently. On the one hand by

the end of 2013 inflation was heading into a dangerous trap, falling towards a

negative region, and on the other the working of the main anti-euro speculation

backstop, the OMT device invented by the ECB President Mario Draghi, was put in

doubt by the decision of the German Constitutional Court published at the begin-

ning of February 2014. In the months elapsing from 2013 to 2014, compared with

the ECB target (below but close to 2 %), the consumer price index (all items) in

Italy was floating between 0.6 and 0.7 %, i.e. at dangerous levels, where deflation-

ary traps might be present.13 At the same time, the risk that the eurozone as a whole

could be really heading into a Japanese-style deflation was high, since negative

13At the eurozone level inflation in 2014 would reach 1.1 % according to the ECB and 1 %

following Commission expectations. However, for Italy and Spain the latter forecast lesser levels

of price index dynamics, respectively of 0.9 and 0.3 %.

68 F. Praussello

inflationary trends were already at work in the two main area economies. In France

core inflation decreased from 0.6 % in December 2013 to 0.1 % in January 2014,

whereas in Germany real wages after inflation fell in 2013. In particular, the latter

does not bode well for the future on monetary integration, given that deflation

hitting the largest eurozone market could hamper the much-needed competitive

adjustment in favour of the periphery (Munchau 2014c; Wolf 2013).

Means to fight deflationary developments are not always workable but are

nominally present in the toolbox of central banks, starting with quantitative easing

(QE) measures. However it not sure that within the present institutional setting the

ECB is free to adopt them, owing to the anti-growth pressures originating from the

German authorities.

As far as the QE option is concerned, the ECB has to date not followed the

course of other foremost central banks, such as the Federal reserve (FED), which

largely implemented it in recent past. Besides the general conservative stance of its

policies, one possible additional reason which explains its cautious behaviour is the

difficulty to identify the government bonds to be acquired, along with the scarce

availability of several conservative board members to follow a non-traditional path

of monetary policy. Indeed, whereas the FED can plainly decide to buy in a given

amount long-term US government bonds, the ECB has to choose not only how

much, but also what debt to purchase, and that only in secondary markets in order

not to infringe the no bail out condition enshrined in European treaties. It is clear,

for instance, that one thing is to choose bonds issued by, say, Austria, and a

completely different thing is to support public debt issued by countries such as

Italy and other periphery members.

Other possible means employed by the ECB to contrast deflationary pressures

within the eurozone would be the purchase of packages of bank loans to households

and firms, according to signals emitted by its President Mario Draghi (Fontanella-

Khan 2014), or to accept the recent proposal by Bofinger (2014) to issue at the

eurozone level a non-jointly guaranteed European bond in the form of

“eurobundles”, i.e. a composite security where the debt of each country would be

warranted pro quota by the relevant government, which would be also liable to pay

interest rates linked to its idiosyncratic risk premium.14

Regarding the judgement delivered by the Karlsruhe court after a long litany of

rulings subordinating the participation of Germany in the functioning of common

instruments created by the eurozone governments in order to address the latter crisis

to limitations and an explicit assent by the German parliament, its basic meaning

could be that, following it, OMT, which so far has not yet been implemented, is in

practice suspended sine die (Munchau 2014a). It is true that the German court has

asked the European Court of Justice to clarify whether the ECB has respected its

14 In a sense the “eurobundles” proposal could be considered as a second best approach to the

standard Eurobond scheme of jointly warranted eurozone public debts, which is currently excluded

from the programme of the German Grosse Koalition government. According to Bofinger (2014)

eurobundles of national debts could deepen the eurozone security market, translating into lower

interest rates, without damaging the most creditworthy countries.


mandate by promising to buy unlimited amounts of bonds issued by a member

country with the aim of saving the eurozone from a break up. However, in doing so,

it maintains that OMT are a form of debt monetisation and violate the German

constitution, by depriving the German parliament of its fiscal sovereignty. Even

though the European court will side with the ECB, one wonders how could the

Bundesbank take part in an OMT programme, should the latter be needed.15

Within such a framework, in February 2014 a fresh government headed by

Mr. Renzi was set up, with the task to introduce a new urgent set of institutional

and economic reforms in order to maintain in the long run Italy within the eurozone.

The mission of Renzi government seems to be mammoth, given that the country has

a long record of negative growth or stagnation since the inception of the single

currency, in the presence of a huge public debt and an incomplete monetary union.

According to an independent estimate from IMF, the rate of growth necessary in

coming years in order to stabilise the debt and recover the 15 percentage points lost

during the great recession in comparison with the pre-crisis trend could be as high

as 13 % (Lusinyan and Muir 2013). Adding an extra cost due to a possible fiscal

reform, the country could have to offset a total growth gap in the order of 20 %. A

goal that could be impossible to achieve in the absence of extra positive drivers

such as absence of deflationary developments, low interest rate bred by unconven-

tional monetary policies by ECB, and the reform of the local banking sector

(Munchau 2014b).16

In any case an active policy to modernise economic and social institutions in

Italy with a view at ensuring its long-term participation in the eurozone needs the

fulfilment of a number of prerequisites at the European level, together with specific

national efforts. As to the former, the current path towards the banking and fiscal

union and further to some form of political union has to be followed in

non-geological times for fixing the many-sided flaws which undermine the mone-

tary union model adopted by the EU (De Grauwe 2006; Stiglitz 2013). To be sure,

without correcting the manifold limits that make it impossible the working of the

eurosystem as a proxy of an OCA’s, the current freezing of the sovereign debt crisis

could not indefinitely go on, paving the way to a possible eurozone breakdown in

the long run.

After the high social costs and the delusive results delivered by austerity policies

by which eurozone governments have tried to save monetary integration, new

growth-oriented policies are needed, although within a financial stability framework.

Concerning Italy, if we exclude the option of partial cancellation, the sesquipe-

dalian burden of the public debt could only be reduced by a resumption of growth.

Even the constraint of the fiscal compact could be bearable, provided the long-term

15However, the recent ruling in March 2014 recognising the legitimacy of the ESM could change

the German public opinion stance.16 Bofondi et al. (2013) find that during the debt crisis in 2011 Italian banks reduced credit supply

by about 3 % in comparison with foreign banks operating in the country, and charging interest

rates higher than 15–20 basis points.

70 F. Praussello

stagnation of Italy’s economy is terminated. As a possible case in point, we can cite

a sufficient condition for a reduction of the outstanding debt should its level be fixed

at 120 % of GDP. In a such a case, the required decline of 3 % of the debt towards

the final goal of 60 % could be achieved with a combination of a growth rate of 1 %

and an inflation rate of 2 %, for instance. But of course the reality is more

complicated, since the debt has currently reached the 133 % ratio and inflation

could dangerously approach a zero or a negative level.

All that requires both an accommodative monetary policy by the ECB and an

expansionary fiscal policy at the European level, since member countries are

committed to fiscal consolidation and cannot be assigned the main task for the

resumption of a decent growth. The squaring of the circle could be obtained by a

European plan for sustainable growth, whose most recent version is given in

Majocchi (2013). The proposal is to establish a European Fund for Growth and

Employment aimed at financing investments for increasing the productivity and

competitiveness of the European economy, with the help of new financial resources

transferred to a eurozone budget such as the Financial Transaction Tax (FTT). With

the caveat that developments towards advanced forms of fiscal union will necessary

require a strengthening of democratic control on eurozone capacity to tax and spend

with the final aim to set up a fully fledged political unification based on subsidiarity

principles.

Should such a virtuous path prove to be impracticable, in the absence of new real

developments within the eurozone in terms of a rebalancing between the internal

regional balance of payments of periphery, on the one hand, and of core countries

on the other, concerning specifically Italy the main stumbling block to its partici-

pation in the monetary union would become the mammoth size of its public debt. In

particular, in case the thus far strong austerity policies inspired by Germany and

other core countries and the deflationary bias persist, the burden of the latter would

prove impossible to be reduced towards the standard 60 % level and a at least partial

cancellation of it could not be avoided, not to speak of a possible unilateral exit of

the country from the euro area.

With the additional consequence that almost certainly Italy’s defection would

produce the final outbreak of the eurozone and the blocking, if not the disintegration

of the efforts made over 60 years of European integration (Praussello 2012). In this

way, the dire prediction by some Anglo-Saxon economists, and in particular by

Milton Friedman (1997), could be fulfilled: monetary unification, prompted by the

ambition to lead to political unification of European countries, would in fact

generate the outcome of destroying not only the monetary union in the form of

the eurozone but the community building so far achieved.17

17 In this regard, Feldstein (1998) added that after a possible euro break up tensions between

France and Germany would eventually deteriorate to the point of questioning the peace condition

that now reigns among European countries since the end of World War II.


4.7 Concluding Remarks

In this note we focused on the main costs encountered by Italy in the aftermath of its

adhesion to the eurozone. We found that in its long quest for financial stability the

country progressively gave up a traditional revolving cycle between higher domes-

tic costs, high inflation, devaluation of the Lira, with a very poor record of fiscal

credibility. The drastic change in its monetary constitution with the entry into the

eurozone, after a preliminary experience of financial ex-ante convergence with the

leader country of the EMS, Germany, which delivered the necessary strong cur-

rency option, was followed by a number of valuable benefits, but also by high costs

associated to the long great recession caused by the sovereign debt crisis.

After the end of the double-dip recession Italy’s economy has reduced its

divergences with the eurozone core countries, but has been still suffering from a

long-term stagnation with a worsening public debt to GDP ratio. The austerity

measures carried out on the basis of a European consensus inspired by Germany

have failed to correct the main economic imbalances, which could bring into being

a new debt crisis in the future. What is needed now is a resumption of growth, even

though in a framework of financial stability. A European plan for a sustainable

growth and employment could do the job, according to some valuable recent

suggestions.

A long-term absence of growth, indeed, could provoke a withdrawal of Italy

from the eurozone, with a possible break up of the monetary union and risks of

disruption for the EU itself.

Annex 1

Italy GDP Growth RateThe Gross Domestic Product (GDP) in Italy stagnated 0 % in the third quarter of

2013 over the previous quarter. GDP Growth Rate in Italy is reported by the

National Institute of Statistics (ISTAT). From 1960 until 2013, Italy GDP Growth

Rate averaged 0.6 % reaching an all time high of 6.0 % in March of 1970 and a

record low of �3.5 % in March of 2009. Italy has the eighth largest economy in the

world and the third largest in the Euro Zone. The country has a diversified industrial

base driven in large part by manufacturing of high-quality consumer goods. After

joining the European Union in 1952, Italy experienced several decades of growth

rates above 4 %. Yet, after 1992, the expansion rates went below EU average. Since

then, the government has been trying to revive the economy by increasing public

spending. As a result, the public debt and budget deficit have reached unsustainable

levels and the country is facing tough austerity measures and the second recession

in 4 years. This page provides—Italy GDP Growth Rate—actual values, historical

data, forecast, chart, statistics, economic calendar and news.

72 F. Praussello

Fig. 4.1

Euro Area GDP GROWTH RATEThe Gross Domestic Product (GDP) In the Euro Area expanded 0.10 % in the

third quarter of 2013 over the previous quarter. GDP Growth Rate In the Euro Area

is reported by the Eurostat. From 1995 until 2013, Euro Area GDP Growth Rate

averaged 0.4 % reaching an all time high of 1.3 % in March of 2000 and a record

low of �2.8 % in March of 2009. The Euro Area is an economic and monetary

union of 18 European Union countries that adopted the euro as their currency. The

countries it comprises are: Austria, Belgium, Cyprus, Estonia, Finland, France,

Germany, Greece, Ireland, Italy, Latvia, Luxembourg, Malta, Netherlands,

Portugal, Slovakia, Slovenia and Spain. The Euro Area is the second largest

economy in the world and if it was a country it would be the fourth most populous

with 330 million inhabitants. France, Germany, Italy and Spain are the most

important economies accounting for over 74 % of the Union’s GDP. The current

economic crisis affecting some of the Euro Zone peripheral countries has been

raising doubts over the euro’s future and is the major obstacle to growth. This page


provides—Euro Area GDP Growth Rate—actual values, historical data, forecast,

chart, statistics, economic calendar and news. 2014-02-12

Fig. 4.2

74 F. Praussello

Fig. 4.3

Italy GDP Per CapitaThe Gross Domestic Product per capita in Italy was last recorded at 28374.76 US

dollars in 2012. The GDP per Capita in Italy is equivalent to 229 % of the worlds

average. GDP per capita in Italy is reported by the World Bank. From 1960 until

2012, Italy GDP per capita averaged 21941.4 USD reaching an all time high of

31263.5 USD in December of 2007 and a record low of 9009.4 USD in December

of 1960. The GDP per capita is obtained by dividing the country’s gross domestic

product, adjusted by inflation, by the total population. This page provides—Italy

GDP per capita—actual values, historical data, forecast, chart, statistics, economic

calendar and news.


Fig. 4.4

Italy Labour CostsLabour Costs in Italy decreased to 122.90 Index Points in the third quarter of

2013 from 124.10 Index Points in the second quarter of 2013. Labour Costs in Italy

is reported by the National Institute of Statistics (ISTAT). Labour Costs in Italy

averaged 92.92 Index Points from 1980 until 2013, reaching an all time high of

124.90 Index Points in the first quarter of 2013 and a record low of 44.50 Index

Points in the first quarter of 1980. This page provides—Italy Labour Costs—actual

values, historical data, forecast, chart, statistics, economic calendar and news.

Fig. 4.5

76 F. Praussello

Fig. 4.6

Italy Consumer Price Index (CPI)Consumer Price Index (CPI) in Italy increased to 107.40 Index Points in January

of 2014 from 107.20 Index Points in December of 2013. Consumer Price Index

(CPI) in Italy is reported by the National Institute of Statistics (ISTAT). Consumer

Price Index (CPI) in Italy averaged 45.13 Index Points from 1957 until 2014,

reaching an all time high of 107.80 Index Points in August of 2013 and a record

low of 3.90 Index Points in January of 1957. In Italy, the Consumer Price Index or

CPI measures changes in the prices paid by consumers for a basket of goods and

services. This page provides—Italy Consumer Price Index (CPI)—actual values,

historical data, forecast, chart, statistics, economic calendar and news.

Fig. 4.7

Italy Current AccountItaly recorded a Current Account surplus of 2828 EUR Million in November of

2013. Current Account in Italy is reported by the Banca Ditalia. From 1942 until


2013, Italy Current Account averaged �307.0 EUR Million reaching an all time

high of 19332.7 EUR Million in July of 1981 and a record low of �11387.0 EUR

Million in April of 1995. Current Account is the sum of the balance of trade

(exports minus imports of goods and services), net factor income (such as interest

and dividends) and net transfer payments (such as foreign aid). This page

provides—Italy Current Account—actual values, historical data, forecast, chart,

statistics, economic calendar and news.

Fig. 4.8

Italy Government Debt TO GDPItaly recorded a Government Debt to GDP of 127 % of the countrys Gross

Domestic Product in 2012. Government Debt To GDP in Italy is reported by the

Eurostat. From 1988 until 2012, Italy Government Debt To GDP averaged 109.8 %

reaching an all time high of 127.0 % in December of 2012 and a record low of

90.5 % in December of 1988. Generally, Government debt as a percent of GDP is

used by investors to measure a country ability to make future payments on its debt,

thus affecting the country borrowing costs and government bond yields. This page

provides—Italy Government Debt To GDP—actual values, historical data, fore-

cast, chart, statistics, economic calendar and news.

78 F. Praussello

Fig. 4.9

Italy Government Bond 10YThe Italy Government Bond 10Y decreased to 3.69 % in February from 3.79 %

in January of 2014. Italy Government Bond 10Y averaged 6.46 from 1991 until

2014, reaching an all time high of 15.29 in October of 1992 and a record low of 3.22

in September of 2005. Generally, a government bond is issued by a national

government and is denominated in the country‘s own currency. Bonds issued by

national governments in foreign currencies are normally referred to as sovereign

bonds. The yield required by investors to loan funds to governments reflects

inflation expectations and the likelihood that the debt will be repaid. This page

provides—Italy Government Bond 10Y—actual values, historical data, forecast,

chart, statistics, economic calendar and news.


Fig. 4.10

Fig. 4.11

80 F. Praussello

Italy Personal Income Tax RateThe Personal Income Tax Rate in Italy stands at 47.30 %. Personal Income Tax

Rate in Italy is reported by the Italian Revenue Agency. From 1995 until 2013, Italy

Personal Income Tax Rate averaged 46.6 % reaching an all time high of 51.0 % in

January of 1997 and a record low of 44.1 % in January of 2005. In Italy, the

Personal Income Tax Rate is a tax collected from individuals and is imposed on

different sources of income like labour, pensions, interest and dividends. The

benchmark we use refers to the Top Marginal Tax Rate for individuals. Revenues

from the Personal Income Tax Rate are an important source of income for the

government of Italy. This page provides—Italy Personal Income Tax Rate—actual


Fig. 4.12

Disposable Personal Income in Italy increased to 270617 EUR Million in the

third quarter of 2013 from 268883 EUR Million in the second quarter of 2013.

Disposable Personal Income in Italy is reported by the National Institute of Statis-

tics (ISTAT). Disposable Personal Income in Italy averaged 250255.20 EUR

Million from 1999 until 2013, reaching an all time high of 279034 EUR Million

in the second quarter of 2008 and a record low of 197571 EUR Million in the first

quarter of 1999. This page provides—Italy Disposable Personal Income—actual



Fig. 4.13

Italy Unemployment RateUnemployment Rate in Italy increased to 12.70 % in November of 2013 from

12.50 % in October of 2013. Unemployment Rate in Italy is reported by the

National Institute of Statistics (ISTAT). From 1983 until 2013, Italy Unemploy-

ment Rate averaged 9.1 % reaching an all time high of 12.8 % in November of 2013

and a record low of 5.9 % in April of 2007. In Italy, the unemployment rate

measures the number of people actively looking for a job as a percentage of the

labour force. This page provides—Italy Unemployment Rate—actual values, his-

torical data, forecast, chart, statistics, economic calendar and news.

82 F. Praussello

Fig. 4.14

Italy Youth Unemployment RateYouth Unemployment Rate in Italy decreased to 41.60 % in December of 2013

from 41.70 % in November of 2013. Youth Unemployment Rate in Italy is reported

by the Eurostat. Youth Unemployment Rate in Italy averaged 27.48 % from 1983

until 2013, reaching an all time high of 41.70 % in November of 2013 and a record

low of 19 % in February of 2007. This page provides—Italy Youth Unemployment

Rate—actual values, historical data, forecast, chart, statistics, economic calendar

and news.


Fig. 4.15

Italy ProductivityProductivity in Italy decreased to 122.90 Index Points in the third quarter of

2013 from 124.10 Index Points in the second quarter of 2013. Productivity in Italy

is reported by the National Institute of Statistics (ISTAT). Productivity in Italy

averaged 75 Index Points from 1960 until 2013, reaching an all time high of 124.40

Index Points in the first quarter of 2013 and a record low of 24.50 Index Points in

the fourth quarter of 1960. In Italy, Productivity is the real value of output produced

by a unit of labor during a certain time. This page provides—Italy Productivity—

actual values, historical data, forecast, chart, statistics, economic calendar and

news.

84 F. Praussello

Fig. 4.16

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Economic Transition in Romania:A Completed Process? 5Luminița Șoproni and Ioan Horga

Abstract

The concept of “transition economy” emerged two decades ago, with the

changes in political regimes in Central and Eastern Europe. It has generated a

number of analysis and investigations in all fields, while people have associated

it with the economic and social difficulties which had to be faced in order to

reach a better standard of living, offered by the “saving” market economy.

Although everyone—experts and laymen—hoped it would be a short transition,

the social, economic and political events, both domestic and international, have

extended the period of uncertainty, the spectacular changes of economic pace

and the institutional reforms. All these have prompted us to seek the answer to

the question: When will Romania’s transition to a truly functioning and wealth

generating market economy have been completed (or when it will be

completed)?

5.1 Introduction: What Is Transition?

“The transition to a functional economymarket” is an expression well known by the

Romanians; a post-communism ideal flamed by all the political formalities that

have governed after the events in 1989, events which have generated a change in the

political regime and in the economic system. Although everybody—specialists or

common people—hoped that there would be a short transition, the political, eco-

nomic and social internal and international events have prolonged the period of

uncertainty, radical economic changes and institutional reforms. Therefore, the

hopes of people for a better life, within a true democracy and an economy able to

L. Șoproni (*) • I. Horga

Department of International Relations and European Studies, University of Oradea, 1, University

Street, 410087 Oradea, Bihor, Romania




87



generate satisfaction and to create wealth and well-being are increasingly weaker,

and the optimism regarding a better future decreased as time passed by.

The study Life in Transition. After the crisis, conducted by the European Bank

for Reconstruction and Development (EBRD) and the World Bank in 2010, came

up with an analysis of the attitudes and perceptions of more than 34,000 individuals

and households across the transition region, in countries from Central Europe to

Central Asia. A truly interesting fact is that the chief economist of EBRD, Erik

Bergl€of, says in the introduction that the “transition is a work in progress”

(European Bank for Reconstruction and Development [EBRD], 2010).

Romania, according to the study, is dealing with an obvious reduction of the life

standard and a strong pessimism regarding the future and perspectives of moderni-

zation for the Romanian state. The state registered the lowest degree of life

satisfaction out of the entire region in transition. The support for a market economy

is at the lower end of the transition region scale, only over one-third of respondents

claiming to prefer a market economy to any other economic system (EBRD 2010).

The economic and social situation in Romania appears to be even more serious

when compared to a similar analysis conducted by EBRD in 2006 (EBRD 2006):

the population’s optimism towards its future went down to half compared to 2006,

the degree of support of a market economy reduced, and the attitude towards the

democracy has become less positive (despite the fact that the combination between

democracy and market economy remains the most popular political and economic

option).

The economic and political events during the past 23 years, along with the social

dissatisfactions generated by them, have determined us to search for the answer to

the question: is the economic transition in Romania a completed phenomenon?In order to answer this question, we must first define the concepts of “transition”

and “transition economy”.

The transition is defined as the “slow or sudden going from one state, situation,

or idea to another”, and the transition economy is “the period during which a

country goes from one type of social structure (form of governing, economical

organization) to another, a social change” (Tranziție 2013). In a more narrow

perspective, the countries which have passed from socialism to a market economy

are considered to be economies of transition, meaning states from Central and

Eastern Europe, South Eastern Europe, the Community of Independent States (CIS)

and China, the most significant socialist country in Asia.

However, in the specialty literature, some authors consider the notion of transi-

tion to be very wide and subject to interpretation. Thus, “every country in the world

can legitimately claim that its economy is undergoing some form of transition”

(Peng 2000, p. 9) in a certain period of time. From this enlarged perspective, the

concept of “transition economy” is applicable to a larger group of states, and at the

same time, the research regarding the term which marks the end of the transition

process becomes much more complex. However, the distinction between “transi-

tion economy” and “emerging economy” remains sufficiently clear, the latter being

defined as “countries that suffer a process of accelerated growth, whether be it

during the time of transition from a centralized economy to a market economy, or

88 L. Șoproni and I. Horga

during the recovery from an economic crisis” (Piețe emergente 2013) or “national

economies at the beginning of their capitalist development” (Piața emergenta

2013). Thus, emerging economies can be transition economies which are expanding

or recovering within a country over a short period of time. The transition however,

is a long lasting phenomenon, prolonged by the economical national and interna-

tional lapses.

The countries which undergo the transition process are sometimes included in

the group of developing countries, as the concept of “economic development”, seen

as a process of transformation, “refers to the progress that has been made in a

particular case toward a defined set of goals, such as higher incomes, improved

living conditions, or greater economic opportunity” (Anheier and Juergensmeyer

2012).

According to the experts from EBRD, the transition to the market economy is notonly an intermediate goal contributing to economic development, but it is an end initself. It involves changing and creating institutions (particularly private companies)

and fundamentally different governmental institutions (because the role of the state

in a market economy is very different from that in a command economy). That is

the reason why the key ingredients for a market economy are considered: the

companies and the households (responsible for decisions concerning production

and consumption), the markets (the means by which the goods and resources are

exchanged between companies and households) and the financial institutions

(which are links for the allocation of resources over time—channeling savings

and investment—for the allocation and assessment of risks, for payments

mechanisms and for the enforcement of financial discipline) (EBRD 1994).

Considering everything said, we will analyze several dimensions of the Roma-

nian economy, both the inner ones, as well as those resulting from its integration in

the European and global social and economical context, imposed by regionalization

and globalization. These elements will contribute to outlining whether the eco-

nomic transition is a completed process or an ongoing one.

5.2 The Steps of Romania’s Economic Development Since1990 Until the Present Time

The post-communist economic road marked, of course, by the political and social

context, is a very troubled one, with repeated economic changes and uncertainties,

confirming the fact that the transition is not a linear process.

If we are to look at the road taken by Romania within the more wide context of

transition economies from the Central and Eastern Europe, it can be seen that, apart

from a common economic legacy—macro balance by direct control, coordination

through plans, little private ownership, distortive relative prices (De Melo

et al. 1997), there are fundamental differences due to the historical conditions,

political structures, economical structures, geography, culture or resource

endowments. Therefore, both the past experiences as well as the results of these

countries are significantly different. But their experiences “have been much more

5 Economic Transition in Romania: A Completed Process? 89

shaped by the policies than by any other factors. And that is the main cause that

whereas in certain countries the transitional recession lasted just 3–5 years, in some

others it continued over the entire 1990s” (Kolodko 2002, p. 16).

The road taken by the Romanian economy between 1990 and 2013 can be

divided into three different eras: the 1990s, which registered a significant economi-

cal decrease, the 2000s which had a sustainable growth, whereas the 2010s have

returned to being years with a strong decrease in the economical rhythm. These

three periods also contain several intervals with different characteristics and results,

marked by economical events and economic policies adopted by the governments at

the time, as well as by the international ongoing events. The dimension of the

national economy, a poorly industrialized agriculture and old or abandoned indus-

trial complexes were major challenges for the economic reforms of the transition.

The international financial crisis which hit Romania in 2008 showed the fragility of

its market economy and the need to introduce a more strict discipline regarding the

formulation and implementation of reforms.

Therefore, we can distinguish the following steps for the Romanian transition

economy:

– 1990–1992: recession, which has generated economic decrease. It was a time of

normal decrease, due to the first measures taken by the young democratic state in

order to accomplish the passing from a centralized economy to a market econ-

omy. Similarly, all the former socialist countries from the region underwent the

same recession period (see Table 5.1), the decrease of Gross Domestic Product

(GDP) (reflected in both agricultural and industrial production) being due to “the

reduced demand when international trade is free and imports cease to be

restricted to state barter agreements” (Turnock 2007, p. 134).

– 1993–1996: a slight growth, 1993 being the first year to register economic

growth after 1987. The process of privatization started in 1993 as well. By the

end of the year 1996, approximately 2,700 companies had undergone this

process, and 710 of them were middle-sized and large companies. In 1996, the

private sector was responsible for 54.9 % of the GDP as opposed to 35 % in 1994

and 26.4 % at the end of 1992. The country rating increased to BB+, same as

Poland and Hungary (Sararescu 2011; Jeffries 1996). In 1993 Romania became a

member of the European Free Trade Area (EFTA), and in 1995 it joins theWorld

Trade Organization (WTO). Romania applied for EU membership in 1995.

In the Transition report 1996, EBRD experts placed Romania in the group ofcountries at intermediate stages of transition, alongside of Albania, Bulgaria,

FYR Macedonia and the majority of CIS, as a country which “has moved

decisively to strengthen product market competition by liberalizing prices and

foreign trade and cutting back sharply on government subsidies and on enter-

prise access to soft credits from the banking system [. . .] but is substantially lessadvanced with respect to enterprise restructuring and reform of financial

institutions than the countries of the Central European Free Trade Agreement

(CEFTA) and the Baltics (countries at relatively advanced stages of transition)”(EBRD 1996).


Table

5.1

Growth

inreal

GDPin

theEast-Europeancountries(1989–1999)

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Romania

�5.8

�5.6

�12.9

�8.8

1.5

3.9

7.1

4.1

�6.9

�7.3

�4.0

Albania

9.8

�10.0

�27.7

�7.2

9.6

9.4

8.9

9.1

�7.0

8.0

8.0

Bulgaria

0.5

�9.1

�11.7

�7.3

�1.5

1.8

2.1

�10.1

�7.0

�3.5

0.0

Croatia

�1.6

�7.1

�21.1

�11.7

�8.0

5.9

6.8

6.0

6.5

2.3

�0.5

Czech

Republic

1.4

�1.2

�11.5

�3.3

0.6

3.2

6.4

3.8

0.3

�2.3

0.0

FYRMacedonia

0.9

�9.9

�7.0

�8.0

�9.1

�1.8

�1.2

0.8

1.5

2.9

0.0

Hungary

0.7

�3.5

�11.9

�3.1

�0.6

2.9

1.5

1.3

4.6

5.1

3.0

Poland

0.2

�11.6

�7.0

2.6

3.8

5.2

7.0

6.1

6.9

4.8

3.5

Slovak

Republic

1.4

�2.5

�14.6

�6.5

�3.7

4.9

6.9

6.6

6.5

4.4

1.8

Slovenia

�1.8

�4.7

�8.9

�5.5

2.8

5.3

4.1

3.5

4.6

3.9

3.5

Sou

rceEBRD,Transitionreport1999.Ten

yearsof

tran

sition

,p.73


– 1997–1999: recession, due to the lack of structural reforms. Under the pressure

of lack of currency reserves, several privatizations and reforms were made which

were not always successful (Voinea 2009, p. 63). The reforms were applied

during the financial crisis in Asia and Russia, which in turn affected Romania’s

ability to attract external funds in order to finance them. During this period,

Romania maintained soft budget constraints on enterprises for a long time, in the

form of both budgetary subsidies and bad loans in the banking system. These

policies also boosted domestic demand during 1994–1996, but this expansion

was accompanied by swelling imports, weak exports and rising inflation (EBRD

1999).

In this context, Romania undergoes recession again whereas most post-

communist countries in the region had considerable economic growth (see

Table 5.1).

– 2000–2008: economic growth and overheat (see Table 5.2). The GDP increased

yearly starting with 2001 until 2008 when the effects of the international crisis

started to appear, combined with the effects of the internal crisis due to overcon-

sumption. If between 2000 and 2004 the engine of growth was export and

investments, starting with 2005, the economic growth was supersized, mainly

due to the dynamic of the internal consumption, dynamic sustained by the easy

access to bank loans, especially for consumption goods.

This period was marked by Romania’s decision to adhere to the European

Union (EU), which gave the government the opportunity to focus on a concrete

objective and clear strategies while making its economic policies. The adherence

to the EU, accomplished on January 1st, 2007, was a major impulse for reform

and modernization. The global economic crisis hit the Romanian economy as

well (alongside a series of internal factors), leading it towards a new time of

recession.

– 2009—present: recession and economic recovery (see Table 5.2). The recession

had internal causes (economic growth based on consumption, faulty fiscal and

budgetary policies, the reduced absorption of structural funds, the postponing of

structural reforms), as well as external causes (the US financial crisis) (Voinea

2009).

According to the International Monetary Fund (IMF) experts, even if Romania

made significant progress in restoring macroeconomic stability and its growth

outlook for 2013 is better than that for many regional peers, the recovery is still

fragile and vulnerability to external shocks remains high (IMF 2013). The

challenges regarding maintaining the growth are connected to insecurities in the

Euro zone and on the export markets, political evolutions and absorption of EU

funds (The World Bank 2013a, b).

The GDP’s evolution offers a clear image of the fluctuating evolution of the

Romanian economy, marked by the “stop and go” strategy, with disrupted or failed

stabilization policies and with negative long term effects on the business environ-

ment and population. This makes us inclined to say that Romania’s transition to a

truly open and functional market economy is not yet complete. There must be a


Table

5.2

Growth

inreal

GDPin

Romania

(2000–2008)/(2009–2012)

2000

2001

2002

2003

2004

2005

2006

2007

2008

Romania

2.4

5.7

5.1

5.2

8.5

4.2

7.9

6.3

7.3

2009

2010

2011

2012

2013

2014

2015

Romania

�6.6

�1.1

2.2

0.7

2a

2.2

a2.5

a

Sou

rceRomania’sNational

Institute

ofStatistics,IM

FCountryReport(2013)

aIM

Fforecast


durable economy and not a cyclical one in order to talk about macroeconomic

stability, economic dynamism and better life conditions, as these are all essential

characteristics of the market economy.

On the long term, the durable growth requires Romania to adopt economic

policies which respect the fiscal objectives, improve the quality of expenses and

consolidate tax collection, ensure progress regarding structural reforms, mainly in

the energy and transport sector, and ensure financial stability (The World Bank

2013a, b). In order to attain sustainable development which ensures social inclu-

sion, according the European Commission, Romania needs to increase participation

on the labor force market, improve global competitiveness and reform public

administration (European Commission 2013).

5.3 The Transition Indicators: European Bankfor Reconstruction and Development

The transition indicators, drawn by EBRD in 1994, are indicators showing progress

of countries transitioning to an open market economy.

Initially, there were six indicators, covering three major areas of transition:

enterprises, as the basic units of production (incorporating large-scale privatization,

small-scale privatization and enterprise restructuring), markets and trade (price

liberalization and competition, and trade and foreign exchange system) and finan-

cial institutions (banking reform). Subsequently, changes were brought to the

analyzing system of the transition progress: the existing indicators were redefined

and new indicators were introduced.

However, the weaknesses of these indicators, in terms of their strong subjective

element and failure to take sufficient account of the institutional framework,

prompted the development of the sector-based methodology. Instead of

concentrating on what has been achieved in the past, the new indicator examines

different sectors of the economy and assesses the remaining transition gap for each.

There are 16 sectors analyzed, grouped in four blocks: corporate (including agri-

business, general industry, real estate), energy (incorporating electric power, natu-

ral resources, sustainable energy), infrastructure (including railways, roads, urban

transport, water and wastewater, telecommunications), and financial institutions

(banking, insurance and other financial services, capital markets, private equity,

micro, small and medium-sized enterprises finance) (EBRD, Transition reports

from 1994 to 2012).

As seen in Table 5.3, Romania has taken significant steps towards transforming

its economy, but there still remain areas where work needs to be done. Moreover, if

the sector transition indicators are analyzed, there are more issues to be solved

(corporate sector—agribusiness score 3; infrastructure sector—roads score 3; finan-

cial institutions sector—banking score 3, private equity score �3, micro, small and

medium-sized enterprises finance score �3).

In Transition Report 2012, EBRD experts recommend Romania (in order to

continue the transition process so as to attain an open market economy) to make


Table

5.3

Countrytransitionindicatorscores(2012)

Enterprises

Marketsandtrade

Large-scale

privatization

Small-scale

privatization

Governance

andenterprise

restructuring

Price

liberalization

Tradeandforeign

exchangesystem

Competition

policy

Romania

44

3�4+

4+

3

Bulgaria

44

3�

4+

4+

3

Hungary

44+

4�

4+

4+

4�

Poland

4�

4+

4�

4+

4+

4�

Slovak

Rep.

44+

4�

4+

4+

4�

Slovenia

34+

34

4+

3�

Rangefrom

1to

4+,1representinglittleornochangefrom

arigid

centrally

planned

economyand4+representingthestandardsofan

industrialized

market

economy

Sou

rceEBRD,TransitionReport(2012).Integrationacross

Borders,p.12


further improvements to the investment climate, to advance privatizations in key

sectors and to improve the quality of the transport network (EBRD 2012).

The data within the EBRD report and the mentioned indicators confirmRomania’s status as a transition economy, with a long road ahead in order to

finalize this process successfully.

5.4 European Economic Integration

With the drop of the Iron Curtain, the former communist countries channelized their

efforts to renew their relations with the West and particularly with the European

countries which were already part of the European Union. This was also due to the

desire to rid themselves of Russia’s influence, as prior to the fall of the communist

regimes, some Central and South Eastern European countries had been economi-

cally integrated in the former Soviet Union, within the Council for Mutual Eco-

nomic Assistance (CMEA or Comecom)—this is Romania, Bulgaria,

Czechoslovakia, Hungary, and Poland. The commercial relations within CMEA

“were guided by a colonial pact when compared to the mechanisms used in Britain

in the nineteenth century: the center—the Soviet Union—took raw materials from

its outskirts in exchange for processed goods of average quality (Guyader 2013).

Most of the commercial transactions were towards URSS, and there were barely

any exchanges between the other member countries. Thus, some authors (Bideleux

and Taylor 1996, p. 177), consider that CMEA was “a surrogate for the OEEC1 and

the Marshall Aid” offered to the Eastern countries, which did little to promote the

commercial relations between member states and hasn’t truly accomplished their

economic integration.

Romania was the first country in Central and South Eastern Europe to establish

commercial relations to the European Community through the General Preference

System (1974) of the Agreement regarding the creation of the mixed Commission

Romania—CEE (1980) and of the Agreement regarding industrial products (1980)

which facilitated the access to a larger number of Romanian goods on the European

market. On January 1st 1993, Romania signed the Association Agreement to the

European Union, document which entered into force in 1995. In October 1999, the

European Commission recommended the beginning of adhesion negotiations,

alongside other six states, which began on the 15th of February 2000 and ended

on the 17th of December 2004, during the winter European summit in Brussels.

Romania’s adherence Treaty was signed on the 25th of April 2005 in Luxembourg

and Romania became a member state of the European Union on January 1st, 2007,

along with Bulgaria.

1 Organisation for European Economic Cooperation (OEE)—came into being on 16 April 1948, to

continue work on a joint recovery programme for Europe and in particular to supervise the

distribution of aid. In September 1961 the OEEC was superceded by the Organisation for

Economic Cooperation and Development (OECD), a worldwide body.


Out of all the agreements signed by Romania with various international

organizations, the accession process to the EU was by far one of the most important

ones in determining certain economic structural changes, real changes, with a

precise economic end—the integration in the European Single Market—which

was a huge leap taken towards reaching fundamental objectives of a functional

market economy.

For our analysis regarding the finality of economic transition from the perspec-

tive of European integration, we have chosen as a criterion the degree of fulfillmentof the convergence criteria for the Euro Zone.

Romania’s accession to the Euro Zone means low inflation, constitution of the

internal market for long term capitals and the convergence of the interest rates. A

relative market stability of the Romanian currency (“leu”) is also required for a

complete convertibility. And all these are essential prerequisites for the existence of

a functional market economy, which represents an obvious end of the transition

process. At the same time, adopting the euro favors sustained economic growth by

the reduction of transaction costs, stimulation of trade, investments and use of labor

force.

After becoming a member state of the European Union, Romania aims to access

the Euro Zone, after it will have fulfilled the economic conditions; thus Romania

will be completely integrated in the Economic and Monetary Union (EMU).

Although the Romanian authorities have set reaching the Euro Zone in 2015 as

an objective, lately officials’ discourses and the predictions of the economic

analysts are increasingly pessimistic regarding the real possibility of reaching this

target, the date being more likely set to 2018 or even 2024 (Bilefsky 2012; Vatu

2012; “Romania, ın zona,” 2013). If in the Convergence Programme 2012–2015,

the Government still maintains its commitment to adopt the euro in 2015 (Govern-

ment of Romania 2012), in the Convergence Programme 2013–2016, there is no

specific target, but there is a mention regarding the fact that “the commitment to

adopt the euro is maintained for a date when will be attained the objective regarding

the fulfillment of the real and nominal convergence criteria” (Government of

Romania 2013b).

The country must accomplish more requirements and the preparation for the day

when it will be able to adopt the unique currency—euro—is very difficult. The

conditions established by the Treaty of Maastricht for the adoption of euro require

that the government budget deficit should be less than 3 % of GDP, the government

debt should be less than 60 % of GDP, and the inflation should not be higher than

1.5 % of the average inflation of the three EU countries with the lowest inflation.

5.5 The Stage of Romania’s Nominal and Real ConvergenceIndicators

The achievement of nominal convergence means the fulfillment of the criteria

stipulated in the Treaty of Maastricht.


• Price stabilityStarting with the year 2000 the disinflation was always present in Romania,

until 2007; this fact is confirmed by the annual inflation average rate which has

decreased each year, from 45.7 % in 2000 to 6.56 % in 2006 and to 4.84 % in

2007. In 2005, the strategy of direct inflation targeting had a special role in this

process; consequently, the prognoses of the inflation level had low values. The

year 2008 disrupted the decrease trend, by bringing about an abrupt increase of

7.85 %, caused by the effects of both the internal and international crisis. During

the following period, the inflation returned to smaller values, due to the demand

deficit associated with the economic recession, thus reaching 5.59 % in 2009, a

value of 6.09 % in 2010 and 3.14 % in 2011, which represents a minimum of this

indicator after 1990. In 2012, the inflation rate increased again, reaching 4.85 %,

which is bigger than the objective set by Romania’s National Bank (BNR) (3 %

� 1 %). The causes of these increases were the increase in the prices of raw

materials for food and energy, alongside the evolution of the exchange rate,

slightly improved by the persistence of the demand deficit and the decrease in the

imported inflation for non-food good (Banca Naționala a Romaniei [BNR],

2012).

For the year 2013, the National Bank reduced its inflation prognosis to 1.8 %.

Likewise, the National Prognosis Commission revised and decreased the number

for the inflation prognosis for the end of 2013 from 3.5 to 2 %. These numbers

were set keeping in mind this year’s great agricultural outcome and the reduction

of the Value Added Tax (VAT) for some bread products starting with September

1st 2013. The risks associated with this projection of the inflation rate include both

external components, generated by relevant European and international facts (the

fragility of recovery perspectives of the economies of Romania’s main commer-

cial partners, sustainability problems of public debt and the private bank sector of

certain countries in the Euro Zone; issues within the American financial system;

the possible decrease or halt of economic growth of the major emergent

economies) as well as internal factors (increases in taxes for certain goods,

measures included in the agreement signed by the Romanian authorities with

EU, IMF and the World Bank, structural rigidities which preclude the necessary

adjustments in the national economy) (BNR, August 2013; BNR, November 2013;

“CNP a revizuit,” 2013).

• The long-term interest rate

The decrease of the risk degree associated to the Romanian economy has

contributed greatly to the diminish of the long term interest rate compared to the

reference level of maximum 3.7 % decided in 2009 to 1.5 % in 2011 and 1.6 % at

the end of 2012. Subsequently, this threshold continued to decrease, registering a

level of 0.9 % in May 2013, due to the general decreasing trend of long term

interest rate and the increase of the reference value (BNR 2012).

• Stability of the exchange rate

In 2007, the year of the EU accession, the exchange rate was the most

oscillatory in the previous 4 years: between +11 %/�6.4 % (“Cursul de schimb,”

2007). In the Convergence Programme 2007–2010 prepared by the Romanian

Government they were forecasting a continuous tendency of moderate


appreciation of the exchange rate, because of the reduction of the import prices

as well as of those administrated related to euro (Government of Romania 2007).

But the events which followed derailed all the optimistic forecasts, so starting

with the outset of the global financial crisis until the beginning of 2009, the

national currency decreased significantly compared to the euro, due to the

degrading of the foreign investors’ perception of the risks associated with the

states in the region. Subsequently, there were numerous agreements made with

international financial institutions, strict measures of fiscal consolidation were

taken, and the financial issues in the region became less pressing. All these facts

favored a relatively stable evolution for the exchange rate. Its variation was

within the standard fluctuation of�15 % both between 2011 and 2012, as well as

between June 2011 and May 2013 (BNR 2012).

• The sustainability of the government financial position

Between 2002 and 2008, the percentage of the consolidated general budget

deficit out of the GDP was beneath the 3 % limit set by the Treaty of Maastricht,

but between 2008 and 2011, this limit was passed every year. Therefore, the

European Commission started the excessive deficit procedure for Romania in

2009. The abidance by the recommendations and commitments thus taken

within the external financing agreements signed by Romania with the interna-

tional financial institutions turned out to be measures of fiscal consolidation

which determined the reduction of the percentage of the consolidated general

budget deficit out of the GDP until 5.6 % in 2011 and reaching the limit set by

the Maastricht Treaty in 2012, with a value of 2.97 %. As a consequence of these

performances, the EU Council approved the cease of the excessive deficit

procedure for Romania on June 21st, 2013 (BNR 2011, 2012; Council Decision

of 21 June 2013, 2013).

Some authors believe that the budgetary deficit target is difficult to be met as

there are many additional budgetary expenses necessary to co-finance the struc-

tural funds, to contribute at the communitarian budget, to modernize the infra-

structure, to accommodate to an economy based on knowledge and environment

protection. On these terms, the only way to reduce the budgetary deficit is to

diminish the quasi-fiscal deficits (Marinas 2006) and to better establish the taxes.

The second indicator of the public finance’s sustainability, the report between

the public debt and GDP also has an ascending trend (30.8 % in 2010, followed by

33.3 % in 2011 and 37.8 % in 2012), yet is still significantly beneath the 60 % limit

set by the treaty of Maastricht (BNR 2010, 2011, 2012) (Table 5.4).

The Treaty of Maastricht does not mention clear criteria for the real conver-gence, which should assure a high level of cohesion between the economical

structures of the countries aspiring to become members of the EMU by reducing

the difference between the countries in what regards the productivity and prices

level; the incomes in the growing countries should be increased as much as they

reach the level of the incomes in the well-developed countries. Mugur Isarescu, the

Governor of BNR, believes that this is due to the fact that EU has initially included

the well-developed countries which had similar economies. Lately, when they have


acknowledged the importance of the real convergence for the successful integration

of the new Central and East European members, the European Commission and the

European Central Bank (ECB) have sounded some warnings about the risks that a

country which has not a real convergence with the West-European countries may

adopt the euro currency too fast. Lorenzo Bini Smaghi, member of the Executive

Board of the ECB, has stated in a conference of the European Central Bank

regarding the problems in the Central and Eastern Europe that “substantial progress

has been made, but gaps in terms of income per capita relative to the euro area

remain large. This suggests that the challenges of real convergence [. . .] will remain

relevant for several years.” (Bini Smaghi 2007a). He has also emphasized the

importance of real convergence, not only for the countries concerned, but also for

the whole of the European Union, because of the existing economic relationships:

“the trade share of the new EU Member States, excluding Slovenia, is 18 % for

Germany, 9 % for France and 12 % for Italy. These shares are comparable to that of

the US and more important than China. Links through financial and foreign direct

investment are also equally, if not more, important.” (Bini Smaghi 2007b).

According to the Governor of BNR the most important criteria for achieving the

real convergence are (Isarescu 2007):

– the opening level of the economy, that is represented by the percentage of

imports and exports in the GDP;

– the amount of the bilateral trade of the EU members in the total foreign trade;

Table 5.4 Maastricht criteria. Nominal convergence indicators

Nominal

convergence

indicators Maastricht criteria

Romania

2011 2012

Difference

(2012)

Inflation rate(percent, annual

average)

<1.5 pp above the three best

performing Member States

3.1

5.8 3.4 0.3 pp

Long-terminterest rates(percent per

annum)

<2 pp above the three best

performing Member States

5.8 (2011)/5.1 (2012)

7.3 6.7 1.5 pp

Exchange rate(vs. Euro)(maximum

percentage change

vs. 2-year

average)

�15 % +3.9/�3.3 +5.4 / �7.6 √

Generalgovernmentdeficit(percent of GDP)

Below 3 % 5.2 2.9 √

Government debt(percent of GDP)

Below 60 % 33.3 37.8 √

Source BNR, Report annual (2011), Report annual (2012)


– the economy structure represented by the amount of different fields (industry,

agriculture, services) in the GDP production;

– the GDP per capita.

5.6 The Level of Real Convergence in Romania

International trade is a vital channel of economic integration. The importance of

international trade in different countries is measured by the share of trade in goods

and services, for exports and imports, in GDP (OECD 2011).

Regarding the economy’s openness degree, in a global framework, Romania is at

a relatively low level of external trade and at a high level of deficit resulting from

international exchange of goods. This situation leads to an insufficient competitive-

ness compared to the internal consumption, which affects the macroeconomic

stability and the standard of living. According to the analysts, an openness degree

of 100 % of the GDP should be a national interest objective, prior to the start of the

negotiations for the adherence to the Euro Zone (Pana 2012b) (Table 5.5).

The integration degree of the Romanian economy regarding commercial

exchange with the European Union, measured by the percentage of exchange

with the other member states out of Romania’s entire foreign exchange, is consid-

ered to be high, reaching values of over 70 % over the past years (BNR 2012). The

Euro Zone is the main export and import area, summing up 71 % of Romania’s

export and 72.7 % of its import in 2011 (Government of Romania 2013a).

The evolution of the Romanian foreign trade with the EU members is shown in

Table 5.6.

One of the main causes that contributed at the strengthening of the export of

Romanian products on the foreign markets, in the period 2007–2009, was the fact

that it aimed to use the markets from the EU well-developed countries which

represent 70 % of the total value of exports. In 2007 the main EU markets where

Romania has exported were: Italy (17.2 % of the total export of Romania),

Germany (17.1 %), and France (7.7 %). In what regards the import, the main EU

partners were: Germany (17.2 %), Italy (12.8 %), Hungary (7.0 %), and France

(6.3 %). The main influential factors for the external Romanian trade were: the new

system of general trade in the case of exchanges within the European Union,

according to which all goods are registered in the very moment they cross the

national border, and not in the moment when they can move freely, as they did

before; the abolition of the customs duties, the EU taxes for the extra-communitary

imports and the high volume of the economic activity; the appreciation of the

Table 5.5 The opening level of the Romanian economy

1990 2000 2007 2008 2009 2010 2011 2012

Share of international trade

in GDP (%)

32.8 63.6 65.5 65.4 57.7 67.9 73.5 75.5

Source The World Bank, World Development Indicators—Merchandise trade (% of GDP)


Table

5.6

TheRomanianforeigntradewithin

theEuropeanCommunity(m

il.euro)

2007

2008

2009

Export(FOB)

29.549

33.725

29.084

Intra-EU

(%)

71.9

70.5

74.3

Import(CIF)

51.322

39.838

38.953

Intra-EU

(%)

71.1

69.6

73.1

2010

2011

2012

2013

2014

2015

2016

2017

Export(FOB)

37.360

45.275

45.070

48.200

51.700

55.400

59.445

63.845

Intra-EU

(%)

72.2

70.7

70.4

70.0

69.9

69.8

69.7

69.6

Import(CIF)

46.869

54.948

54.704

55.000

58.615

62.905

67.625

72.830

Intra-EU

(%)

72.5

72.4

73.6

76.9

77.0

77.1

77.2

77.3

Sou

rceComisia

NaționaladePrognoza,Prognoza

detoam

na(2008),Prognoza

detoam

na(2010),Prognoza

detoam

na(2012),Prognoza

detoam

na(2013)


national currency (in the first half of 2007) and the high decrease of the external

demand for light industry products. In 2009, the top 10 partner countries for export

were accountable for 67.7 % out of the total amount of export and the only non-EU

country out of those 10 is Turkey, accountable for 5 %. As for imports, 7 partner

countries out of the top 10 are member states of the European Union (Comisia

Naționala de Prognoza 2007, 2009).Starting with 2009, the effects of the global economic crisis began to be felt in

Romania’s foreign trade, leading to a significant decrease in the international

commercial relations: both exports and imports have a descending trend. Between

2011 and 2013, Romania’s foreign trade had a degree of coverage degree of imports

through exports of 85 %, which is a consequence of a rather rigid export structure

and of the high reliance on exports for goods destined to external trade, which

cancels the effect of a weaker leu. In spite of a stronger connection to the EU’s

economies, which are also in a difficult time, states from the region, like the Czech

Republic, Hungary and Poland reached far better results. Czech Republic and

Hungary had similar coverage degrees of about 110 %, resembling those of Holland

or Denmark (Pana 2012a).

The structure of Romanian economy, represented by the contribution of differentfields to the GDP, can be seen in Table 5.7.

The modest GDP increase of 0.7 % in 2012 was determined partly by the severe

drought with unfavorable effects on the agriculture and by the reduced absorption

of structural funds, as a consequence of the disruption of certain programs, and

partly by the recession in the Euro Zone which reduced the external demand. The

values in Table 5.7 indicate the economical growth’s strong dependence of the

agricultural performance. The industry also had a descending trend (due to the

modest performances registered by the internal market demand and exports), as

well as construction (due to the decrease in residential workload). Services are the

only area to record an ascending trend, caused by IT&C services and the increasing

evolution of transportation activities (Government of Romania 2013b; BNR 2012).

Over the past decade, the structure of economy sectors became increasingly

similar to that of the Euro Zone, especially due to the reduction of agriculture’s

percentage, evolution which shows the fact that Romania is becoming a modern

state.

Table 5.7 The structure of Romanian economy

% 2007 2008 2009 2010 2011 2012 2013

GDP 6.0 7.3 �6.6 �1.6 2.5 0.7 2.2

Industry 1.2 0.5 �0.3 1.1 1.3 �0.3 1.1

Agriculture �1.3 1.3 �0.2 �0.4 0.7 �1.4 0.6

Constructions 2.5 2.4 �1.1 �0.8 0.3 0.0 0.1

Services 3.5 2.7 �3.6 �1.1 0.0 2.1 0.6

Source Comisia Naționala de prognoza, Prognoza de toamna (2008), Prognoza de toamna nosis

(2010), Prognoza de toamna (2012), Prognoza de toamna (2013)


GDP per capita indicator is used in the allocation of Structural Funds within theEuropean Union. Regions where real GDP per capita is less than 75 % of the EU

average (taken over a period of 3 years) are eligible for support from the Structural

Funds.

From the point of view of the economic development, Romania is still far from

many European states. In 2002, the GDP per capita in purchasing power standards

(PPS) was about 26 % of the Euro Zone’s level. Subsequently, the difference

diminished significantly, and thus, in 2012, the proportion of GDP per capita in

Romania and in the Euro Zone was of approximately 44 and 49 % when compared

to the EU27. These values set Romania on the second last place among the EU

member states, Bulgaria being the last country on the list, by a very small differ-

ence, namely 47 % (Eurostat 2013; BNR 2012). EU experts confirm the fact that

this is a very strong indicator for the development difference between countries

(European Commission 2013).

The main long-term objective for Romania, as stated in the economic govern-

mental policy, is to converge with the living standards from the EU. This objective

implies a sustainable economic growth which involves macroeconomic stability

and continuous structural reforms. Consequently, there are still a lot of reforms and

measures to be taken in order to reach the end of the transition process, when the

real convergence between Romania’s development and EU development will be

perfectly achieved.

5.7 Globalization of the Romanian Economy

For Romania, just like for the other countries in the region which have had

centralized economical systems, rigid and uncompetitive, the answer to globaliza-

tion needs to be a modern, open and flexible economy, adapted to the needs of

sustained development.

If transition countries need globalization’s instruments to develop and reach a

higher degree of integration in the global economy, their transformation is a part of

the globalization process: thus, the relation is interdependent. “Ongoing transition

in the former centrally planned economies of Eastern Europe and the former Soviet

Union is an indispensable part of globalization. Without this transition globaliza-

tion would fall short of its full dimension, comprehensiveness and dynamism”

(Kolodko 2002, p.1).

In order to identify Romania’s economy degree of globalization, we will analyze

the globalization index created by Ernst & Young (E&Y). The index measures

levels of trade development, investments, technology, labor market and cultural

integration of a particular country compared to another country regarding their

GDP and not the absolute value which would result from these trades. Due to these

facts, the index reflects the amount of noticeable or felt degree of global integration

within that country.

The Globalization Index was developed by the Economist Intelligence Unit for

E&Y to measure the 60 largest countries/territories by GDP according to their


degree of globalization. It uses the following indicators: movement of goods andservices (including total trade of the analyzed country, trade openness, tariff and

non-tariff barriers, ease of trading, current-account restrictions and share of main

trading partners in total trade), movement of capital and finance (containing foreigndirect investment (FDI) stocks as percentage in GDP, portfolio capital flows as

percentage in GDP, government policy towards foreign investment, expropriation

risk, investment protection schemes, domestic favoritism by governments, and state

control/ownership), exchange of technology and ideas (including foreign trade in

information and communication technology (ICT) goods as percentage of GDP,

foreign trade in creative goods and services as percentage of GDP, broadband

subscriptions, and internet subscribers), movement of labor (integrating the net

migration rate, current transfers, and hiring of foreign nationals), and culturalintegration (including tourism, international total fixed telephone traffic per capita,

and openness of national culture to foreign influence) (Ernst & Young 2012).

Romania is on the 31st place in the classification of the countries most open to

globalization with a score of 4.1, with only 5 other countries in the region ranking

higher (Hungary—9th place, Slovakia—12th place, Czech Republic—18th place,

Bulgaria—22nd place and Poland—27th place) and is way ahead of Russia (56th

place), while the rest of the former communist countries are not included in the top

60. The highest scores reached by Romania were for movement of goods and

services (5.42) and movement of labor (5.2), while the worst score was for

exchange of technology and ideas (2.58). Considering the interdependency relation

between globalization and technology, as well as the fact that informatization is

able to transform the economic and social relations in such a manner, that the

cultural and economic barriers are reduced to minimum (Kluver 2000), Romania

must set clear priorities concerning the development of modern digital networks

and their connection to the global network and must reach towards the new

technologies which will ensure its survival, development and success. This is the

only way for Romania to increase its connectivity and integration degree into the

new global economy (Fig. 5.1).

Romania’s evolution is in line with the global average, with outstanding results

for Movement of labor, with 0.77 points above the global average. There are certain

values beneath the global average, like Exchange of technology and ideas, where

the value recorded is below the average by 0.51 points, as well as Movement of

capital and finance, with 0.25 points below the average. Romania ranks 11th

amongst the 22 fast growing markets monitored during the study.

The study reveals the fact that Romania has an open economy, which has

benefitted greatly from the access to the new markets, especially those in the

EU. It will continue to benefit from the gradual liberalization of global trade and

increasingly tight commercial integrations with the EU. A part of the barriers to

trade of goods within the EU which remain may be eliminated and the liberalization

of commerce and services, which can benefit Romania, will continue, even if at a

slower pace than that previously anticipated, claim the analysts of E&Y (Craciun

2013).


Romania is part of the group of emergent states with the highest need for

globalization, which need investments and foreign capital to continue their devel-

opment process. Therefore, its position in the middle of the classification for the

most open states to globalization is beneficial for its transition to a more open and

stable economy.

5.8 Conclusions: What Stage Is Romania’s Transition At?

All aspects analyzed throughout the paper lead to the conclusion that the Romanianeconomy transition is an ongoing process, as not all objectives for a functional andstable market economy have been reached, which ensure a sustainable develop-ment: long term stability, integration in the EU and Monetary Union, a national

economy interconnected with the other economies in the area and in the world

which will generate beneficial effects for all parties involved.

The post-communist economic road was marked by strong differences, caused

by disrupted or failed macroeconomic policies, mainly owed to the governors’ lack

of vision or struggle for power, which have often put the economy on the back seat.

Therefore, the fundamental objective of having a stable and durable economy,resistant to internal and external shocks has not yet been reached, fact confirmed

by the abrupt economical fall as a consequence of the global economic crisis.

We believe that one of the essential prerogatives for the finalization of the

transition process is the integration in the Euro Zone. Our study shows that from

this perspective as well, the transition is not complete considering the nominal andreal convergence criteria that Romania does not yet fulfill and the fact that thedeadline for monetary integration is as uncertain as it has ever been (in the last

4.1

3.523.73

5.2

2.58

5.42

0

1

2

3

4

5

6

Overall Culture Finance Labor Technology Trade

Fig. 5.1 Romania’s scores—globalization Index 2012 (Source Ernst & Young (2012) Globaliza-tion Index)


Convergence Programme 2013–2016, the government doesn’t even set a precise

target).

Another objective necessary to the finalization of the transition process is an

economy open to globalization which will benefit from the advantages of the

liberalization of trade, capitals, finances, technologies and ideas. From this stand,

Romania has a good position, being one of the most globalized countries in theworld, according to the E&Y Index of Globalization, although it still requires largeinvestments and foreign capital in order to continue its development process. Thefinancial crisis has affected the ability of all of Central and Eastern Europe to attract

and maintain foreign direct investments, this being a significant break in Romania’s

road to a solid and durable development. The economic rebound is far too fragile to

balance the decline of foreign direct investments. Amongst the options for recovery

is the larger absorption of European funds, considering their role and, at large, the

role of EU’s cohesion policy for economic development through the objectives set

at Lisbon and Goteborg: competitive economies based on knowledge, research and

technological advancement, sustainable development and employment.

Our opinion that Romania’s transition process is not over yet is supported by the

data offered by Bertelsmann Stiftung’s Transformation Index (BTI) 2012.2

According to BTI, Romania’s degree of economic transformation is of 7.79 (on a

scale from 1 to 10), which puts it on the 19th place out of 128.3 It is a good rank, but

it is descending, as Romania was on the 15th place in 2010. This score confirms the

fact that the transition process is not yet over, and the experts’ arguments are the

following (Bertelsmann Stiftung 2012): the structural socioeconomic deficits (large

urban–rural disparities, unsustainable fiscal policies and an agricultural sector

absorbing 30 % of the labor force for 7 % of GDP); big vulnerability to the global

economic crisis because the government’s social security spending was not covered

by tax income, FDI was low and the weight of remittances from workers abroad in

public consumptive spending high; the weakness of the Competition Council and

other market arbiters in regulating the competition on the market; relatively poor

economic performance in the global crisis, which has revealed the structural

weaknesses and vulnerabilities underneath the substantial growth rates of the past

few years.

Therefore, Romania’s transition process continues, until the fundamental objec-

tive of a functional market economy is reached: an economy which generates

prosperity and wealth for its citizens, which ensures sustained development and

the state’s competitiveness in the region and in the globalized world.

2 The BTI is a global assessment of transition processes in which are evaluated the state of

democracy and market economy as well as the quality of political management in 128 transforma-

tion and developing countries.3 The other values of BTI for Romania are: Status Index—8.17 (rank 16), Political Transforma-tion—8.55 (rank 14), and Management Index—6.35 (rank 23).


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Impact on European Union Studiesof the Developing EU ComprehensiveEconomic and Trade Agreementswith Third Countries: The Case of Canada

6

Tatjana Muravska, Alexandre Berlin, and Don Sparling

Abstract

The EU has signed an agreement in principle for a Comprehensive Economic

and Trade Agreement with Canada, the first of its kind for the EU, entering into

force in 2015, opening a renewed market access strategy for the EU and has

initiated negotiations with the USA.

The EU agreement with Canada has implications on the EU-Canada relations

broadening their scope, going beyond the classical trade agreements. For the EU

citizens to benefit from this agreement, a more in depth knowledge of Canada

would be required, which should be reflected in a comparative approach to

European studies.

We examine these implications on the need to expand and adapt, the content

of and approach to research and teaching European studies. We conclude that the

theoretical approach to European and related studies of other countries (includ-

ing as appropriate in the case of federal countries, the sub-national level) and

their practical implications should always be multi and interdisciplinary in

nature and benefit from direct in-situ exposure and should be fully integrated in

the university curriculum.

T. Muravska (*)

University of Latvia, Raina 19, Riga LV 1585, Latvia


A. Berlin

European Commission, Paris, 121 d’Italie, Paris 75013, France


D. Sparling

Masaryk University, Zerotınovo namestı 9, Brno, Czech Republic




111




6.1 Introduction: Transformation of the EU as Ever Expanding“Project”: The Multi- and Inter-Disciplinary Natureof the EU

The European Union, as an International Integrational Organization and a regional

trading block, since its inception in 1952 (Coal and Steel Treaty), has expanded

regularly from its initial 6 Member States to now 28, and with a number still in the

antechamber. This increase in membership has also been accompanied by a major

expansion of the scope and functions of the European Union, with each successive

revision of the Treaty, into a very broad and complex role and mandate. These

match, with a few exceptions those of its Member States, the notable exception

being defense.

The Commission’s President, Barroso declared in 2007 that the “new raison

d’etre” of the EU is to help Europeans prosper in a globalized world.

This way of considering the EU on the occasion of its 50th anniversary was new.

Less than 20 years earlier, the EU was primarily seen as a regional integrational

entity among a relatively small number of participating countries tearing down the

wall that separated them and prevented their economic and political integration, the

EU’s external policy being essentially a sub-product of this internal consolidation

(Sapir 2011:vii). With globalization this internal integrating approach (single

market) was loosing its relevance and consequently the EU’s external policy

acquired a new importance and dimension, which needs to be taken into account

in consolidating the fragmented character of the governance of Europe’s external

economic policy.

In the last decade, furthermore there has been a major eastwards shift in global

economic power of unprecedented nature. The exact composition of the newly

emerging global economic powers (including China, Russia, India and Brazil) is

not yet clear, but it is now fully acknowledged that the political and economic

relevance of the West is being re-scaled.

As the functioning of the Member States is multi and inter-disciplinary in nature,

so consequently is that of the European Union; for the EU this is expressed in terms

of its organizational structure and interactions between Institutions—European

Parliament, European Commission, European Council and the European Court of

Justice- just to name the main ones. While proposed EU actions emanate usually for

the European Commission, they must be agreed by the other Institutions before

adoption at the EU level and implementation at the EU or Member States levels.

This approach requires a close and regular interaction between these Institutions,

which can be assimilated to inter-disciplinarity in academic terms. Similarly within

the structure of the European Commission, proposals for actions are developed by

over 20 separate General Directorates (DGs) (depending on the subject matter)

(multi-disciplinarity) but have to receive the agreement of the other DGs, before

been considered and adopted by the College of Commissioners and then forwarded

to the other Institutions for “consideration and adoption”.

This broad and complex mandate discharged by a large number of Institutions

and Agencies composing the EU structure, requires a broad multidisciplinary as

112 T. Muravska et al.

well as interdisciplinary approach for its effective implementation. During the last

decades, inter-disciplinary thinking has moved up on the policies agenda not only in

the EU and other international organizations (OECD, World Bank) as well as in

many advanced knowledge societies. In the Box 6.1 the multi and interdisciplinary

approach to functioning of the EU is presented.

Box 6.1: The Multi- and Inter-Disciplinary Functioning of the EU

In 2006 and 2007 the European Commission sent two Communications to the

European Parliament, the Council, ECOSOC and the Committee of Regions

(COM (COM 2006) 567 of 4.10.2006 and COM (2007) 183 final of

18.4.2007) focused on “Global Europe: as stronger partnership to deliver

market access for European Exporters”.

The European Commission focused in these communications on three key

aspects:

– Competitive markets

– Economic openness

– Social justice

The communications stressed:

– The single market is vital for creating globally competitive companies in

the EU

– European economic openness is vital for creating jobs in Europe and for

the EU international competitiveness

– While maintaining the Commitment to multilateralism, carefully selected

and prioritized bilateral free trade agreements should also be promoted

– The need to overcome the restrictive public procurement practices of most

countries—this area is a very significant to untapped potential for EU

exporters

– The need to recognize the potentially disruptive impacts of market open-

ing for some regions and workers particularly to less qualified

– Trade and Investment relations must not be developed at the expense of

the environment and labour rights (in relation to the recently started

EU-USA trade and investment partnership negotiations the EU asked for

a temporary suspension on part of the negotiations to explore the potential

impact of the of the agreement in particular on the investment provisions,

including the labour protection laws on both sides of the Atlantic for

workers coming from the USA and going to the on temporary

assignments—and has launched a public consultation to that effect).

6 Impact on European Union Studies of the Developing EU Comprehensive. . . 113

The documents, mentioned in the Box 6.1 also recognized that while the

transatlantic trading relationship is by far the largest in the world and the heart of

the global economy; only limited progress in negotiations has been made—a future

injection of momentum is essential. The documents underlined also the need to

develop and establish locally based partnerships between the European Commis-

sion Delegations, Member States Embassies and Business in key industrialized and

emerging economies. Due to the changing nature of not- tariff barriers in the global

economy it is essential to be able to analyze locally the distinction between

unnecessary barriers and legitimate policy objectives such as security, protection

of human and plant health and the environment, as well as unfair use of state aid—

these are often behind the borders barriers. The demand to provide support to SMEs

is also emphasized. This renewed market access strategy of the EU is to lead to a

new generation of Free Trade Agreements; they should be more comprehensive and

ambitious and aim at deeper integration, including new provisions for investments,

intellectual property rights, public procurement, and labour mobility (far beyond

the multi-lateral trade agreements).

6.2 The EU-Canada Comprehensive Economic and TradeAgreement (CETA): A Renewed Market Access Strategyfor the EU

It is against the background of the above Communications of the Commission, that

that at the 2008 EU-Canada summit (17.10.2008) an agreement was reached to

develop a CETA agreement between the EU and Canada, taking into account that in

1976 already a cooperative framework relationship was established between

them—the first for the EU with a developed country. An assessment of the potential

benefit for both parties was an increase of over 25bn euros in trade in goods and

services: furthermore the EU is the second major investor in Canada and Canada—

the forth-largest investor in the EU.

Following the above EU-Canada summit negotiations between the EU and

Canada started in May 2009 and 13 rounds held until the end of 2012. In 2013 a

Ministerial meeting was held in Ottawa and a summit between the European

Commission’s President, Barroso and the Prime-Minister of Canada Happer in

Brussels in October 2013 at which the Agreement in Principle of CETA by both

parties was initiated. Currently a series of technical meetings continue to further

clarify certain points. Once a clean text is agreed the ratification progress on both

sides of the Atlantic will start and it is hoped that it will be completed in 2015.

Canada considers that CETA will have a greater impact on Canada than

NAFTA; an opportunity for Canada to diversify its trade relations now mainly

focused on the USA. Canada will be becoming a more attractive destination for

manufacturing investments, as Canadian based companies will have privileged

access to both EU and USA markets—a very strong signal to investors and

businesses. However Canada stresses that it’s powers and ability to regulate are


not for sale (no privatization of public services). The key provisions of CETA

(COM—MEMO/13/911 18/10/2013) foresee:

– Elimination of all industrial tariffs;

– Reduction of quotas and tariffs on most agricultural products;

– Mutual recognition of industrial standards;

– Open trade in services- financial, telecom, e- commerce, energy and transport;

– Opening of public procurement markets at all government levels;

– Provision for facilitating the temporary movement of persons between the EU

and Canada.

In view of the fact that a number of provisions being negotiated were in Canada

of direct and exclusive competence of the provinces and territories, the EU

requested that they be fully and appropriately involved in the negotiations, the

more so as it was Quebec that urged the Canadian government in the negotiation

process. For example in terms of public procurement the provincial and municipal

shares are considerably in excess of the federal.

In Canada at present there are the provincial and territorial levels, 440 regulatory

bodies for over 100 occupations (for example Certified Accountants, Architects,

Engineers, Early Childhood Educators, Lawyers, Real Estate Agents, Translators,

Court and Conference Interpreters, Chiropractors, Dental Technicians, Dentists,

Kinesiologists, Medical Laboratory Technicians, Doctors, Nurses, Optometrists,

Pharmacists, Elementary and Secondary School Teachers, etc.).

Provinces individually fully regulate labour mobility (different licensing

requirements and qualifications resulting in significant impediments to mobility—

for some trade skills and in certain provinces trade union membership required.

Temporary admissions (mobility) concern essentially skilled and even highly

skilled workers. While Canada has a very pro-active immigration policy receiving

over 250.000 immigrants per year, less that 15 % (Department of Finance, Canada,

2013) of these come from the EU; thus temporary admissions between the EU and

Canada should considerably enhance the two-way flow and exchange of talent.

From the EU point of view it is essential for provinces to be involved in the

recognition of European credentials. Some knowledge of these issues, as well as of

the labour laws (including trade-union affiliations) would be of benefit for EU

students having a more in-depth practical interest in EU-Canada relations.

For example, the nursing profession is regulated in the public interest and

nursing education programs under law, must prepare graduates to meet the profes-

sional standards and competencies set by the regulatory nursing organizations. All

registered nurse education programs in Canada lead to a baccalaureate degree.

Licensed practical nurse programs vary in length from 1 to 2 years and are usually

in a community college setting (Registered Nurse Canada).


Box 6.2: CETA and Requirements for Interdisciplinary Competences and Skills

in Nursing

In Alberta, (392 Website www.nurses.ab.ca e-mail: [email protected]) The

College and Association of Registered Nurses of Alberta (CARNA) is the

regulatory body for registered nursing in the province of Alberta, Canada. For

the Registration Requirements for Nurses Educated Outside of Canada All

nurses need to be registered with CARNA and obtain a practice permit to be

eligible to practice as a registered nurse in Alberta.

Language requirement

• Evidence of competence in, and comprehension of, the English language.

Nursing Education Requirement

• Successful completion of a professional nursing education program that

was approved in the jurisdiction where the program was completed.

Previous/Current Registration Requirements

• Registered nurse status in the country where you obtained your nursing

education

• Registration in good standing from other jurisdictions where you have

practiced nursing in the last 5 years

Practice Requirements

• Have completed within the last 5 years (not including the current year),

(a) 1,125 h of registered nursing practice; or

(b) A nursing degree or a nursing program satisfactory to the CARNA

Registrar

Substantially Equivalent Competency Requirement

• Evidence of competence to practice that is substantially equivalent to the

competencies required of all Alberta nurses (i.e., having a combination of

education, experience, practice or other qualifications that meets the

Alberta entry-to-practice competency requirements)

(continued)


http://www.nurses.ab.ca

Box 6.2 (continued)

Fitness to Practice

• No health problems that impair your ability to practice

Good Character

Evidence of good character based on a satisfactory employer references

No outstanding relevant criminal charges or convictions

Exam Requirement (fee approx. C$500)

Achieve a passing score on the Canadian Registered Nurses Examination

(CRNE) Currently Common Licensing Requirements for all provinces

have been agreed, except for Quebec.

A similar set of requirements applies to many other professions both in Canada

and in the EU Member States. Currently training and competences skills

requirements in a number of professions are being updated and these updates

have to be fully taken into account in university EU studies and research

programmes. This will facilitate a renewed market access strategy for the EU. In

informing the public about implications for society the press pays the key role.

6.3 Canadian and European Press Views on the Significanceand Impact of CETA

The press coverage of a major event such as the initialing of the EU-Canada CETA

document has a major impact on how public opinion will be shaped and reacts to

that event. The press coverage also reflect the perceived importance of these

agreements for both partners—for Canada full access to the EU market and

economy (of over 500 million persons) while for the EU access to the Canadian

market and economy of 35 million persons, and through it by implanting

manufacturing facilities in Canada, access through NAFTA (North Atlantic Free

Trade Agreement) to the USA and Mexican markets. Accessing the USA market in

this way gives the European companies a head start in relation to the currently

initiated EU-USA agreement the entry into force of which will be at least several

years behind the EU-Canada agreement.

The CETA agreement initialed in October 2013 by Government of Canada and

the highest EU authorities is “unfortunately” a very good example of important

differences between the press coverage of that event in the EU and Canada.

While the CETA, once into force and fully implemented, will have a much

greater impact in Canada than in the European Union, does this justify the much


more modest coverage of the event in the European Press as compared with the

avalanche of coverage in Canada? In our views this is not the case, as this

agreement is not only important in itself, but it is likely to be only the prelude to

other “enhanced economic and trade agreements” to be negotiated and signed by

the EU, in particular with the USA and other G8 countries.

The coverage by the Canadian press of this very important step in the CETA

negotiations, the initialing of the Agreement, was extensive in the Canadian Press

across Canada, with emphasis in terms of both trade benefits and possible negative

impact on “local” products and local jobs.

The HUFF Post Business (1.2.2014) stressed that EU exporters get a way better

deal than Canada on tariffs (reduction of 670 million $ for the EU as compared with

270 for Canada). It also emphasized the win-win nature of the agreement—Prime

Minister Harper stated in the Commons that “The agreement is the most important

signed by our country; it will lead to jobs and opportunities for families, workers

and companies”.

The Premier of Ontario, Kathleen Wayne (The Star, Robert Benzie, and

18.10.2013) touts CETA as a “very good deal” for Ontario, but Ottawa must

address some of the province’s concerns. The Ontario—EU trade is in excess of

40 B$ annually; Ontario expects a significant increase in jobs (30,000) and major

increase in exports (for example a fivefold increase in car exports). However, and at

the same time Ontario is beefing up its public procurement rules to favour local

construction bids (impact both with respect to CETA and interprovincial trade)—

Ontario is banking on changes to the way it awards construction contracts to make it

harder for companies outside the province to win government work, while forcing

builders to help expand their workforce (reducing also worker mobility);

Compatibility with CETA?; and also with the enhancement of Canadian inte-

gration? (Adam Radwanski Then Globe and Mail, 29.10.2013) Furthermore, the

City of Toronto expressed formal concern with the possible impact of CETA in

reducing its ability to set purchasing policies (public procurement). The recent

introduction of a minimum 25 % Canadian content on transit vehicles, will it stand

the CETA implementation test? In a different vein the winemakers in Ontario

expressed “their fear of the EU trade deal” (Globe and Mail 22.10.2013). On the

other hand, Lawrence Martin (Globe and Mail, 20.10.2013 stresses that “a deal with

Europe is nation-building governance”. In The Gazette (Paul Delean 19.10.2013)

stressed that Quebec is “completely favorable” to the EU free-trade deal. One must

recall that Quebec has been the initial promoter of this idea and it feels that it will

benefit considerably as its trade with the USA has been in decline. Finally LA

PRESSE (Sylvain Charlebois 22.10.2013) stresses that the agreement is “Un coup

de maitre de Harper”; in addition to tariff elimination, many quotas on agricultural

products will be also significantly reduced.

As mentioned above the coverage by the European press was much more modest

with articles appearing in about a dozen of the EU Member States, in particular

Austria, Belgium, the Czech Republic, Finland, France, Great Britain, Ireland, Italy

and the Netherlands.


While all articles focus on the increase general trade advantages, and in particu-

lar for meat and milk products, only a very few mention the other key aspect of the

agreement, that related to possibility for both sides to bid on procurements not only

at national but also at subnational level, this aspect is surprisingly barely

mentioned.

The Financial Times of 20 October 2013 does mention briefly “that in return

Canada has yielded on allowing European companies to bid for highly lucrative

federal and provincial government procurement contracts”. This aspect was also

stressed in Le Monde of 19 November 2013 ‘a first for Canadian provinces, they

will have to be open to procurement bids from European companies”. Otherwise all

journals only hail the economic advantages of the trade aspects of the agreement,

substantial gains for a number of European companies in both the industrial and

agricultural fields. They also stressed the potential impact of this agreement on the

negotiations, which have just started with the USA. Le Monde of 19 October states,

“these results constitute a reference for the negotiations of the same nature just

started by the EU with the USA”. The Financial Times of 20 October also

pinpointed this important aspect, and stressed also that “the European governments

will be keen to overturn the ‘By American’ provision that several US States attach

to their public procurement”.

6.4 CETA and Human Impact

The November 2013 initialing of CETA by the EU and Canada is it the prelude for

the development of a deeper dimension in international relations with significant

human implications? CETA results could serve as a very good example of compar-

ative approach in university academic programmes such as EU programmes and

Canadian Studies programmes. The results of CETA are also of inter-disciplinary

character. Inter-disciplinarity is becoming slowly an accepted and increasingly

applied concept in many areas of human endeavour. The need to increase the

knowledge and understanding of the European Union among the population and

in particular the youth is essential and should be a high priority for the European

Institutions and those interested in the European Union.

European Union studies attract students with many different academic

backgrounds and thus by the very nature of the student body are more open to a

multi -and interdisciplinary approach.

European Union Studies focusing on the European integration process have the

advantage of access to the European and related institutions as well as bodies

involved in EU activities, to complement their academic training with confrontation

with reality by an “academic” immersion in a non-academic interdisciplinary

setting. The changing nature of the EU external policies influence in the light of

CETA type agreements impacts on the knowledge and skills required of EU Youth

to be competitive and thus the EU studies have to strengthen its comparative

approach in teaching and research; one such approach being the Youth of non-

academic immersion settings for teaching and research. This approach (study tours


and internship programmes) to be effective, has to be integrated in the academic

programmes and receive credit. Furthermore many new disciplines have entered the

curriculum of universities in EU and Canadian studies. Broadening considerably

the scope of these studies. Globalisation and technology have created new

professions, which demand new skills and radically impact on established

disciplines. Many of the disciplines, among other factors, depend upon the current

socio-political global trends and inherent strong path dependency.

Education and training in our societies have the paradoxical and often contra-

dictory tasks of preparing students to perform very specific and complex tasks while

at the same time being able of critical thinking, having the ability to discuss, work

with multiple sources and great amount of different information. Today’s

employers in business, the public sector, and private research organisations look

for problem identifiers, problem solvers and problem brokers. And as the complex-

ity of our world increases, an ever-higher level and diversity of skills and knowl-

edge will be needed to manage this complexity. Interdisciplinarity is a most

valuable tool in decision-making process and for analysing different policy options

(e.g. Muravska and Ozolina 2011, p. 167).

The European Union, as an International Integrational Organization, as it has

been already stressed above has a very broad and complex mandate assigned to it by

the various successive treaties, since its inception in 1957, being very different from

the so-called international organisations.

This broad and complex mandate discharged by a large number of Institutions

and Agencies composing the EU structure, requires a broad multidisciplinary as

well as interdisciplinary approach for its effective implementation. European Union

studies focusing on the EU must therefore encompass a large number of disciplines

focusing in particularly on labour economics, environment, and public health and

be structured in both a multi-disciplinary as well as interdisciplinary modes.

Inter-disciplinarity is a most valuable tool in decision-making process and for

analysing different policy options. While the importance of interactions between

governmental policies is recognized, it is not always fully implemented in practice

in most countries resulting frequently in incoherent policies. There is in particular

the need to encourage a greater “knowledge exchange and interaction” between all

parties concerned, including public authorities, research and teaching institutions,

NGOs, and opinion makers.

Inter-disciplinarity means also a close interaction of the educational establish-

ment with the rapidly evolving international scene and its needs. The impact on

European Union studies is evident. The need for a more practical approach should

also be explored.

6.5 Comparative Approach to European Union Studies

In the contemporary world human societies with different and complex cultural

identities and different beliefs interact very closely. To describe the transforma-

tion of the twenty-first century’s societies, with words such as complexity,


interdependence and interaction of various processes is to indicate clearly that the

problems of society are increasingly complex and interdependent. These problems

are not isolated to particular sector or disciplines, and they are not predictable.

Reality is a nexus of interrelated phenomena that are not reducible to a single

dimension (e.g. Muravska and Ozolina 2011, p. 8).

Higher education and research in particular in European Union studies is facing

new challenges of more than ever integrated international trade and must respond to

the new processes that strengthen the mutual ties between international

communities. Interrelation and interaction of political, economic, social and other

dimensions leads to the interdependence of studies and the demand for integrated

comparative programmes that offer an interdisciplinary approach to the develop-

ment of generic and specific knowledge, skills and competences.

Interdependence of studies as, for example in such areas as international

relations, governance, corporate and social responsibility is an obvious trend in

the modern type of university education and research. Practitioners and theories are

confronted with challenges, that are becoming more and more important and this

interdisciplinarity in study and research programmes remain a controversial topic at

many higher educational institutions. During the past years qualitative changes in

international trade arrangements have taken place. Changes in European relations

with most economically developed countries (political, economic and social

environments) imply a growing demand for knowledge of economic, political,

social and legal matters of the EU and these countries Higher education and

research must respond to the challenges and effects of international and European

integration and, consequently, to the increased demand for skills and knowledge

relevant to the economic and political environment. Today’s development of a new

type of trade and economic agreements between the EU and other major world

economies, such as Canada and USA, have served as good examples for these

developments, but what is even more important they have also shown the ability to

manage and influence the course of these events.

6.6 Impact of the Changing International Environmenton the EU Studies in the Member States

How can any education and research system and society cope with the influx of

changes resulting from these interactions and the new thinking that comes along

with them?

Integrated and comparative EU study programmes promote civic competences

and provide coordinated, systematic study of such disciplines as economics, politi-

cal science, law, business and management, regional science, history, sociology and

anthropology. In addition, the content of these programmes should include appro-

priate contributions from humanities, mathematics, and, possibly natural and health

sciences. To study integrated disciplines in EU studies in interdisciplinary manner

helps students to develop the ability to make informed and reasoned decisions for


the public good, as citizens of a culturally diverse, democratic societies in an

interdependent world.

This is specifically important for all the New Member States since these

countries have undergone serious political and socio-economic changes before

the accession to the EU, during the post-accession period, at the time of the

economic downturn in 2008–2010 and economic recession of 2011–2012 and

economic recovery 20013–2014. All these changes affected virtually all aspects

of daily life and had significant long -term results economic and social results. All

the New Member countries had integrated their higher education systems into

European Higher Education Area, which required reforms in higher education.

Particular attention during the reform process in the current period is given to

increased mobility and joint degree programmes., To meet challenges of the above-

mentioned themes, a number of European and EU studies courses and programmes

have been launched. Development of interdisciplinary programmes in higher edu-

cation system of which European and EU studies programmes are, is an obvious

strategy for the higher education institutions. This trend offers to students and

young researchers an opportunity to acquire a solid knowledge about Europe, the

European Union and partner countries. Implementation of such programmes also

contributes to creation of a stimulating research environment. Development of

analytical skills of graduate students and specialist knowledge promoted by Euro-

pean and EU studies is an asset in areas, where profound knowledge of contempo-

rary European Union matters is required. In other words, European and EU studies

prepare academically educated qualified specialists in the fields of vital importance

for the EU and their home countries as well as the EU partner countries. Graduates

are able to successfully perform in public sector and non-governmental institutions

at the EU and country’s levels; they can make an objective analysis of the ongoing

processes of European integration. European and EU studies programmes contrib-

ute also to the development of the civil society inside and outside the EU, for

example, such issues of current importance as the global shift in major world

economic and political powers, as financial problems, public debt and lack of

confidence by suggesting new fiscal, safety and justice mechanisms. Interdisciplin-

ary is also a valuable tool in decision-making process and analysing different policy

options. Usually there are wide variations in preferences and values of decision-

makers and stakeholders over qualitative and quantitative, and social attributes of

alternatives in a decision—making process. Interdisciplinary approach can help to

identify trade-offs and different policy options, as well as evaluate what is the most

optimal and relevant policy choice.

The European and EU studies programmes are therefore characterised by the

specific methodology used both in teaching specific courses and in research. The

common feature of all these programmes is the focus on the European integration

processes in Europe and more specifically, the development of the European Union.

Relevance for the European Union and applicability for decision makers especially

in public administration are important features for these programmes. According to

the common knowledge, the development of the European Union only is


understandable in a combination of various disciplines in social science,

humanities, environmental and health sciences.

This trend reveals that European and EU Studies courses and programmes are

often both multi- and interdisciplinary. Multidisciplinary trend represent a combi-

nation of disciplines relevant to European and EU studies that are studied in

parallel. At the same time, when the disciplines studied are aimed, for example,

at problem- solving that requires knowledge of different disciplines, this in the

inter-disciplinary approach in studies. The move from multidisciplinary to interdis-

ciplinary teaching and learning is a core element in the development of the

curriculum of European and EU studies at universities.

Universities worldwide are in the midst of a dramatic transformation of their

administrative and scholarly goals. Such reforms are driven by a sense of global

competition among higher education institutions, now requiring universities to set

strategic plans for growth and excellence. Complementing strategies for financial

solvency, global ranking, and curricula, universities also approach their identity in a

strategic manner and increasingly concentrate their efforts on branding. While still

being “Republics of Scholars”, in today’s economic and political environment

universities are often perform as “Organisations”. This is a new trend in transfor-

mation of our societies in which universities are involved.

More emphasis is required on creating and encouraging a greater “knowledge

exchange” between the universities in the EU and Third countries. At the same

time, the global knowledge economy brought dramatic changes to the millennium-

old institution, which is the university. How can any education system and society

cope with the influx of those rapid changes? The global knowledge economy also

opened new horizons for universities: international recruitment of students and

faculty, engagement in trans-national co-operative research, and to establishment of

satellite campuses in distant countries. In these various ways, the global knowledge

economy transformed the university into a market actor, imposing a new regime of

administrative adequacy and competency, which in turn required universities to

develop strategies for market differentiation and branding.

Because academic knowledge may be hard to transfer, it becomes desirable to

directly involve academic organisations and scientists in commercial activities. As

a result, policymakers in Europe, Canada and the USA have implemented legisla-

tion to stimulate the involvement of universities in the commercialisation of

research and university–industry links through aggregate inputs and outputs at the

university level. One of the important conditions for the entrepreneurial functions

of universities and research institutions is their autonomy. Independence of these

institutions allows them to develop their missions, profiles and entrepreneurial

models—regional, national or international.

At the national level national funding mechanisms could be established to

support different profiles of universities and research institutions to create a critical

mass for ground -breaking innovation, research and education. In the “New”

Member States the implementation of European Social Fund in the area, is another

source to reallocate resources to form more effective establishments that help to

create a critical mass. Funding mechanisms and their successful use and are often


based on international partnerships, which in many cases are of vital importance.

Such funding arrangements among various parties are required to guarantee ade-

quate resources as well as the quality and social relevance of research and

innovation activities. Incentives for additional private funding are needed for

efficient resource accumulation, sufficient for ensuring sustainable and competitive

research and educational environment. In addition, recognition of developing

excellence at higher education institutions are required. This will help to coopera-

tion with external partners on bringing innovations to be implemented in various

areas of society.

Through increased interdisciplinarity, one can get increased benefits from the

investments in knowledge and education. At the same time, one can strengthen the

interaction between research, education and business; so that enterprises can

develop unique products, which combine the most advanced knowledge within

the fields of humanities, social sciences, technology, health sciences and natural

sciences.

6.7 Changes Necessary for Adjustment to the New EconomicRealities

Different factors are impacting on the educational and research environment, for

example, implementation of new approaches to international trade, changes in the

international division of “intellectual” labour and the corresponding financial

resources as well as a number of economic growth factors, such as the period of

the recent economic and social turmoil started in 2008 and its consequences on

education and research. These changes are reshaping global markets, and impacting

on education systems, research and innovations. Such transformation processes

lead to intriguing research questions such as: How are universities adjusting to

these new market demands and, specifically, how are universities creating a brand?

And, what are the implications of the “brand university” and the introduction of

“brand society” in the field of higher education?

Currently the European economy and politics, in particular European integration

in general, is facing important challenges. In the past similar downturns resulted in

a period in the European integration history called “eurosclerosism”, when protec-

tionism tendencies dominated and integration was not developing further. There is a

danger of the same tendency to be repeated and one should do the utmost to avoid

this repetition. Capital outflows are taking place form the EU, which is facing a

major wave “brain drain”, seriously impacting on the economy. Lack of labour and

especially high skilled professionals is recognized as an important constrain on the

way to economic recovery in the EU and is one of the main concerns for politicians

and intellectuals.

EU level “Youth on move”- is an excellent achievement of the EU. This requires

having a larger share of courses and study programmes in English, the vehicular

language used in teaching and research activities at the public higher educational

institutions in Latvia and in a number of other countries in the EU. This is especially


important in social sciences including economics, political science, law, and Euro-

pean/EU studies. Most professors and researchers accept this constraint. At the

same time, there are more diverging views when it comes to the specific outline of

the programmes and especially the balance between specific EU-courses and

methodological courses at the master level programmes.

However, students tend to select universities for studies with good quality

education and to move to countries with an attractive economic and cultural

environment. This trend could strengthen the human potential of certain countries

as well as enhancing their educational system with highly qualified students, while

at the same time weakening high quality human resources in other countries.

The European Commission could focus in the future on a regional “multi-

country” policy when considering small countries and to see them as one region.

This, in turn could influence development of high quality universities with higher

concentration of high level of education and research. This will represent a trend of

deeper integration without the loss of national identity. This concept should be

further developed.

It is necessary to reassess the role of the government and good governance.

Solidarity is one of the fundamentals of the European integration, and very often

this is the only opportunity to get economies of the Union out of recession, to

maintain financial stability and keep the broad benefits of the common market, such

as, for example, the free movement of labour.

There is also a serious risk that the continued lack of knowledge accumulation

will further increase the pre-existing gap between industrially developed and less

developed regions and countries in Europe. The question is how much time and

effort will be required to reconstruct the human capital once it has been dispersed?

Member States should adapt policies and steering mechanisms with the objec-

tive of encouraging interaction between universities, research institutes, businesses

and public institutions.

6.8 Impact of the CETA Agreement on Canadian Studiesin the EU

The conclusion of the CETA agreement also has many implications for the field of

Canadian Studies in Europe. For obvious reasons, in most European countries

Canadian Studies emerged, beginning in the 1970s, within departments of language

and literature. Though the disciplines treated by Canadianists have since extended

to cover an extremely wide range, it nevertheless remains true that academics from

Departments of English and French have been responsible for the bulk of teaching

and scholarly publications in the field. This might suggest a narrow specialization in

the areas of literature and/or language. However, much of their work could be more

properly characterized as belonging to the field of cultural studies. This has been a

feature of Canadian Studies since its emergence in the 1960s: Canadian literature

has always been treated as “a part of Canadian life [rather] than as a part of an

autonomous world of literature” (Frye 341). This means that many teachers with a


core expertise in Canadian literature have also dealt extensively in their teaching

and scholarly research in areas that have a profound influence on Canadian society

and as such are reflected in its literatures. One thinks in particular of majority/

minority relations, multiculturalism, human rights, the First Nations, but equally

relevant (though less extensively explored by literary scholars) might be Canadian

history in its broadest outline, the Canadian political system (in particular federal/

provincial relations and the nature of the Canadian constitutional law),

communications, Canada’s position and relations on the international scene, finan-

cial and economic issues and many other areas. Naturally all of these areas are also

treated by European Canadianists specializing in the specific areas in question,

though their numbers are smaller. So there already exists across Europe an exten-

sive network of academics with an extensive knowledge of Canada. How might

they be of use in a post-CETA world, and how might Canadian Studies in Europe in

general develop in this context? The key to an understanding of the possibilities

open to Canadian Studies is to keep in mind the almost revolutionary nature of the

CETA agreement. Though often referred to as a “free trade” agreement, it is much

more, pioneering as it does cooperation in such areas as the provision of services,

public procurement at most levels of government, the movement of people and the

mutual recognition of qualifications, and so on. Assuming there will be a marked

increase in the presence of EU firms and EU institutions in all these areas, it will be

imperative for Europeans to have a deeper and more complex understanding of the

Canadian reality so as to be able to take best advantage of the many opportunities

opened up by the CETA agreement. One could give many examples of areas where

this might be true. For example, what are the specific features of the financial sector

in Canada that enabled its institutions to weather the financial storm after 2008

better than those in any other Western country? How does Canada’s unique division

of federal and provincial powers affect virtually every aspect of the society, and

what is the impact of this when it comes to international cooperation? In what ways

are the various provinces structured very differently when it comes to their

economies, and what are the implications of this for investors? How is it that

multiculturalism can be considered a “success story” in Canada, and how does

this affect all aspects of the society? Why do Quebec and the Anglophone parts of

Canada have different social and economic models, and what are the effects of

these in practice? How has the Canadian Charter of Rights and Freedoms

(re) shaped Canadian society in the past 30 years? This is just a sampling of some

of the areas where a deeper understanding of the specific situation in Canada could

be of great benefit to Europeans planning on getting involved in Canada.

The increased intercourse with Europe that can be expected in the wake of the

CETA agreement offers many new opportunities for the European Union and

Canadian Studies community. New courses dealing with key areas can be

introduced; existing courses can be adapted and expanded to take into consideration

the new reality. Scholars who have not hitherto been involved in Canadian Studies

can be approached and encouraged to pursue an interest in Canada. This should lead

to a deepening and even greater broadening of Canadian Studies as such in Europe.

Second, and equally important, those involved in European Union studies should


look to Canada and Canadian Studies as a means of enriching their discipline. One

way would be to include courses by already established Canadianists in their degree

programmes, even if only as electives rather than compulsory elements, or to invite

outside academics to give lectures on relevant Canadian topics. Another would be

to encourage those already involved in European Union studies to become inter-

ested in the Canadian aspect of the subjects they already teach and do research in. In

both cases, it is assumed that a comparative EU- Canada element would prove

fruitful as a source of inspiration on the part of the academics and of interest on the

part of the students.

Such an approach should be progressively extended to other countries with

which the EU will conclude similar agreements.

Finally, with more students enrolled in courses dealing with Canada, particularly

those with a Europe-Canada comparative element, there will be an increased need

to find ways of enabling more of them to actually experience Canada in person.

Various avenues can be explored, but one unique approach that already exists could

be further explored and promoted—that pioneered by the EU-Canada Study Tour

and Internship Programme “Thinking Canada”.

6.9 An Integrated Multidisciplinary “Academic” Immersionin Non-academic EU Settings

Both EU and Canadian studies and on both sides of the Atlantic have benefited in the

past few years of an additional practical approach through the offer of in-depth Study

Tours and Internship programmes (STIP). These Study Tours of 4 weeks duration,

followed by the possibility of internships of at least 2 months duration, expose the

participants to the reality of both EU and Canada in terms of institutional structures

at all levels, civil society including business and labor relations, and the internships

provide an opportunity to apply this acquired knowledge in a practical setting.

The Study Tours to the EU for Canadian students have already 10 years of

experience, and have involved close to 500 participants (including over 200 interns),

while the Study Tours to Canada for European students (with the support of the

European Commission have been initiated only 4 years ago. These Study Tour to

Canada have involved already 124 participants and 35 internships.

A way to assess the real value of these practical in-situ programmes is to have the

students-participants (Box 6.3) as well as academia (Box 6.4) and sponsors (Box

6.5) express their views—a selection of these opinions is the best testimony.

Box 6.3: Students: Participants’ Views of the STIP

Following the Study Tour the participating students submitted and published

a number of reports and comments and organized seminars to share their

acquired knowledge. One such seminar took place at the Free University of

(continued)


Box 6.3 (continued)

Brussels (ULB) in April 2014 with the support of the University; it was titled

“The Canadian conception of multiculturalism. How a diversity treated in

Europe and Canada?” The reports prepared by the participants following

these programmes reflect their “new” understanding of Canada through the

numerous meetings across Canada and internships—the vibrant cultural

atmosphere of the country (reference) and the complexity of its current

political, social, cultural and economic landscape. In the view of one of the

participants, Miklos Horvath, from the E€otv€os Lorand University in

Budapest, Hungary. “Hungarian flag waving in Canada” accessed at http://

www.hungarianpresence.ca/youth/horvath-414.cfm), “today’s Canada can

definitely be considered to be a forerunner in supporting the active interaction

and intercultural dialogue between people with all kinds of differences and as

such it could serve as an example for the EU seeking to advance integration

and the cohabitation of its citizens.” Furthermore Miklos Horwath’s 2 months

internship at the Portage Residential Rehabilitation Centre in Ontario allowed

him to be “actively involved in the daily tasks of a Canadian organization

which provides facilities to substance abused individuals in four different

locations across the country. The rehabilitation centre is residential in its

nature, thus its mission is to build strong communities where residents can

feel safe, are able to grow and can express their feelings in a comfortable

manner.” This assessment of the internship benefits was also shared by the

other participants.

Jofre Moreno Rocart from the Universidad Pompeu Fabra in Barcelona,

Spain and Alexandrine Gauvin from the Universite de Montreal, Canada

having participated actively in the Study Tour to Canada and to the European

Union respectively, concluded jointly: “Students bring back knowledge with

them to their home country, which fuels high level innovation, competitive-

ness, and better job quality in the long run. These programmes ought to be

better known and receive enhanced support, as they offer unique

opportunities and experiences to Canadian and European students alike”.

Andreanna Mazereeuw from the University of British Columbia, Canada

underlines another interesting aspect and impact of these programmes:

“While most take part in the EU Study Tour and Internship component the

same year, my experience has been more unconventional. After participating

in the Study Tour in the summer of 2009 I went back to UBC and completed

another year of studies. The in the summer of 2010 I interned at PAYOKE,

Antwerp, Belgium, and anti-human trafficking NGO. Taking a year between

the Study Tour and the internship was extremely beneficial, as the Study Tour

peaked my interest in specific areas which I explored later in my studies at

UBC; I was then able to apply to internships based on the interest and

knowledge acquired during the year at UBC following the Study Tour. Had

(continued)


http://www.hungarianpresence.ca/youth/horvath-414.cfm

http://www.hungarianpresence.ca/youth/horvath-414.cfm

Box 6.3 (continued)

I not taken a year between the two components I would not have had the same

insight into which internships would be best for me. Therefore I highly

recommend taking a year between the Study Tour and the Internship to

develop interest and knowledge in specific areas”.

Academic have been deeply involved in the selection of student participating in

the STIP and confirms and reinforces the views of the students of STIP.

Box 6.4: Academia’s and Sponsors’ Views of the STIP

Professor Dr. Kurt Hubner, University of British Columbia, Vancouver,Canada. The Study Tour was originated at the Institute for European studies

at UBC, and from the very beginning it added a unique feature to our MA

Program in European Studies: students had the chance to deeply immerse into

the life of EU—institutions. It is one—important element to study the EU and

its many policies from scholarly literature; it is a different—and complemen-

tary element to experience the working of the EU. Understanding the EU in a

deep way matters the more, closer “official” relations between Canada and the

EU become. CETA will open a new chapter, and will make an undertaking, as

EU study tour is more relevant in training the next generation of Canadian EU

experts. It is well-established knowledge in business as well as in international

politics that it needs deep and substantial knowledge about the respective

markets and partners to make the best out of mutual treaties and agreements.

My students participated in “the Tours” are leaving prove that their intellec-

tual and financial investment has an enormously good rate of return.

Professor Dr. Joan DeBardeleben, Carleton University, Ottawa, Canada.Carleton University students who have participated in the EU Study Tour

come from a range of academic programs including Masters’ students

specializing in EU studies, as well as advanced undergraduate and graduate

students from other professionally-oriented programs, such as the Sprott

School of Business, the Bachelor of Public Affairs and Policy Management,

and the Norman Paterson School of International Affairs. Students gain a

first-hand feel for how ‘where you sit’ can affect ‘where you stand’ on an

issue. They come away with a far more nuanced understanding of the

complex workings of the European Union, of interactions between the EU

and other institutions in Europe, and of the nature and importance of the

EU-Canada partnership. The consultations provide a perspective that the

academic literature alone cannot impart. After each Tour, participating

Carleton students are required to write a paper in which they compare

material from their consultations in Europe with the scholarly literature on

the same topic; in this way, they gain an appreciation of insights that

(continued)


Box 6.4 (continued)

practitioners can offer, but also of how scholarly research can enrich practical

decision-making. Apart from the clear academic value of the Tour, students

who choose to do the optional Internship portion of the program learn skills

and gain connections to European networks that would otherwise be inacces-

sible to them. This professional experience has, for some students, been a

pivotal influence on their career trajectories.

Professor Dr. Martin Kuester, GD, Marburger Zentrum f€ur Kanada-Studien, Institut f€ur Anglistik und Amerikanistik, Philipps-Universit€atMarburg, Germany. I had the pleasure to participate as an academic advisor

in the first two “Thinking Canada” Study Tours of students representing the

member countries of the European Union. These tours brought together

highly motivated students of superb intellectual calibre who were willing

and able to participate in and contribute to a strenuous tour during which they

met leading representatives of central Canadian institutions in the field of

politics (on the federal, provincial and municipal levels), multicultural and

multi-ethnic society, the economy, medicine and culture. The tour gave them

first-hand experience of Canadian political discussions and topics reaching

from CETA to the role of the First Nations and Inuit, from the treatment of

addiction to environmental questions and the controversial exploitation of

natural resources. Their travels through the provinces of Ontario and Quebec

as well as British Columbia provided them with an excellent base for further

graduate and doctoral work in Canadian Studies as well as preparing them for

a role in international and transatlantic business and politics. As a teacher of

Canadian Studies and as former President of the Association for Canadian

Studies in the German-speaking Countries I see no better way of preparing

future academic and political leaders from the European countries for well-

informed action in the transatlantic realm.

Carleton University offers an MA degree in European, Russian, and Eurasian

Studies. Sponsors, on the basis of the views of students and academia express their

satisfaction with the outcome of the STIP. The selection of students from Canada,

participating in the STIP was done by an instituted Academic Selection Committee.

Impact of the “Thinking Canada” STIP on the EU diplomatic community in

Canada led to the improvement of their knowledge of the Canadian reality in the

provinces.

Box 6.5: The Canadian Reality in the Provinces: Study Visits by the EU

Ambassadors

On 19 February 2014, Marie Anne Coninsx the EU Ambassador to Canada

has initiated a “hands on” Canada programme to better apprehend Canadian

reality in the provinces—a similar approach to the “Thinking Canada” study

(continued)


Box 6.5 (continued)

tour for European students. The Ambassadors of 23 out of the 25 EU member

states represented in Ottawa have travelled to Toronto as a Delegation headed

by Marie Anne Coninsx, the idea being to get to know the provinces as a

group—it is a historic visit as it has never happened before. “To get to know

Canada, you have to get to know the provinces—for us, it’s a way to give

visibility to what the European Union is and what it does,” the initiative will

expand to other provinces, like Saskatchewan next. Starting with Ontario,

reflex that it represents the largest economy in Canada (The Ottawa Citizen,

19.2.2014)

Premier Kathleen Wynnemet with ambassadors from the European Union

to discuss the changes coming to Ontario businesses with the Comprehensive

Economic and Trade Agreement (CETA). The Ambassadors and Wynne’s

cabinet ministers spoke about a broad range of issues including the

manufacturing sector, agriculture (especially cheese and wine) as well as

education and other sectors that will be affected by the near-total elimination

of tariffs.

“I was in Alberta speaking with beef producers, and they are very happy

with the opportunities this presents,” said Coninsx. The LCBO (Liquor

Control Board of Ontario) does not present a stumbling block to the agree-

ment, as European states won’t tell Ontario how to sell wine and spirits as

long as European producers aren’t discriminated against. Cheese, however,

remains a small obstacle in the overall agreement. Coninsx called out Canada

for its supply management in the dairy sector. “I always ask: Where is the

voice of your 34 million consumers? Why aren’t they protesting more? That

you have such high prices, denying your people some of these delicious

products? I think politicians who have these systems must never have gone

shopping themselves.”

6.10 Conclusions

The EU leaders promoted less than a decade ago a major “new raison d’etre” for the

EU in the rapidly globalised world—the EU should use its collective weight to

shape “globalization” and thus help Europeans prosper as well as create a better

global world.

In this context the need to re-consider and adjust European Union studies has

become more pressing, as is the need to link these studies with studies of countries

targeted by the EU in the “new raison d’etre” policy.

Among the G8 countries Canada is the one with which negotiations are

most advanced, and thus the requirement for a rapprochement between European

Union and Canadian studies. The European Union studies should enhance their


interdisciplinarity and be complimented by the teaching and research in non-

academic settings.

This new vision requires study visits and internships respectively to the Euro-

pean Union and countries targeted by the EU. The EU should increase its commit-

ment in promoting the educational component associated with this new globalized

“raison d’etre” of the EU.

The increased intercourse with Europe that can be expected in the wake of the

CETA agreement offers many new opportunities for the European Union and

Canadian Studies community. Another would be to encourage those already

involved in European Union studies to become interested in the Canadian aspect

of the subjects they already teach and do research in. In both cases, it is assumed

that a comparative EU- Canada element would prove fruitful as a source of

inspiration on the part of the academics and of interest on the part of the students.

Such an approach should be progressively extended to other countries with

which the EU will conclude similar agreements.

References

COM. (2006). 567 of 4.10.2006 and COM (2007) 183 final of 18.4.2007.

EU and Canada conclude negotiations on trade deal. COM IP/13/972 18/10/2013.

Migration. Department of Finance Canada. Available at: http://fin.gc.ca/pub/annual-annuelle/

2013-eng.asp

Muravska, T., & Ozolina, Z. (2011). Interdisciplinarity in social sciences: Does it provide answersto current challenges in higher education and research? Riga: University of Latvia Press.

Registered Nurse Canada. Available at: http://www.registered-nurse-canada.com/nurse_educa

tion.html#sthash.bMRI1jPq.dpuf. Retrieved October 3, 2014.

Sapir, A. (2011). Political economy of transatlantic regulatory cooperation and competition: A

(unofficial view from Europe). In S. J. Evenett & R. M. Stern (Eds.), Systemic implications oftransatlantic regulatory cooperation and competition (Studies in international economics, Vol.

15). Singapore: World Scientific.


http://fin.gc.ca/pub/annual-annuelle/2013-eng.asp

http://fin.gc.ca/pub/annual-annuelle/2013-eng.asp

http://www.registered-nurse-canada.com/nurse_education.html#sthash.bMRI1jPq.dpuf

http://www.registered-nurse-canada.com/nurse_education.html#sthash.bMRI1jPq.dpuf

Part II

Politics and Security

Transitions of Democracy: An EvolutionaryPolitical Economy Perspective 7Manuel Wackerle

Abstract

This chapter offers a fundamental criticism on the alterations of democratic

regimes as a result of conditions determined by political economy. The article

emphasizes the fact that democracy is a non-static principle, rather, it is a

dynamic, evolving and context-dependent principle influenced by conditions

relating to historical processes. The article reminds us of the necessity to

reinvent political philosophy, and in extension consider new forms of demo-

cratic governance, by developing a thorough understanding of the implications

economic patterns have on the nature of democratic governance and transition.

7.1 Introduction

Democracy has always been a principle of social emancipation and therefore an

institutional principle of change. Conversely, by looking back into the recent

history of democracy, it has also been used to slow down or even prohibit processes

of change, thereby contributing to institutional inertia. These are the two main

mechanisms of democracy in political economy and can thereby be understood as a

balancing principle of power relations. However in this chapter we won’t elaborate

much on the instrumental nature of democracy for the state and the people, but

focus on democracy in practice, as an evolving dynamic principle. Democracy as a

principle of multi-level governance has a very long and rich history. Its cultural

memory goes back to Ancient Athens with the first democracies in Greek city-states

(poleis) with 2,000–4,000 people on average. Today the Republic of India is the

world’s most populous democracy with over 1.2 billion people. Still the

M. Wackerle (*)

Department Socioeconomics, Institute for the Environment and Regional Development, Vienna

University of Economics and Business, Wien, Austria




135


foundational idea of democracy has not changed from a formal perspective over

2,000 years. Nonetheless its institutional setup has evolved in manifold ways and

we assume that its complexity with regards to multi-level governance has increased

over this period of time, concerning interdependencies between formal as well as

informal institutional changes. To this extent a major aim of this chapter is to

deconstruct this complex evolution by providing a brief overview of the develop-

ment of democratic models and contextualize them in their respective historical

period.

The emphasis on democratic models suggests reference to the philosophical and

political economic origins of particular democratic ideas and concepts. Respec-

tively this chapter does not go into details about the spatial, regional and geograph-

ical influences on the institutional evolution of democracy. Traditionally

democracy has been considered as a static concept of state governance, from a

political economic perspective it was considered as macro politics. This top-down

perspective made the idea of democracy very rigid and resistant to adaptation in the

light of conflict. From a theoretical viewpoint, it is connected to equilibrium

thinking, the atomization of the individual and the disentanglement of the public

(political) from the private (social), as practiced in neoclassical economics. As

Joseph A. Schumpeter argued, in capitalism democracy evolves necessarily to a

political method of competition for votes. The theoretical peak of this notion can

get connected with the analysis of Kenneth Arrow on social choice and individual

values, resulting into his impossibility theorem. Then the idea of democracy gets

idealized via representative rational voters and respective election strategies. The

methodological apparatus behind it, shares the logic of Classical Newtonian phys-

ics, where the laws of movement decide over aggregate results and outcomes.

Obviously this concept is entirely static and is not suitable for modern democracy

in line with multi-level governance, where political economic processes are of

multi-causal—layered and—directional nature. Still this concept is comparable to

what Amartya Sen called transcendental institutionalism, where he locates the

political philosophy of John Rawls and to some extent also of Jurgen Habermas.

It is the drive for an ideal concept of democracy which unites these approaches.

Otherwise Sen suggests a philosophical turn towards comparative institutionalism

in order to save the operational and effective potential of democracy, instead of

focusing on efficiency and legitimacy.

We substantiate this view with the notion of democracy in practice and elaborate

on pragmatic modes of democracy. In particular we look into the tradition of

American pragmatism and discuss the interconnection of habit and knowledge

and its relevance for democracy as an essential social emancipatory project.

Obviously this leads us to aspects of the old institutionalism and its evolutionary

roots. Thereby we regard democracy as a dynamic concept. Democracy faces some

deep inner contradictions if practiced in the capitalist mode of production. This

aspect among others, articulated as the democratic paradox by Chantal Mouffe,

makes democracy and the political sphere in general an antagonistic concept, as it

was already conceived by Karl Marx.

136 M. Wackerle

7.2 A History of Democratic Transitions

The following section sketches a brief history of democratic thought and models of

democracy, discusses their foundational ideas, institutional designs and their place

in history. Classical variants of democracy share a common idea about the process

dynamics of democratic governance, the political exchange in public in order “to

extract a public will”. One of the major turning points in the evolution of demo-

cratic models—so the argument—has appeared with the rise of modern branches of

democracy. The mode of production, the consequential political economic

constellations are decisive for the mode of democracy, which can never get

represented by a single theory but by a multitude of theories of democracy if we

follow Dahl (1982). However modern forms of democracy have emerged with a

better understanding of capitalism and are therefore heavily influenced by the work

of Karl Marx and Friedrich Engels, compare Hobsbawm (2011). Scholars such as

Max Weber and Joseph A. Schumpeter provided a more competitive, but also more

realistic view of democracy in comparison to the notion of ideal democracy

encapsulated in classical models. Obviously Marxism has played a crucial role

within this turn, the class struggle and the drivers for reform and/or revolution have

revealed democracy as an essential project of social emancipation going far beyond

a concept of governance. Indeed Schumpeter has shown that the political economic

elites will always try to protect democracy for the republican idea through the

conceptualization and interpretation of democracy as working under the same

mechanics as free markets do, i.e. in particular perfect competition for votes.

Schumpeter (1942) pointed out that democracy as such does not represent the

public will, but the public will is the product of the political method called

democracy. Therefore the institutional understanding of democracy has changed

towards a battle for votes between different interest groups. Otherwise, some

decades before, Max Weber (1972) has emphasised that vast societal inequalities

due to capitalist production won’t get resolved under democracy, because itself is

driven by an elite system. Still democracy has followed many paths in history which

are necessary to understand the aforementioned stands as well as developments

beyond the embeddedness of the political in the economic sphere.

To this extent democracy has grown over time and as all components of living

systems its order has increased with regards to complexity. Evolutionary theory

takes as a starting point the history of living systems and in case of evolutionary

political economy we look into the history of human systems. A particular concern

of this endeavour relates to the transitional phases in society transforming institu-

tional setups like models of democracy. These transitions happen usually in differ-

ent time frames, where a specific institutional regime builds up very slowly and

structures itself with ever finer granularity till it breaks apart due to inner

contradictions along new societal circumstances. We would call this a

co-evolutionary process between agency and structure (Wackerle 2014). The evo-

lutionary logic we follow in this political economic respect is connected to the

major logic of accumulation (Marx) and creative destruction (Schumpeter). To this

extent we look into specific transitional phases of models of democracy starting

7 Transitions of Democracy: An Evolutionary Political Economy Perspective 137

with Ancient Athens, following Held (1996) and Schmidt (2006), in this section and

work out some generic similarities along static and dynamic democracy in the

following sections.

Following the work of Held (1996) and Schmidt (2006) we are able to differen-

tiate and categorize between classic and modern branches of democracy, as

visualised in Fig. 7.1. Classic models work roughly under the umbrella of macro-

politics, where society was considered as a specific homogeneous group, implying

also a homogeneous preference structure. Focal points in the development of classic

models of democracy relate to issues of protection, law and the very idea of a state

or republic. In these types of models we can anticipate two separate tendencies of

political thought, i.e. protectionist and developmental.

Classic democracy has its origin in Ancient Athens, expressed basically in the

writings of Plato (437–347 B.C.) and Aristotle (384–322 B.C.). The polis representedthe origin of democratic thought, whereas the agora was a public place within the

polis where democracy came to practice. Not all citizens were allowed to

participating in the democratic process, foremost it have been men deeply rooted

in the common civil life. For instance Aristotle was not one of them, he was a

foreigner to the polis without civil right, compare Schmidt (2006, p. 20). The

practice of democracy was granted to men only over almost the whole historical

period of classic models. The Greek city-state had a very exclusive character: “Theclassical polis was marked by unity, solidarity, participation and a highly restrictedcitizenship. The state reached deeply into the lives of its citizens, but embraced onlya small proportion of the population. . . . Ancient democracy was a democracy of

Fig. 7.1 Variants of democracy [Source Held (1996), p. 5]

138 M. Wackerle

the patriarchs;. . .” Held (1996, p. 23). Collectivity was on the agenda just for a

selective body of a few, within this small elite the public had priority over the

private. Ancient Greek democracy was also not really a liberal system, it was

democracy in its purest form of deliberative negotiation but just among a few.

Kleistenes has written a constitution for Athens already in 507 B.C. (Held 1996,

p. 22). Only adult men over the age of 20 were allowed to be part of the citizenry,

representing the so-called assembly of the demos. Then a council of 500 sovereign

men was chosen by the ten tribes of Athens. The higher institutional body was a

committee of 50 council members, made up by rotation. Athens was also

represented by a president of the committee, who held office only for 1 day.

Aristotle’s writings in The Politics indicate the radical novelty of democracy in

its institutional features, i.e. deciding collectively by vote on all public affairs

within the assembly, “The assembly met over forty times a year and had a quorumof 6,000 people” Held (1996, p. 21). Critical concerns of this model were especially

addressed by Plato, who was in favour of an even smaller class of experts governing

the city-state. In The Republic he asserts that equality between men represents the

fundamental institutional criterion for a democracy, but the ruling class governs

from its bureaucratic centre. This centre should be managed by the expertise of

philosophers, for Plato the guardians of society. However today we know that

Ancient Athens broke apart politically, because it lacked bureaucratic efficiency.

The economy as well as the military was loosely organized and failed obviously due

to an early attempt of direct political self-organization. However the Athenian

model of democracy carries the most basic and therefore generic institutional

rule-set (Dopfer and Potts 2008), because its foundational rules have still retained

in our modern institutional settings of democracy. Otherwise from an agency

perspective we may also ascribe the birth of Homo Politicus exactly to this era.

If we move on in history over more than 1,000 years, we can identify some

fundamental novelties in the institutional rule-structure of democracy. Accordingly

the next major milestone among democratic variants has appeared with the political

concept of Republicanism, appearing in the era of Italian renaissance. Political

entities such as City-Republics have developed especially in medieval Northern

Italy, inspired by the republican thought of Marsilius of Padua (1275–1342) and

Niccolo Machiavelli (1469–1527) among many others. The Homo Politicus expe-rienced some crucial transitions within this period of political thought. During the

Renaissance absolutist autocracies began to fall apart slowly in continental Europe.

The strong bond between aristocracy and Christian clerics seemed to get disturbed.

With regards to Held (1996, pp. 45) we identify two major streams of Republican-

ism that we will briefly discuss: developmental and protective Republicanism. The

former follows the institutional strand of direct democracy in the Greek polis,whereas the latter is closer to the political system of Ancient Rome. As Held

(1996, p. 45) notes, obviously there is a great stream of cross-fertilization between

these two conceptualizations, but the developmental strand focuses more on the

“. . .intrinsic value of political participation for the enhancement of decision-making and the development of the citizenry” and the protective institutional

frame emphasises to a greater extent the “. . .instrumental value of political


participation for the protection of citizen’s objectives and interests”. The two

streams are connected on the one hand to the notion of social emancipation and

on the other hand to the protection of civil rights. Marsilius of Padua can get

associated with the former institutional outline, where political participation

becomes a means of emancipation, a condition for the further development of

civic life. Instead Machiavelli tinkered generally with the notion of system vulner-

ability with regards to corruption of particular leading groups. Those concerns

relate to the dominance of aristocrats and the consequential mistrust towards any

particular leader or leading group. A crucial point within the developmental stream

of thought, argued by Marsilius of Padua, is represented by the idea that govern-

ment is an unfinished idea, that it needs continuous development by the involve-

ment of all citizens. Democracy entails thereby first dynamic and anti-teleological

theoretical components. Governance may succeed if it operates for the common

benefit with a unitary concept of coercive power, still acknowledging that conflicts

are inevitable. Otherwise Machiavelli elaborated more on the conditions of inde-

pendence, self-rule and glorious endeavour as outcomes of civic involvement.

Therefore it is decisive whether one takes equality as a starting point for develop-

ment or homogeneity as an end to fulfil and protect.

Machiavelli looked into a protective balance of power between the citizenry and

the state (Held 1996, pp. 50–51). Regime transitions occur in particular if power

relations are unequally distributed and if a specific social class is not protected by

the state. Hence, Machiavelli emphasised in The Discourses that cycles of regime

changes are inevitable, since political balances won’t hold in the long run: “Andfrom this there was, stage by stage, a return to anarchy, by way oftransitions. . .This, then, is the cycle though all commonwealths pass, whetherthey govern themselves or are governed.” The Discourses, pp. 108–109, in Held

(1996, p. 51). These disastrous and apocalyptic conclusions are pretty similar to

Plato’s critique, discussed some lines above, that monarchy tends to decay into

tyranny, aristocracy into oligarchy and democracy into anarchy, turning back to

monarchy again. In Machiavelli’s terms tyranny remains a necessity to sustain

liberty, thereby the protective concept of republicanism needs to install a powerful

leadership or elite capable of creating and defending its law (Held 1996, p. 54). This

institutional picture of democracy—realised in rather small Italian city

communities—conceives somehow a mixed constitution and government, where

aristocracy, monarchy and citizen participation are all involved.

In eighteenth century France, Jean-Jacques Rousseau (1712–1778) has articu-

lated a new radical and thereby also romantic perspective on republicanism, still in

between the Ancient and modern thought. The epoque was dominated by rivalries

between absolutists and progressive forces, Rousseau himself supported by the

aristocracy till the end of his life (Schmidt 2006, p. 80). Rousseau tried to revive

the idea of assembly politics by the installation of public forums for democratic

dialog within the communities, which have been the place of political life in his

time. However, the slowly rise in complexity of economic operations and

interactions over Europe forced democrats to think in bigger spheres. These

circumstances clearly undermined the concept of a mere city-democracy. The

140 M. Wackerle

macro-perspective on democracy has demanded a new institutional vision, where

Rousseau’s focus on the people as the sovereign comes in. His vision of democracy

was still bounded to regional communities, nevertheless he was one of the first who

has demanded social justice for the whole nation. In this respect he has argued along

the state of nature and an emerging social contract overall. It is the era of the socialcontract which made democracy to a macro issue finally. In the so-called state of

nature all humans are equal and free, Rousseau argued that it is the society and its

institutions which turn them around (Schmidt 2006, p. 81). On the contrary Hobbes

argued that in the state of nature humans are wolfs in front of each other and it is the

Leviathan who needs to tame them. Rousseau considers sovereignty of the people

as absolute and indivisible, the conflicting source in this respect is given by the

institution of private property. Anyway in his terms a variety of institutional

novelties need to emerge in order to overcome the problems stemming from

property and possession as well as from common miseries, therefore “. . .peoplejoined together to create through a ‘social contract’—a new basis of understandingand agreement, ‘perhaps never formally stated. . .everywhere tacitly admitted andrecognized’—. . .” Held (1996, p. 57). Rousseau emphasised in ‘The Social Con-tract’ that the public administration was thus formed and articulated as the Republicor the Body Politic instead of the political category of a city-republic in Northern

Italy. Rousseau’s liberal Republicanism was truly a radical outline in this respect.

From a theoretical point of view the conception of ideal democracy appears in this

context, where society and democracy gets articulated by an integration of govern-

ment and the people. Hence the state was not separated from the citizens anymore,

they were connected along the so-called general or public will. This will is a

“. . .publicly generated conception of the common good. . .”, Held (1996, p. 59),

created by the citizens and bounded to their given direction. Therefore Rousseau

also was forced to elaborate on the case that the public will may not be shared by all

citizens. To this extent a majority rule was necessary to implement in order to stay

consistent and arrive at collective decisions eventually. In his writings on Emile,compare Held (1996, p. 61), he claimed the role of education within a democratic

institutional corpus. Education asserts democracy the necessity of critical thinking

and recognition of other opinions, i.e. the acquisition of a discursive technique.

Furthermore Rousseau has addressed the need for a separation of power within the

state in tradition of Montesquieu, who died 20 years prior to Rousseau. Accordingly

legislative tasks should get operated by the people and the government should

execute the people’s laws, quite similar to Machiavelli’s formulation in ‘ThePrince’. Rousseau’s republican conceptualization of the social contract was not

the only blueprint for a contractarian1 system of thought in political economy.

Apparently contractarian thought was also articulated in the United Kingdom,

even 100 years before Rousseau. Thomas Hobbes (1588–1679) and John Locke

(1632–1704) elaborated on contractarian political philosophy within the set of

1We refer broadly to contractarian theory as the search for an ideal or supreme contract among

equal citizens or agents.


liberal democracy. Even in the context of liberal democracy we may distinguish

between a protective and an adaptive or developmental model variant (Held 1996,

pp. 70). Similarly to Republicanism, the former highlights the need for institutions

in order to protect the citizens’ liberty. Whereas the latter concentrates on institu-

tional development for political participation as the central mechanism of democ-

racy. In ‘Leviathan’ (1651) Hobbes focuses on power and sovereignty within the

state, power establishes protection for the egoistic individual. Hobbes articulates

also the idea of a state of naturewhere natural law and a natural allocation of power

evolves upon. Obviously this metaphor implies theoretically the existence of an

institution-less social space, i.e. a “divine” space without any history and therefore

without any politics; a central starting point for Rousseau as well as Hobbes. The

respective dynamics starting from this initial condition are quite simple: it is the

natural competition of laws leading to an emerging order (societal equilibrium)

which he denotes as a liberal order. This emerging social contract reflects a supreme

order of ideal democracy in particular. Locke argues basically along a similar

schema, but he elaborates more on the role of the state within the natural order

(implying the existence of institutions in this state thereby anticipating history and

politics) and on the role of critical rationality. If we can assume rational choice and

the state guarantees a protection in front of the law, the people will achieve liberty,

so the argument. In consequence the parliament represents the legislative institution

creating law and the state—at that period it was still the monarch—executes it,

following a constitutional monarchy with some parliamentary elements.

Otherwise Jeremy Bentham (1748–1832) and James Mill (1773–1836)

elaborated on utilitarian philosophy and introduced it to political economy.

Bentham’s and Mill’s influence on the social and economic sciences were tremen-

dous. We may argue that it was the utilitarian system of thought which separated

economics from political theory or which made political science to an economic

discipline and not the other way around. It was the first model of democracy where

the argument of optimization comes into play. For Bentham and Mill the

contractarian concepts of former democratic thinkers were just romantic fictions.

The aim was clear to define the real mechanisms of political decision making.

Nevertheless democracy as a principle made also substantial institutional gains

from this period, since the strict emphasis on anonymous voting was clearly a

novelty. Only a system of anonymous voting can guarantee free political competi-

tion, so the argument. In this respect elections have received institutional attention

finally, although still only citizen male were allowed to take the walk to the ballot.

The economic rationale behind tells that free competition regulates interaction in

the most efficient way. To this extent the state just represents a referee for economic

competition from now on. Laissez-faire economics opened the way for a new

category of civil liberty in front of still ruling aristocrats. However it also made

the original notion of the Greek polis disappear eventually. Mill’s son John Stuart

Mill (1806–1873) played also an intriguing role in order to defend the utilitarian

argument for a liberal democracy. But Mill junior made some critical remarks on

the sole protective concept and introduced the idea of a representative democracy,

where an adaptive development of the system can get achieved along active

142 M. Wackerle

participation. Political participation is always connected to information, knowl-

edge, education and power consequently, which was well recognized by John Stuart

Mill, and plays a central role in the latter part of the paper. Mill junior discussed

some central problems of democracy: how much bureaucratic administration is

necessary? How much parties should represent the citizens and does bureaucracy

undermine innovation and creative political design? Furthermore he underlined the

importance of a constitution coding explicitly the right of citizens to vote on the one

hand and separating the state’s power into executive, judicative and legislative

organs. Still the major outline of political economy was based upon free competi-

tion and the laissez-faire doctrine.

During the nineteenth century the legitimacy of European absolutist regimes got

scrutinized more and more which led to the 1848 revolution eventually. Alliances

across the working class and the bourgeoisie have claimed the fall of absolutism in

consequence. Causes and effects of the revolution are of highly complex nature and

go definitely beyond the scope of this paper. However the bourgeois revolution in

1848 had failed more or less and as Hobsbawm (2011, p. 69) concludes “. . .the‘ideal’ political regime of the bourgeoisie, the constitutional parliamentary state,was either not achieved or (as in France) abandoned by Bonapartism.” Of coursethis outcome was a major driver for the further development of capitalism, since the

centralised state apparatus, still under the model of absolutist monarchy, was

“strengthened by bourgeois revolution in order to achieve ‘the bourgeois unity ofthe nation’” (ibid.), a necessary condition for the further autonomy of state-driven

capitalism. Thereby several problems have become apparent for the socialist

movement, most importantly, as analysed by Marx and Engels, those were related

to the organization of the proletariat and the relation between the ruling class and

the state apparatus, also a crucial question for the development of democracy under

concrete historical circumstances. The tied bonds between the owners within the

industrial economy and the power elite opened up a series of socio-political

problems decisive for the theoretical development of Marxism as a social theory

in the twentieth century. For both of them it was pretty clear that the concept of the

democratic republic was the logical form of bourgeois rule. However Marx and

Engels were also aware that a radicalization of direct democracy would be a

necessary practice for the transition towards socialism. The democratic strategy

of Marxism has to get understood in terms of international social emancipation and

not as a specific theoretical model of democracy with a certain institutional config-

uration, since Marx has rejected to use the word of ‘democracy’ in this respect

(Hobsbawm 2011, pp. 84–85). The institutional setting anticipated in this context

was just the dynamic principle of social development evolving along the dictator-

ship of the proletariat. Marx built very much on the idea of historical inevitability

on behalf of historical materialism, to this extent it was not necessary to provide a

blueprint or specific social contract, the concept was designed purely dynamic. Of

course envisioning this utopia made generic political guidance complex, because

Marx and Engels have always focused, following Hobsbawm (2011, p. 87), on the

forms of political action dependent on concrete situations. In consequence they did

not need to worry about the formulation of permanent rules or formal institutions.


In the aftermath of capitalism, compare also Schumpeter (1942, Part II), along the

transition to socialism and communism, it comes to an ‘Aufhebung’ of the state andthe civil society. The role of democracy is thereby purely transitional to “. . .end theseparation of people and the state. . .”, accordingly “. . .constitutional forms weresecondary to social content. . .”, Hobsbawm (2011, p. 51). Within Marxism democ-

racy does not represent a formal part of the state but it is its essence. Marx has

followed the idea of politics and shared respect with it in contrast to the anarchists,

consequently, as also Schmidt (2006, p. 155) observes, democracy builds the arena

for the class struggle, for revolutionary practice, transition and societal

transformation.

In the early twentieth century capitalism has gained real momentum and the

political got undermined by the economic sphere. These developments let to a

severe micro-foundation of democratic models where we state the beginning of

modern democratic models. Max Weber and Joseph A. Schumpeter elaborated in

particular on the so-called elitist, bureaucratic, competitive and technocratic

approach to democracy. The Max Weber conceptualization of democracy stands

contrary to Marxism in terms of institutional theory. Weber envisions a powerful

modern as well as elite-driven state. In the final chapters of his magnus opum

‘Wirtschaft und Gesellschaft’ he discusses in particular the different functions and

aims of the ‘rational state’, the parliament and the administration under the princi-

ple of democracy (Weber 1972, pp. 815–868). An effective constitution guarantees

the stepwise development of a powerful elite, where the parliament firstly selects

leadership, secondly it demands responsibility of the selected and thirdly it

approves and controls the manners of the administration. Weber (1972, p. 851)

summarizes that these roles of the parliament form the positive character of politics

parallel to the monarch. Eventually in Weber’s terms politics is nothing else than

fight and promotion. Consequently for Weber but as well for Schumpeter leadership

needs to be charismatic (Weber 1972, pp. 140–148) in contrast to legal and

traditional. However as Weber notes, there is a difference between the charisma

of a still rising and genuine star and the necessary maintenance of it in the

profession of a politician. Thus Weber’s political thought was necessarily analyti-

cal, rational and very technical. In this respect the approach was by nature realistic

with an emphasis on conflict and competition. Weber emphasised the charismatic

component of leadership in stark contrast to the traditional, patriarchal, geronto-

cratic or patrimonial expositions implicit in classical models of democracy.

Thereby Weber’s rationalization of leadership, legitimacy and power has an eman-

cipatory function in this respect.

Schumpeter, the so-called bourgeois Marxist (Catephores 1994), has many

theoretical roots back to Marx. Foremost, as he also argued (Schumpeter 1942,

Part I), it was the visionary nature of Marx’ work, the conceptualization of a unified

social science that Schumpeter has also adopted (Shionoya 2009; Hanappi 2012)

and of course the praise for Marxian analytical precision, compare also Schumpeter

(1942 Part I, 1954 Part III: Chap. 6). However Schumpeter also shared the specific

evolutionary explanation of economic development with Marx, the idea of cyclical

change and endogenous instability. To this extent political economy dealt with the

144 M. Wackerle

http://dx.doi.org/10.1007/978-3-319-13814-5_6

social consequences and political implications of gradual as well as abrupt eco-

nomic changes. Schumpeter (1942, pp. 134–143) makes it quite explicit that these

are the economic dynamics (creative destruction) driving the capitalist engine and

making it inevitably unstable. Eventually, within this grand analysis the capitalist

system stops to work because the romantic goals of the bourgeoisie, such as the

‘building of an industrial dynasty’ (Schumpeter 1942, p. 252), become unreachable

due to the tendency of a falling rate of profit (Marx), the running out of investment

opportunities (Schumpeter) as well as the dissolution of the institutional structure of

capitalist society. Additionally Schumpeter shared explicitly with Marx the concept

of historical materialism as well as the revolutionary character of the bourgeoisie

(Catephores 1994, p. 7). Of course the latter is essentially related to the instruments

of production, but if we follow Schumpeter (1942, p. 471) that classic democracy is

basically a product of the capitalist process, the revolutionary character of the

bourgeoisie needs to get connected also to its advancement. Within the Marxian

and Schumpeterian interpretation, the concept of modern democracy gains momen-

tum as a central endogenous gravedigger of capitalism. To this extent democracy

may survive capitalism—one may also speak of transcendence in this respect due to

the same ideological bourgeois roots. However Schumpeter (1942, p. 397–427) is

certain that the classic models of democracy are theoretically lost and not realistic

for explanations about the political and social structure brought upon by industrial

capitalism, since the class struggle in particular but the higher fragmentation of

society in general does not allow for a common rationalistic schema, preference

structure or public will, i.e. the death of the macro-political idea of classic democ-

racy. On the contrary Schumpeter (1942, pp. 427–451) suggests a model of

democracy, comparable to Weber, where democracy has always been a theoryabout competition for leadership, a political method or democratic practice. Theconditions for its success are connected to a sufficiently high quality of people

capable to work as politicians. The set of these people does not belong to the

general public but to the people standing for election—the politicians. It is this

concept of democracy, which “. . .led the process of political and institutionalchange, that allowed the bourgeoisie on the one hand to transform the social andpolitical structure, that has preceded its coup d’etat, and on the other hand torationalise it from its own point of view: the democratic method was the tool of thisreconstruction.”2 Schumpeter (1942, p. 471) . . .for Schumpeter, two questions

remain, firstly can democracy survive capitalism or do they get buried together?

Secondly, is the capitalist society capable to work with its own developed demo-

cratic method? (ibid.) The first question is rather complicated. In respect of the

second, Schumpeter argues, of course capitalist society can easily work with its

method, because the bourgeoisie has already found and adequate solution for its

procedural mode of political economy. The sphere of political decision gets

reduced to an extent, where the method of leader competition is sufficient. The

bourgeois system limits the sphere of public authority via an ideal of the

2 Translation by the author.


parsimonious state, guaranteeing bourgeois legality through maintaining an institu-

tional frame for autonomous individual endeavours (Schumpeter 1942, pp. 471–

472). The implications for the political system are obvious, it is the continuous

presentation of its own inability and incompetence. To this extent Schumpeter

(1942, p. 472) concludes that the bourgeois democracy is not a democracy. For

the first question, we just one want to emphasize that the possibility of a democratic

socialism is given, since the expansion of the public (till it absorbs all economic

activities) does not imply an expansion of the political under democracy practice as

articulated above. However the limits of this method may become a bigger problem

in socialism than in capitalism (Schumpeter 1942, p. 475): “lack of effectiveadministration will mean lack of sufficient bread.” Nevertheless democracy can’t

be an answer to this problem. “. . .socialism may be the kit that can re-establish anunanimity about the tectonic principles of the social building. If so, a specific kindof antagonism will remain, which the democratic method may handle.” Schumpeter

(1942, p. 478) Conversely there will always remain some sort of antagonism

inherent in democracy, the main driver for transition and transformation in evolu-

tionary political economy, a topic of Sect. 4 then.

7.3 From Static to Dynamic Democracy: TranscendentalVersus Comparative Institutionalism

Weber and Schumpeter have gone beyond the perspective of classical models of

democracy by elaborating on the technocratic, bureaucratic and competitive view

of democracy. Thereby they have also discussed the social and political role of the

economic system. The classical models of democracy (except the Marxian view)

are founded either on a contractarian or a utilitarian philosophy, by that on the

formulation of ideal democracy. These foundations inhabit a common characteristic

which Sen (2010) denotes as transcendental institutionalism. A transcendental view

of democracy focuses on the search for supreme or ideal premises for democratic

governance roughly. This notion, which has also been highlighted in twentieth

century political philosophy, is methodologically connected to a major paradigm in

economics, i.e. static equilibrium.

Neoclassical economics serves as the prototype within this respect (compare

Zolo 1992, pp. 82–89) and has influenced political science tremendously along its

rational choice doctrine. The origin of this paradigm goes back to classical Newto-

nian physics, a methodological rule-set still in use by the social and political

sciences for micro as well as macro concerns. “It was a science of causality, rigiddeterminism and preordained order; in other words, it was physics prior to theSecond Law of Thermodynamics.” Mirowski (2002, p. 7). Many others have

commented on this particular methodological fallacy, compare the recent poststruc-

turalist critique on the ‘Oikodizee’ by Vogl (2010), the evolutionary economic

critique by Dopfer and Potts (2008), the econophysicist critique by Prigogine

(2005) or the institutional economic critique by Berger and Elsner (2008) or Elsner

(2010). Within a mechanistic (i.e. a static) conception of socioeconomic and

146 M. Wackerle

political change the actors are implicitly conceived as particles, moving automati-

cally from a certain natural state towards a preferred state of equilibrium. Theforces within this mechanism follow a universal principle, law or nomological rule.

In particular the terminology of law within classical physics refers to nomological

expressions, which constitute by assumptions such as time-invariance and time-

symmetry (Dopfer 2005). Time-invariance implies that discrete events are not

addressed with sufficient importance and in consequence historical developments

play a minor role in contrast to analytical rigour.

A closed-system evaluation of political economic change remains anti-historic.

Marx was the first who recognized this relationship in its deeper meaning and

argued that political economy changes cumulatively in dependence on the mode of

production and capital as a social relation. The notion of equilibrium or ideality is

misleading in this respect, since the social relations don’t remain in a constant and

static frame. On the contrary the co-evolution of agency and structure relations—

i.e. institutional change and transition—stands for a dynamic conceptualization of

change. Sen (2010) develops modern concepts for democratic change with the help

of institutional theory, in line with a historical and comparative narrative. His

approach follows a liberal democratic idea of development by elaborating on

alternative modes of thought about justice and democratic practice in a

non-transcendental institutionalism. Thereby he criticizes substantially the outline

of analytical political philosophy by John Rawls, especially the ‘A Theory ofJustice’, Rawls (1971). Certainly Amartya Sen has played with this outline by

titling his recent book (Sen 2010) ‘The Idea of Justice’. Respectively he does not

aim for a complete theory of just and moreover ideal institutions, but for the

propagation of an idea for the development of such just institutions as a realistic

option. Rawls’ theory of justice connects, integrates and synthesizes a broad range

of contractarian models of political theory. This aspect also builds the cornerstone

for the critique of Sen (2010), that contractarian theory troubles too much with an

outline towards a supreme ideal social contract. Thereby he emphasises an alterna-

tive perspective of comparative institutionalism going beyond contractarian and

utilitarian systems of thought.

Reasoning drives democracy, even though it constitutes political economy not

more than the evolution of power relations. Arguments may indicate just solutions

or may undermine unjust solutions for social practices in public life. But what

characterizes good reasoning in public spheres, can there be any objectivity in

reasoning, are there true reasons? Obviously there is a necessity to reason within a

democracy as the rich European history of democratic thought indicates. Therefore

“. . .the pursuit of reason is the way to address difficult problems of good behaviourand the challenges of constructing a just society.” Sen (2010, pp. 36–37). Amartya

Sen elaborates that democratic practice is not merely an invention of Western

European philosophy and discusses the Indian roots of democracy. He discusses

the historical role of Akbar, the mogul of India in the sixteenth century, who

claimed religious tolerance and equidistance to the state, a vision of secularity,

whereas in Europe during the same epoque the inquisition has left a terrible shadow

behind. Along such examples Sen indicates that the generic foundations or claims


of democracy, as we elaborated above, have not merely emerged in Europe. The

Indians have articulated a series of profound ideas to reach levels of social justice,

among them Akbar’s argument that the “. . .’the path of reason’ or ‘the rule of theintellect’ (rahi aql) must be the basic determinant of good and just behaviour aswell as of an acceptable framework of legal duties and entitlements.” Sen (2010,

p. 39). However reasoning means that we recognize emotions and affects as driving

forces for behaviour and decision, hence there is good reason to think about their

origin. To this extent we may address that there is a strong but complex connection

between emotion and reason. This is a point which was truly neglected in the

European tradition for centuries. With Rene Descartes body and mind got strongly

separated and a dualistic perception of the world was suggested. This notion is not

sufficiently criticised in the European tradition, still it is a crucial point for the

development of democratic theory and especially for practice. The Indians have

anticipated this close connection and asserted it as a pillar for exercising philoso-

phy. The major European critics of so-called rational constructivism, elaborated in

its origin by Decsartes, were the Scottish moral philosophers, i.e. David Hume and

Adam Smith. Both asserted to the moral sentiments of human beings a central role

for political economic action as well as for exercising philosophy.

In this liberal tradition Sen argues that reason and emotion are complementary

categories. In consequence reasoning has obvious limits facing objectivity. “Thequestion that remains, however, is this: why should we accept that reason has to bethe ultimate arbitrator of ethical beliefs?”, Sen (2010, p. 39) Pure objective

reasoning may also lead to arbitrary solutions, Sen argues that also a very dubious

logical procedure can yield a more correct answer than extreme rigorous reasoning.

In contrast Rawlsian political philosophy suggests to derive a normative definition

of objectivity, an “objectivity of justice as fairness”, compare Sen (2010, p. 42). In

this respect it is interesting to look into the relations between the Rawlsian system

of political thought and Habermas’ (1981) ‘Theory of communicative action’.Conversely Sen (2010) highlights that both perspectives are remaining within a

transcendental institutionalism, although Habermas focuses more on the argument

for objectivity which relies on open, informed and public discussion. Thereby

Habermas tries to solve the issue of ideal democracy with the metaphor of an

ideal space of discourse. Hence the problem is also circumvented in his line of

argument. Rawls intends to find a “. . .procedure independent identification of whatwould convince people who are ‘reasonable’ persons and who would find somepolitical conviction to be ‘reasonable’ as well.”, Sen (2010, p. 43). Habermas

emphasises apparently the procedural strategy, however Sen (2010) outlines that

it seems that both approaches are not of completely different nature. The basic

reason lies in the demands for justice, assumptions which have to be taken into

account to reach an ideal state of objective reasoning; independent from the strategy

of both lines of argumentation.

Furthermore Sen (2010, p. 44) outlines that the Rawlsian approach imposes an

elitist picture of democracy, demanding the necessary condition of ‘reasonable

people’. But how can we even think of universal premises for reasonability of

human beings, a rather difficult task. What brings Rawls and Habermas together in

148 M. Wackerle

this specific question? “. . .there is an essential similarity in their respectiveapproaches to objectivity to the extent that objectivity is linked, directly or indi-rectly, by each of them to the ability to survive challenges from informed scrutinycoming from diverse quarters.”, Sen (2010, p. 45). Sen points out that it is

misleading to assume a unique set of the principles capable of surviving scrutiny.

“Indeed, any approach to justice that follows the rigidity of a unique institutionalstructure . . ., and which proceeds to tell us, step by step, an as if history of theunfolding justice, cannot easily accommodate the co-survival of competingprinciples that do not speak in one voice.”, Sen (2010, pp. 46–46). In consequence

we need to open the system of political thought towards a dynamic theory. The

central argument for our concern deals with a further development of a comparativeinstitutionalism, that is open for an evolutionary political economy approach where

democratic practice plays a major role in disequilibrium terms. The model for a

dynamic democracy builds upon the developmental approaches in the history of

democracy and gets substantiated here by the so-called old or American institu-

tional economics.

Institutional economics has a rich history, starting in the end of the nineteenth

century. Its most prominent advocates are Thorstein Veblen, John R. Commons and

Wesley Clair Mitchell, compare Hodgson (2004). A central point in institutional

economics, or the so-called ‘Old Institutionalism’, is dedicated to pragmatist

thought and towards theories of practice. American pragmatists such as Charles

Sanders Peirce, William James and John Dewey have influenced this scientific

stream tremendously. It is the principle of abduction which can be regarded as a

central maxim of pragmatist thought. Abduction considers an epistemological

principle where induction and deduction gets synthesised along a theory of practice.

A key ingredient of pragmatist thought represents the socialisation of habits via its

cognitive, instinctive and affective roots. Referring to Sen (2010, p. 41):“Realethical questions are a species of practical question, and practical questionsdon’t only involve valuings, they involve a complex mixture of philosophical beliefs,religious beliefs, and factual beliefs as well.” Respectively shared history matters

for the formation of common expectations and beliefs, but it is its contingent path

dependent development which makes the notion of practices central for pragmatic

experimentation. Institutional economics is considered as a specific historical

specialized by the notion of evolutionary change, compare Veblen (1898, 1904).

This theoretical variant makes it different to the German historical school, compare

Screpanti and Zamagni (2005) and Milonakis and Fine (2008).

Thorstein Veblen has considered institutional change as endogenous, indicating

that its drivers are always within the system and initialize transition or self-

transformation. These forces build up in a causal cumulative and sequential way,

hence the assumption of a static or ideal equilibrium cannot hold within capitalism.

Veblen’s starting point in his institutional theory is the connection between habits

of thought and the evolving economy; he considers interdependent change between

agency and structure, between habits and institutions. Obviously habits of thought

are diverse and manifold due to cultural evolution and consequently we find

institutions always in conflict or contradiction with a variety of habits and its


de-synchronization lead dynamically to a transitional state, compare also Bourdieu

(1994) or Boyer (2008) for a recent interpretation of the latter in this respect. The

common them in institutional economics is represented by an open-system

approach. Economic, political, social and cultural spheres are highly interconnected

and cannot get separated from each other within a closed-system view. It is the social

unity of science which brings them together in transdisciplinary terms, as also

Schumpeter argued, compare Shionoya (2009). The open-system approach has its

origin in Bertalanffy’s (1968)General System Theory, where notions of physics afterthe second law of thermodynamics are integrated with evolutionary theory, “trans-

lated” into the social sciences by Luhmann (1984). This outline of science advocates

principles of self-organization, complexity, variation, selection and retention.

Berger and Elsner (2008) show remarkably how the open-system approach within

an evolutionary synthesis builds up an evolutionary institutional economics, relevant

for the dynamic analysis of social transitions under terms of complexity and

evolution. Thereby they analyse the European outline of institutionalism,

represented foremost by Gunnar Myrdal, William Kapp and Nicolas Georgescu-

Roegen. The emphasis is given to the concept of circular cumulative causation(CCC). The authors highlight that the idea of institutional economic change, shaped

by cumulative causation of habits of thought, was not a mere American phenome-

non. “Myrdal analysed, for instance, the role of institutions in traditional societiesand showed that the ‘economic factor’, e.g. foreign investment, does not necessarilygain dominance over the ‘institutional factor’ and does not necessarily lead to betterdevelopment. Thus, as a real type and applicable research Hypothesis, CCCcaptures central characteristics of socio-economic processes.”, Berger and Elsner

(2008, p. 83). This very basic cybernetic principle of cumulative causal causation

gets a deeper significance, if it is especially considered under an open-system-

approach (OSA). Georgescu-Roegen (1971) has followed that biological life speeds

up the entropic degradation of the whole system, because it is fed by low entropy.

Institutions let us steer away from a political economy equivalent of a thermody-

namic equilibrium, a static anti-historical and anti-political state of society.

The complexity of democratic practice leads us directly to problems of

polyarchy. In order to prevent what Zolo (1992) titled the consequential evolution-

ary risks from polyarchy for democracy: inflation of power, self-reference of theparty system and neutralisation of consensus, it is necessary to highlight the notionof information and communication for transitions of democracy. Information is

then considered as a social equivalent to energy, thereby power gets close to

entropy in such terms.3 Sen (2010) identifies the information sharing problem as

the crucial element for the future of democratic practice and theory. Within an

institutional framework reasoning becomes a social issue and the problem of nested

reasoning or shared beliefs emerges, the former also addressed by Kawamura

(2009) and the latter by Aoki (2007, 2010). For Sen (2010) the social consequences

3 Consider also Foucault (1978, 1994) for a comparable (in implicit terms) interpretation of such a

power terminology, see also Lukes (2005, pp. 88–97) or Castells (2009, pp. 137–295).

150 M. Wackerle

and realizations are more important for the assessment of institutions, which stands

in true tradition to the institutional economics approach elaborated above. He

argues that Rawls was in search for the ideal behaviour to justice and contrasts it

to the investigation of actual behaviour and social choice guiding towards social

justice. The comparative outline defines itself as an alternative to contractarian

systems within political economy. In Sen’s comparative institutionalism informa-

tion sharing simply represents the process of democracy, whereas the contractarian

system is just searching for the ideal set of information. Since the economies are

heavily interconnected through complex information structures today, there is a

need to consider democracy as a global challenge, which is not an issue within

closed system transcendentalism. In Sen’s (2010, p. 71) words, “The possibility ofproceeding, in this case, through the Rawlsian sequence of setting up justinstitutions for the global society, i.e. demanding a world governance, is, however,deeply problematic,. . .”. Relaxing the issue of information sharing is central

whether we consider a local or global political economy. Unfortunately such

relaxations demand at least some analytical considerations, present in the case of

social choice theory. How can a theory of social choice and collective action be

dynamic?

Sen (2010, pp. 87–114) revisits social choice theory and elaborates on the

“. . .positive and constructive avenue that Arrow’s pioneering work opened up.”Sen (2010, p. 93) Sen’s critique of the social choice approach deals again with the

transcendent aspects of it, he wants to put social choice in the light of a comparative

institutionalism. But before we explain some basic elements of this interpretation,

we revisit Arrow’s impossibility theorem as a major problem emerging from

instrumental micro-models of democracy, i.e. voting and election. It’s characterised

by the willingness to find formal procedures arriving at optimal social choices on

behalf of individual values. Social choice theory builds upon microeconomic

preference theory, the contractarian ordering/ranking of preferences and its final

aggregation/summation of utilities. Thereby it remains ultimately an algebraic

challenge in search of optimal social choice (with theoretical implications for

elections) and social welfare (with theoretical implications for economic policy),

Sen (2010, pp. 91–94) highlights the constructive aspects of social choice theory

but also refers to its mathematical fallacies within an overemphasised analytical

rigour. Arrow (1970) made social choice theory prominent in the economic realm,

unfortunately with its findings about formal impossibility. Arrow linked individual

preferences of lower order to a social or collective preference of higher order. In

this manner he bridged individual (micro) to social choices (macro), but by simple

aggregation of a representative preference structure, thereby ignoring all meso

processes happening in between. Consequently Arrow investigated how the aggre-

gation of individual preferences meets some stated normative assumptions. It was

the formulation of the Impossibility Theorem4 that followed. The theorem shows

4Arrow (1970, p. 47) himself calls and states the theorem as “The General Possibility Theorem forSocial Welfare Functions.”


that any aggregation procedure (in case of democratic elections: voting) can’t

meet all the demanded normative conditions for social choice optimum. Addition-

ally they won’t even meet three out of four conditions. Let’s briefly remember the

conditions, compare also Taylor (1995, pp. 102).

Pareto Condition: A social choice procedure fulfils Pareto Condition if for any

pair of alternatives (x, y) applies, that if everybody prefers x over y then y can’t bethe social choice.

Condorcet Winner Criterion: An alternative x is a Condorcet Winner, if x beatsany other alternative in a 1on1 match. Hence x must be at least at one half of the

preference lists ranged above y. A social choice procedure fulfils Condorcet Winner

Criterion if there is a Condorcet Winner.

Monotonicity: A social choice procedure is monotone, if x is a social choice andan individual changes its preference setting that x ranks higher as before, xmust still

remain a social choice.

Independence of Irrelevant Alternatives: If a set of social choices includes x butnot y and one or more individuals change their preferences, but not the ranking

between x and y, then the set of outcomes should not change and y should stay

excluded. Nevertheless it’s possible that any alternative z ranks above x after the

preference change, but y should stay excluded.

The most common procedures which are used in most democratic countries as a

voting procedure are Plurality Voting for single seat constituencies and Propor-tional Representation for multi seat constituencies. Plurality Voting builds the

social choice out of the most first rankings of individual preference orders, whereas

Proportional Representation constitutes parliament seats out of the amount of votes

for a specific alternative. In case of single seat procedures we can list the most

famous alternatives as Condorcet Method, Borda Count and Instant-Run-Off (HareSystem for single seat). Nevertheless there seem to be more improvements on

non-ranked single seat systems, as discussion on Approval Voting indicates, com-

pare Brams and Fishburn (1978, 2005). Returning to Arrow we are able to follow

that none of these procedures can fulfil Monotonicity and Independence of Irrele-vant Alternatives at the same time, which summarizes the Impossibility Theorem in

brief terms. From an analytical, technical and merely formal micro-orientated

approach we need to consider that democracy obviously faces serious lock-inproblems. However, we are still able to improve procedures and techniques for

elections to aim preferable and even desirable political processes, going beyond a

transcendent institutionalist interpretation which builds just on exchange, barter and

market logic, i.e. perfect competition. Various improvements for social choice

procedures have been suggested, compare Black (1958) for instance. Black

(1958) highlights the significance of single-peaked-preferences to move beyond

Arrow’s paradox with simple majority rule, but neglects universality of individual

preferences. Otherwise Sen (1977, 1999) shows that Arrow’s theorem does not hold

if the conditions are weakened. In particular he suggests relaxing the transitivity of

individual preferences and removing the Pareto Condition, which is a highly

ambivalent welfare criterion anyway (Kapeller and Wackerle 2014). Thereby Sen

circumvents the utilitarian aspects of social choice and returns to the main problem:

152 M. Wackerle

comparing alternative outcomes of social choice. Nevertheless we need to be awarethat all normative approaches to the theory of social choice—in particular the

search for an optimal welfare function in a contractarian way and the aggregation

of individual values towards an optimal social choice in a utilitarian perspective—

won’t improve democratic practice anyway. However there are several pragmatist

approaches towards election methods and social choice procedures which could

practically improve the information sharing problem from a dynamic

institutionalist’s perspective, consider for instance Smith (2000).

In fact Sen suggests looking into the opportunities lying within social choice

theory to enhance public information sharing and communicative reasoning from a

practical and pragmatist perspective. “It is particularly important for a theory ofpractical reason to accommodate a framework for reasoning within the body of acapacious theory—that, at any rate, is the approach to the theory of justice that thiswork pursues. . .. Perhaps the nature of the task can be clarified a little with the helpof social choice theory,. . .”, Sen (2010, p.89, 91). These days it is highly unfortu-

nate that voting outcomes still have very limited informational content, such as

GDP represents only limited information on the general wellbeing of people.

Improving the informational content within voting procedures is possible and not

a technical problem, compare for instance Brams and Fishburn (2005) or Smith

(2000). However, as also outlined by Knight and Johnson (2011, p. 107) voting will

always remain unstable, because it is “. . .that all outcomes are susceptible tomanipulation, that some in fact result from manipulation, . . ., most important,that we have no reliable basis for differentiating manipulated from unmanipulatedoutcomes.” Second voting will always remain ambiguous, because different modes

of aggregation, of counting votes, will necessarily lead to different political

outcomes. “In other words, the social decisions elections generate are, at least inpart, artifacts of the process by which votes are counted.” Knight and Johnson

(2011, p. 107) In line with their pragmatist institutional interpretation of democ-

racy, we argue that these circumstances of systemic instability do not undermine the

principle of democracy. To this extent there are other options than populist and

liberal versions of democracy, simply because this systemic instability makes

democracy a highly dynamic principle, and the advocates of the former mostly do

not “. . .exhaust the[se] theoretical vantage points.” (ibid., p. 108) The authors

follow John Dewey’s pragmatism, which holds, that “. . .knowledge comes bestfrom experience.” (ibid., p. 276) . . .”A pragmatic answer for this question ofdemocratic acceptance would rely, we think, on the effects of experience on theassessment of the relevant benefits of different political strategies.” This interpreta-tion makes democracy substantially a concept of evolutionary political economy,

because it accounts precisely for political, social conflict and open debate. There are

two aspects of democracy which are contradicting each other, the one refers to the

method of counting votes and the mode of election and the other one refers to

democracy as a mode of social emancipation towards societal transformation.

Thereby an antagonism appears that demands a dynamic and progressive thinking

of democracy as practice.


7.4 Outlook

7.4.1 Democracy in Contradiction: Social Emancipationand Evolutionary Political Economy

The inherent contradictory character of democracy leads to dynamic change and

self-transformation of itself, making it one of the most generic institutional

principles (Wackerle 2014). In Sects. 2 and 3 we have analysed the transitions

democracy has experienced in history as models and theories for the organisation of

political life. These transitions have always led or sometimes were also caused by

societal changes and have never been unequivocal. For Marx democracy

(Hobsbawm 2011) remains a transitional principle, he has always emphasised the

emancipatory character of it, in contrary to the analytical games played by Arrow

(1970). Thereby democracy needs to play a central role within a unified and

transdisciplinary social science. Such a paradigm shift and the contributing role

of democracy is also discussed by Santos (2007) in his project on democratizing

democracy. Quite similar to Castells (2009, pp. 299–412), Santos (2007, p. xvii-

xxxiv) elaborates on the notion that there is not just one globalisation process,

denoted as global capitalism, but there is also a globalisation process building upon

“. . .transnational networks and alliances among social movements, social strugglesand non-governmental organizations.” Santos (2007, p. xvi) He basically argues

that there is an alternative counter-hegemonic project organized from the bottom-

up. It demands new forms of resistance and social emancipation, thereby it needs to

generate and fulfil utopias in a world where utopias basically don’t exist anymore.

Santos (2007) follows that this alternative project involves an epistemological and a

socio-political dimension. The former deals basically with the increasing dichot-

omy of orthodox and heterodox social theories and on a similar axis between what

he calls Northern and Sothern epistemologies. This dimension concerns the legiti-

macy of scientific inquiry and judgement and is connected what we might call the

democratization of knowledge. Of course this issue of epistemological particular-

ism followed by Western orthodox science connects also to the categorical distinc-

tion made by Habermas (1981) between communicative and strategic action. Public

reasoning on behalf of communicative action invites pluralism, even if it is

envisioned very elitist in the deliberative idealist framework. Democracy does not

just work by itself, it can only evolve by active participation and experimentation.

Reinventing social emancipation is truly a complex and difficult challenge, because

as Santos (2007, p. xxxi) argues it is not always easy to differentiate between local

and global or between hegemonic and counter-hegemonic, these assertions are

dependent on local circumstances and their specific co-evolutionary dependence

with other socio-political environments. Of course Santos and Avritzer (2007,

p. xxxiii–xxxix) attack the Schumpeterian turn in democracy, because he

overemphasized democracy from its Kelsian procedural aspects and alienated its

participatory nature. However, I think that this notion needs to get relaxed, because

Schumpeter always was a man of extremes and Schumpeter (1942) has shown what

happens to democracy under capitalism, which we have discussed extensively in

154 M. Wackerle

Sect. 2. Conclusively if we consider democracy under an evolutionary political

economy umbrella, democracy is not the historical product of institutional engi-

neering or a natural law, governing human relations via as specific grammar, but it

is especially a socio-historical form, “. . .and that such forms are not determined byany kind of natural laws.” Santos and Avritzer (2007, p. xliii) Therefore the struggleof democracy is a struggle about the ubiquitous expansion of democracy as

dynamic social practice, also in pragmatist terms, and a struggle about the “democ-ratization of democracy” Santos and Avritzer (2007). This socio-historical form

evolves by antagonistically along social visions or utopias of social emancipation,

following (Wright 2010). Wright (2010, pp. 155–167) explicitly suggests a radical-

ization of democratic participation towards an “empowered participatory gover-nance”, which works institutionally via participatory budgeting. Despite its intense

and of course sometimes messy character such projects intensify direct democracy

to actually transform the socio-political nature of the economic system. The

democratic principle offered by Wright focuses moreover on a bottom-up

empowered participation as well as a pragmatic orientation and fits therefore

broadly into the elaborated picture of democracy under evolutionary political

economy.

From a theoretical perspective it is therefore suggested to follow Laclau and

Mouffe (1985, pp. 133–179) and argue that democracy is a “complex, distributed

process of never-ending struggle” compare also Stirling (2014). This struggle and

notion of antagonism was definitely an achievement by Marxism and the clear

analytical presentation of class struggle, social conflict and the consequential

enhancement of social emancipation. “Although, we can confirm with Foucault,that wherever there is power there is resistance, it must also be recognized that theforms of resistance may be extremely varied”, Laclau and Mouffe (1985, p. 136).

This aspect implies that not every social conflict built upon exploitation becomes a

political struggle. However it may still be fought within principles of radical

democracy, but bypassing the state or any other formal institutional bodies. The

latter refers to the transformational potential of democracy as a dynamic principle

of changing power relations, a question of hegemony thereafter. A radical pluralist

view of democracy is suggested to deal with the antagonism of democracy, where

pluralism is not understood as fragmentation, but as a dynamic generating principle

of diversity. This is the terrain which made a deepening of the democratic revolu-

tion possible (Laclau and Mouffe 1985, p. 150). This democratic idea is in search of

a common sense where “. . .in Marx’s words ‘that the free development of eachshould be the condition for the free development of all’.” Laclau and Mouffe (1985,

p. 167) Elsewhere Mouffe (2000, pp. 62–77) makes a strong case concerning

democratic consensus with universalism vs contextualism, in similar terms as Sen

(2010) anticipates with transcendental vs comparative institutionalism, but within a

political economy framework. Here we find promising synergies between

institutionalist and Marxist approaches for advancing democratic practice. Mouffe

(2000) argues that the democratic paradox emerges out of this conflict. Her central

thesis deals with the articulation of deliberative practice, if democracy is considered

as a grammar for universal truths or as a contextualisation of democracy as a


specific life-from or practice. The former deals again with the notion of ideal

democracy as articulated by Rawls and Habermas and the latter uses the thought

of the late Wittgenstein. In such a picture democracy becomes a dynamic principle

of evolutionary political economy. On the one hand it becomes substance rather

than procedure, an argument made also by the American pragmatists, where

knowledge depends on experience and is always historically situated and on the

other hand consensus is defined along an agonistic pluralist model of democracy

thereafter, enforcing the generation of diversity. To this extent we conclude by

highlighting democracy as a socio-historical form, a specific practice in contrary to

just an analytical procedural representation. However, if we consider democracy in

these terms of social emancipation, it is also necessary to practically innovate newtechniques of voting, elections and referenda on several scales of social choice for

successful transformation.

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Crisis and Transition of NGOs in Europe:The Case of Greece 8Sotiris Petropoulos and Anastasios Valvis

Abstract

The ongoing financial crisis has globally impacted nearly every national econ-

omy in the world. Although its initial effects were concentrated purely in the

financial sector, increased economic turbulence has gradually diffused into most

sectors of society—including civil society and NGOs. One basic consequence

has been the transformation of development assistance due to a decrease in

available funding from the usual “suspects”, known as “old donors,” and a

subsequent increase from so called “new donors” such as China and Brazil.

Moreover, many of these “new donors” are negatively predisposed to working

with NGOs and thus available funding to NGOs in the international level seems

to be decreasing. A focus on the national level also reveals a similar case:

countries that were greatly impacted by the aftermath of the crisis, such as

Greece, have sharply decreased available public funding to NGOs.

This paper explores the effects of these developments. Its initial findings

suggest that the “western model” of NGOs expansion is less viable than before.

NGOs are being accused of losing their fundamental values and working mostly

as ‘walking sticks’—covering states’ inefficiencies in specific sectors—thus

their function as an unofficial public sector is being challenged. In practice,

NGOs are transforming into dedicated contractors of national and international

public agencies with limited to no real interconnection with society. This

transformation is being rendered incompatible with the new environment, as

available contracts are becoming less lucrative. As a result, many NGOs are

S. Petropoulos

Department of Political Science and International Relations, University of the Peloponnese,

Dervenakion 47 & Adeimantou, Korinthos 201 00, Greece

A. Valvis (*)

Southeast Europe Programme, Hellenic Foundation for European and Foreign Policy (ELIAMEP),

Vas. Sofias 49, Athens 106 76, Greece




159


rediscovering their idealistic past while new, less formal civil society actors are

arising to cover the multiple needs created by the crisis. Focusing mainly on the

Greek case study, this paper presents a seldom-studied effect of the financial

crisis—the transformation of the NGO sector, culminating in informal networks

overlapping with “old school” NGOs which find it difficult to adjust to the new

economic situation. Evidence suggests that a dual trend currently exists where a

small segment of existing “professionalized” NGOs are able to gain public

funding through the usual public procurement procedures. Thus, they are able

to survive and further expand in conjunction with the rise of small, grassroots

organizations whose main strengths derive from their devotion to the practice of

philanthropy, altruism, and voluntarism, in addition to their widespread accep-

tance from the general public.

8.1 Introduction

Undeniably, the global financial crisis instigated by the collapse of the American

mortgage loan system is the most significant event in modern economics since

(according to several analysts) the Great Depression. Initially impacting the Amer-

ican economy, the ensuing collapse of confidence among financial institutions

prompted a series of chain reactions that affected the entire global economy.

Banks and other financial institutions went bankrupt, production facilities ceased

operations, and states around the world (especially those in southern Europe) began

to feel the ramifications of the subsequent Debt Crisis.

As one might expect, the economic turbulence also impacted the development

aid industry. Initial responses were positive: major bilateral and multilateral donors

agreed to a frontloading of available aid in order to protect the fragile development

rates of developing countries. However, available data depicts that as these funds

were being disbursed, the rate of new aid was slightly decreased. Moreover, in this

new environment the position of new donors—developing states with big pockets

(China, UAE, etc.) and world billionaires wishing to give back to society (Buffet,

Gates, etc.)—was enhanced.

This chapter focuses on the effects of these developments in NGO sectors around

the world and within Europe in particular. Questions such as how the newly formed

economic environment has influenced the operations of NGOs, whether new types

and forms of relevant organizations are being witnessed, and what lies ahead this

third sector’s segment are tentatively being answered as available data gradually

reveals new developments in the NGO industry.

In the first sections, the notions of civil society, NGOs, and development

assistance are explored in order to establish the foundations of our analysis.

Going a step further, we present and analyze from a global perspective the major

changes in the development aid and philanthropy industries, as highlighted by the

effects of the 2008 financial crisis. Consequently, we focus on the new environment

160 S. Petropoulos and A. Valvis

within Europe in general and that of the southern European countries such as

Greece and Spain in particular.

The final sections focus on the new trends in the NGO sector in Greece,

underlining the effects of scarce available resources combined with the increased

needs of a society affected by 5 years of austerity measures. Finally, in our

conclusion we consolidate the discussion with some general projections on how

the world of NGOs is being subject to a phase of transformations and what said

outcomes might be.

8.2 Speaking About Civil Society, NGOs and DevelopmentAssistance

8.2.1 Civil Society

The term civil society has attracted much attention over the last few decades,

inciting a vigorous discussion around the meaning of the term, the entities

(organizations, groups, etc.) that should be included, and its role and contribution

to the development of society. The concept of civil society is heavily debated, given

that it is used in so many different political, economic, and social contexts.

Extensive literature exists highlighting the practical and theoretical origins of

civil society. From a historical perspective, traces related to the concept of civil

society can be found in the work of great traditional political thinkers such as John

Locke, Charles de Montesquieu, and Alexis de Tocqueville (Finke 2007: 11).

However, as Keane very accurately wrote, civil society as a term remained strange

sounding and unfashionable up until two decades ago (Keane 2009). Since then, the

term has won a prominent place in the discipline of social sciences. Simultaneously,

civil society became a key term and phrase used often by politicians, corporate

executives, and journalists, as well as charity foundations, human rights

organizations, and every day citizens. This increased interest in civil society derives

from the development of its distinction from the state somewhere between the late

eighteenth century and the early nineteenth century.

The peaceful revolutions and the democratic developments in Eastern Europe

throughout the 1980s that resulted in the collapse of the communist block also

inspired the academic debate on civil society. The term ‘civil society’ was

reintroduced into political discourse by the democratic opposition to the Commu-

nist states in Eastern Europe (Lewis and Kanji 2009: 125). Yet, the broad variety of

actors that participated in the civic movements, such as trade unions, churches,

citizens’ groups, and individual intellectuals created an even greater confusion

regarding the parameters of civil society.

Within this context, various efforts have emerged during the last 20 years aiming

to prudently describe the true meaning of the term. Assuming that civil society

shares some common characteristics with the general concepts of democracy,

liberalism, and radicalism as a “catch-all” term, a deeper understanding of its

meaning and standing in the contemporary world is necessary. As Henderson and

8 Crisis and Transition of NGOs in Europe: The Case of Greece 161

Vercseg correctly pointed out, civil society “has become a melting pot into whichideas, arguments and examples are poured ceaselessly,” in effect rendering the

term meaningless (Henderson and Vercseg 2010: 11).

Additionally, attempts to categorize or define civil society more accurately have

arisen, placing it in the contemporary construction of society. Perhaps the solution

is to name it as the third sector—something between the state and the market. Yet, it

has proven to be quite challenging to find ways to disconnect it from the state or to

elucidate its relationship with market forces. In order to do so, it was important to

understand what civil society is, as well as what it should be. There are examples

and areas between the three sectors that overlap, fueling more debate. Striking

examples, according to Henderson and Vercseg, are social enterprises and credit

unions that exist on the edge “between civil society and the market” (Henderson andVercseg 2010: 16). This, however, does not necessarily mean that the relationship

between the three sectors is stable. On the contrary, the state, market, and civil

society have a dynamic relationship, which tends to change over time and in

different contexts.

Consequently, it appears to be nearly impossible to draw a map or a guide to

what ‘civil society’ is. The most common way to define the term is by discerning

who makes up a ‘civil society.’ According to Gemmill and Bamidele-Izu, in the

broader sense, “civil society has been characterized as a sphere of social life that ispublic but excludes government activities” (Gemmill and Bamidele-Izu 2002).

Thus, as Lewis and Kanji (2009) said, a civil society is, in political terms, usually

understood to mean a realm or space in which there exists a set of organizational

actors who are not a part of the household, the state, or the market. These actors

form a wide-ranging group. According to Huliaras, most academics would argue

that a civil society consists of voluntary associations, community groups, trade

unions, church groups, cooperatives and businesses, professional and philanthropic

organizations, and, of course, NGOs. Moreover, social movements should also be

considered as a part of civil society (Huliaras 2014: 3).

8.2.2 NGOs

Non-Governmental Organizations (NGOs) are considered to be part of the ‘greater’

sphere of civil society; the space between the state and the market, or as named

earlier, the third sector. While the term NGO is widely used, there are different

terminologies used to describe it, rooted mostly in different cultural and historical

backgrounds. These differences can be seen in the way NGOs are understood by

different societies. For instance, in the UK, due to a strong tradition of voluntarism

and charity work, NGOs are associated with volunteer work. On the other hand, in

the U.S., where the market is dominant in the society, the term ‘Not-for Profit’

seems to adjust better (Lewis and Kanji 2009: 7).

Variety also exists regarding their structure, sources of funding, and personnel.

NGOs can be large or small, formal or informal, bureaucratic or flexible. They may

have many resources at hand or be leading a ‘hand to mouth’ existence (Ibid: 3).


Some of them have highly trained staff, while others rely mostly on volunteers.

Lastly, NGOs are driven by a range of motivations. Some may be charitable, while

others may seek to pursue radical approaches. Consequently, this diversity creates

difficulties in defining ‘NGO’ as an analytical category with specific characteristics.

This paper adopts a narrower definition of what an NGO is. More specifically, in

order to define what a third sector organization is, five key preconditions have to be

met. First, it has to be formal, enjoying an institutionalized structure (holding

regular meetings, having offices, etc.). Second, it needs to be a private institution

separated from the government (this does not mean it cannot receive support from

the government, especially in terms of funding). Third, it has to be non-profit

organization—when a financial surplus is generated it is not accrued by the owners

or directors. Fourth, it has to be self-governing, therefore able to control and

manage its own affairs. Finally, it has to be voluntary. Even if it does not use

volunteer staff, there must be some degree of voluntary participation in the conduct

or management of the organization. In order to become even more exclusive a

concise definition provided by Vakil argues that NGOs are ‘self-governing, private,not-for-profit organizations that are geared to improving the quality of life fordisadvantaged people’ (Vakil 1997: 2060).

The next challenge is to explain what NGOs do. Taking into account that the

number of NGOs has rapidly increased during the past 20 years (See for example

the following table which depicts the number of NGOs in consultative status with

ECOSOC by category), the question is: what purpose do they serve and what role

do they have within both local and global civil societies? As tricky as this question

might seem, there is an easy way to summarize the different types of activities that

NGOs undertake—they work as implementers, catalysts, and partners.

Source: United Nations Department of Economic and Social Affairs (DESA)


As implementers, NGOs undertake to mobilize resources to provide goods and

services to people in need. This is a well-known role of NGOs, which continues to

receive attention. In fact, service delivery work has increased in conjunction with

the increase in governments and donors contracting NGOs to carry out specific

tasks in return for payment. As catalysts, the role of the NGO is to inspire and

facilitate or contribute to improved thinking and action in order to bring about

change. This may include grassroots organizing, gender and empowerment work,

lobbying and advocacy work, undertaking and disseminating research, and attempts

to influence the wider political landscape (Lewis and Kanji 2009: 14). Finally, as

partners, NGOs work closely with other institutions, such as governments, donors,

and the private sector. They do so in joint activities, such as providing specific

inputs within a broader multi-agency programme or project.

8.2.3 Development Assistance

The history of Independent Development Assistance (IDA) goes back to the late

nineteenth century, when western powers shifted away from simple accumulation

and asset stripping towards trade development. Yet, the most profound aid

contributions rose right after the end of WWII. Practically, IDA has evolved over

the past 50 years from its charitable origins to more complex, multi-dimensional

approaches that recognize human development as a matter more complex than

simple economic growth.

The prominent theories of development of the 1950s and 1960s and even of the

early 1970s stressed that the path to development involved rapid, progressive, and

sustainable economic growth as measured by changes in GNP and GDP. This could

be achieved with government-led large-scale infrastructure projects, such as dams

and roads. However, things did not go as planned and during the mid 1970s and late

1980s a change in the concept of IDA was made simultaneously with the prevalence

of ‘Neo-liberal’ thinking in global politics.

During the early 1990s, however, it became clear that the efforts of the previous

decades did not provide sustainable results. Poverty levels in some countries had

not improved, challenging the belief that economic growth was the answer to global

poverty and development. As a result, the ‘good governance’ policy agenda

emerged in the 1990s, propelling the idea of civil society into mainstream develop-

ment policy. This new perspective considered civil society to be the foundation of

civic conscientiousness and public virtue, as well as a place where organized

citizens could contribute to the public good. A strong civil society has become a

prerequisite for democracy and development. Thus, as Lewis and Kanji wrote, “A‘virtuous circle’ is assumed between the three sets of institutions—a productiveeconomy and a well-run government will sustain a vigorous civil society; a well-rungovernment and a vigorous civil society will support economic growth and a well-managed economy; and a strong civil society will act to produce efficient govern-ment. This logic was embraced by donors such as the World Bank during the 1990sand built into aid conditionality” (Lewis and Kanji 2009: 128–129).


The past few years have seen an explosion of bilateral and multilateral agencies

and multiple new private donors, while the explosion on the delivery side has been

even more impressive, changing rapidly the structure of aid. This new trend implies

a shift in the way that rich countries look to channel their funds. Indeed, it appears

that donors seem to bypass official governments in favor of using private

organizations, which they deem more suitable for the successful implementation

of their goals. In this context, NGOs, as the most prominent representative of the

‘third sector’, seem to have a more positive impact. The biggest implication of this

shift is that private aid donors are more targeted and selective about programs they

are willing to support.

In a nutshell, what most scholars seem to agree on is the fact that civil society

contributes positively to democracy and development (Huliaras 2014: 3). A strong

and vibrant civil society, creating collaborations for common purposes, contributes

to the construction of strong interpersonal trust, thus enhancing the democratic web

of a society and creating the proper ground for the development of democratic

reflexes in cases where societies are under authoritarian regimes. This assumption

has repeatedly been used as a cornerstone for the various and numerous decisions

taken by aid agencies and international organizations like the United Nations, the

World Bank, and the European Union. Thus, aid is provided through the aforemen-

tioned channels (NGOs, etc.) for achieving economic development and more

(Huliaras, ibid). International organizations and aid agencies believe a strong and

active civil society can be the interlocutor between the state and the public and the

core factor that prolongs democracies and advocates civil liberties. Civil society has

fought many battles in order to safeguard ‘human dignity and equality before thelaw, equal opportunities, a tolerant society and the counter-balancing of powerfulinterests’ (Henderson and Versceg, ibid). However, success cannot always be takenfor granted given that those in power can often draw civil society organizations into

being part of, or dependent on, their institutions and systems, thus losing their

fundamental characteristic of independence.

8.3 The New Environment

As mentioned above, in many cases development aid was channeled through

NGOs. The latter enjoyed the support of a variety of donors who considered them

to be the most effective way for the implementation of various projects targeting

social capital improvement and the establishment of democratic values and

institutions. The following pages will analyse the operational evolution of NGOs

during the last two decades in correlation with the appearance of new donors in the

international development scene.

The environment under which non-governmental organizations operate has

greatly evolved since the mid-1990s. As early as the late 1980s, the world witnessed

a gradual expansion of the NGOs—initially in number and later in size. In essence,

the past two decades have been recorded as the “golden age” of the organized civil

society, with NGOs being invited to join international fora, consult international


organizations, and, above all, to undertake numerous developmental projects and

humanitarian aid related activities throughout the world. The main argument

explaining these developments is that NGOs are able to move faster than states

and at lower costs to offer relief and cover the needs of society. Indeed, the number

of NGOs has grown significantly over the past 50+ years, leaving institutional and

individual donors facing a serious selection problem (Nelson 2007). For example,

even if one looks at the number of NGOs accredited with the United Nations’

(UN) Economic and Social Council (ECOSOC)—a process that involves signifi-

cant administrative burdens and thus discourages many NGOs from applying for

accreditation—the expansion of the NGO sector is more than obvious: from just

40 in 1945, accredited NGOs reached 3,536 in 2011. This development has led to a

new reality in which the total amount of public funds being spent through NGOs, as

well as the proportion of development aid channeled through NGOs has grown

significantly (Davies 2001).

The global expansion of the number of NGOs triggered a very specific develop-

ment: the reinforcement of the call for transparency, accountability and, most

importantly, of effectiveness. In other words, NGOs may have been gaining ground

on the development and implementation of humanitarian projects but the donor

community gradually began to require evidence of their advertised effectiveness

from them. This trend was not only gaining ground within the donor community,

but was actually the outcome of a general shift in the western world towards

increasing the effectiveness of public spending.

For example, during the late 1970s and early 1980s the concept of Value for

Money (VfM) was gaining ground in the activities of public institutions; a tendency

that gradually passed to the evolving sector of development assistance. Both the

Nordics and the UK had endorsed a results-focused public management culture

(Summa and Toulemonde 2002), as well as a VfM mentality. As early as the 1980s,

UK governments have imposed the evaluation of public bodies through a sort of

VfM approach that gradually evolved (Toulemonde 1995). More recently, the

Department for International Development (DFID), i.e. the main institution respon-

sible for UK development assistance, has surpassed the issue of VfM applied in its

own functions and initiated a set of guidelines for transferring VfM techniques to its

main partners in the disbursement of its development funds (usually

international NGOs).

Indisputably, this new civil society environment required the NGO sector to

embrace evaluation techniques. This was a new reality for international NGOs that

dealt a lot with international donors and for NGOs operating in the national field as

well. As in other industries, the NGO “industry” in several countries moved

towards “self-regulation” and “Code of Conduct formulation” initiatives, some of

which included the occasional or regular evaluation of its stakeholders. Some

examples are the “Code of Conduct for the International Red Cross and Red

Crescent Movement and NGOs in Disaster Relief,” which aims to set specific

standards of behavior, the “Interaction’s Private Voluntary Organization

Standards” which focuses on the relevant US sector, and the “International

Non-Governmental Organizations Accountability Charter,” which sets nine core


principles. In this environment, issues of accountability, transparency, efficiency,

and impact gradually attracted the attention of the sector.

8.3.1 The Impact of the 2007/8 Crisis

The aforementioned developments highlight the environment under which NGOs

operated until the recent global financial crisis. The turbulent economy of 2007/

8 became the catalyst for a new wave of changes in the NGOs’ global sector.

The financial crisis created many doubts concerning whether the amount of

development assistance could be maintained. In reality, most multilateral donors

decided during the 2008–2009 period to proceed with a frontloading of the 3–5 yearaid programs they had committed to. This resulted in a significant increase in this

specific segment of ODA: 11.2 % in 2008 and 15.6 % in 2009. Total ODA also

increased during 2008 by 17.1 % and continued increasing until 2012 when a small

decline (�5.4 %) was recorded (OECD statistics, authors’ calculations).

Source: OECD, DAC Statistics, 2014

The ODA levels also had an impact on NGOs’ funding. More specifically, NGOs

had seen a gradual rise in ODA funding assigned to them or channeled to develop-

ing countries through them. For example, in 2011 members of the DAC allocated

more than 19.3 billion USD to and through CSOs. This figure signifies a substantial

increase when compared to the 17.3 billion USD on average during the 2008–2011

period. Going more into detail, while NGOs received approximately 14.4 % of total

ODA during 2011, their share of bilateral ODA of DAC members reached 20.5 %,

stressing the importance of individual countries’ funding. Within this segment,

some countries’ ODA is more important for NGOs than others. For example,

Ireland channels 38 % of its total development assistance to/through NGOs,

Spain 28 %, and France a mere 1 %. Hence, it must be stressed that a moderate

decrease in total ODA between Ireland and Spain (as is evident) is more detrimental

to NGOs than a sharp decrease in French ODA (Bouret et al. 2013).


The crisis also increased the attention given to developing countries that

achieved significant economic growth during the past decades. As various develop-

ing countries were asked to take part in the stabilization of the world economy, the

usage of a new term, “emerging powers,” was further reinforced. Countries like

Brazil, India, Russia, China, and even Venezuela and Saudi Arabia became the

“talk of the town”. Hence, it is not surprising to see a multiplication of reports and

news of such countries entering the field of development assistance. For various

reasons—ranging from promoting national interests to answering the call to be

responsible international players—a series of new donors such as Saudi Arabia,

Brazil, Venezuela, and China emerged. This new development has been so signifi-

cant that the usual donors, i.e. members of the Development Assistance Committee

(DAC) of the OECD, have commissioned several reports and analyses of what is

now called emerging donors; i.e. a group of states that are not members of the DAC

who have recently commenced distributing development assistance across the

globe (Chin and Quadir 2012: 494).

The following figures provide a small picture of the gradual rise in the

contributions of emerging donors to the total aid disbursed. As is made obvious,

emerging powers have increased their donations, but not in a linear way. Year-to-

year projections highlight an unstable course of disbursement of development

assistance—although data for non-DAC members should be treated with extreme

caution. Non-DAC membership means that emerging donors do not have to follow

the norms developed by DAC or publish data on their development assistance

programs (Smith 2011; ONE 2010; Grimm 2011). This makes calculating the actual

levels of global development assistance disbursed quite difficult. As Woods (2008)

highlights, some conservative estimates set emerging donors’ development assis-

tance at over $1 billion since 2010, while other estimates set such figures at around

$8.5 billion during just 2006.


Smith (2011) assesses the effect of new donors on the field of humanitarian aid.

He finds that the BRICS, for instance, have channeled more than 3.7 billion USD

just in 2009. During the same year, Kuwait, Saudi Arabia, and UAE jointly

dispatched more than 4 billion USD to countries in need. He finds it impossible

to reach a conclusion due to scarcity of verifiable data and calls for all countries to

agree on a common format for the presentation of their aid activities. On the other

hand, a CHR.Michelsen Institute report (2007) analyzes the popular issue of aid

programs in East Asian countries, which are mobilized by increased Chinese

presence throughout the world and specifically in Africa.

Nevertheless, it is clear from our analysis that overall aid from new donors has

been on the rise. This is rather important if one takes into account another key

feature of emerging donors’ aid disbursement patterns: NGOs are very rarely used.

Indeed, as many new donors are not familiar with working with a developed

organized civil society or see it with increased suspicion, they refrain from using

NGOs in their development aid strategies. This results in less of the total develop-

ment aid being made available for them.

Finally, another development partly induced by the financial crisis was the

increased importance of the work of private foundations in the field of aid. Unques-

tionably, the activities of well-known foundations created by world billionaires

such as Bill Gates, George Soros, andWarren Buffet have drawn the attention of the

donor community. Responding to this development, the DAC statistics division has

added a new type of donors: “foundations.” Currently (March 2014), statistics are

only available for the Bill and Melinda Gates Foundation, but the fact that a new

type of donor has been added is indicative of the rising importance of foundations in

the field of aid. The Bill and Melinda Gates foundation is disbursing an average of


$2.5 billion per year, or 18.9 % of total UK ODA and 50.1 % of total Swedish ODA

(OECD statistics, authors’ calculations).

One interesting fact about private foundations is that, unlike emerging donors,

they do tend to use NGOs in their programs. This decision is based on the fact that

civil society organizations are supposed to be quite efficient and effective. At the

same time, private foundations are becoming some of the strictest funding sources

of the activities of NGOs. Considering that successful businessmen have created

most foundations, it is unconceivable that there are no specific mechanisms of

recording the impact of their funding. Hence, NGOs receiving funding from private

foundations (as in the case with many DAC donors) are obliged to present specific

reports on outcomes and impact. In essence, this interaction leads to an infusion of

VfM and project management techniques into a sector that was supposed to work in

a more ad-hoc, idealistic way in which quantitative statistics and measurements

were of minimum importance.

The creation of a new international environment in relation to NGO operations

since the outbreak of the global financial crisis, is one which simultaneously

disregards the role of NGOs in the development assistance field and pushes such

organizations towards more professional management and operational structures.

8.3.2 The “Less Formal” Social Movements’ Trend

As mentioned earlier, civil society is not exclusively formed by NGOs. On the

contrary, it covers a wide range of formal and informal networks and organizations

including NGOs, community based organizations, and networks of neighbors and

kin. Respectively, the number and the type of civil society organizations varies

from one society to another—constituting in every different case what is known as

social capital.1

Thus, apart from NGOs—the prominent representative of civil society—there

are other types of organizations that also play an important role in the construction

of social capital. A well-known type of such an organization is that of Community-

Based Organizations (CBOs). CBOs are grassroots organizations managed by

members on behalf of members. They function regularly as important local

resources to the poor. Especially during the last few years of the global financial

crisis, there has been a tendency of new CBOs to pop up in order to cover the basic

needs of vulnerable people. The latter seem to be able to place their trust more

easily in their own CBOs because they understand that access to state institutions or

to more organized and professionalized NGOs is more difficult. Of course, this does

not necessarily mean that CBOs are more effective than formal institutions.

Neighborhood and kinship networks that provide economic and social support

are gradually attracting the interest of social scientists. The dynamic of this trend is

1 Social capital can be broadly defined as the norms and networks that enable people to coordinate

collective action.


overwhelming and the structure of these informal networks highlights what kind of

attributes the poor seek in formal institutions and organizations meant to help them.

These kind of networks represent the first line of defense outside the immediate

family in times of difficulty or crisis. According to Narayan et al., “Whole

communities are dependent upon the shared human and material resources of

their neighbors, clan and extended family” (Narayan 1999: 126). As Prof.

Molenaers argues, these kinds of informal networks and initiatives have attracted

the attention of state authorities in Belgium (personal interview conducted in 02/03/

2014). Their comparative advantage over the more organized institutions is that

they are direct and they cover the need of the poor right away. Without the burden

of bureaucratic formalities, these informal networks often rely on private donations

from everyday citizens. However, the lack of a common structure might also serve

as a long-term drawback. In fact, long-term stresses can overwhelm informal

support systems. While it seems that kinship and community social networks are

resilient, in times of stress they are less capable of functioning as effective and

dependable support systems. The main reason for this is that the lack of a typical

hierarchical structure creates tensions among the members that ultimately corrode

the very pure intensions of the initiative.

These informal “organizations” are a product of a new challenge that originates

from the economic crisis as well. Given that aid is generally decreasing, their

purpose is to serve and assist the communities so they may be able to act on their

own rather than through or with professional NGOs. They are part of a wider

discussion of moving from a top-down ‘development’ mechanism towards a

bottom-up one.

Nevertheless, no one can neglect the fact that formal organizations (in particular

NGOs) have been catalytic in the development of civil society; strengthening the

abilities of poor communities, combating social exclusion, and providing vulnera-

ble groups with the means to seek justice, by arming them with power and the

ability to communicate with the official state. Yet, they have been highly contested

due to problems of accountability and their general nature, as they mostly seek to

answer a specific need and help a specific group of people in each case thus

contributing, to a lesser degree, to social exclusion. An example of such is how

some NGOs work towards providing facilities (such as food or accommodation) to

specialized groups of people. Within the Greek context, this facility might be “the

house of the actor,” an NGO that provides accommodation and other basic facilities

only to actors who are unemployed and are struggling to survive.

On the other hand, grassroots organizations are more widely accepted due to

their nature and the fact that they are considered pure because they lack any formal

ties to the official state. The appearance of these informal networks during recent

years clearly demonstrates that the future of civil society is not only contained in its

formally registered bodies. While there are distinct differences as far as the nature

of these networks and their initiatives in different countries are concerned, societies

are witnessing the emergence of a new generation of social movements arising from

popular concerns such as poverty, unemployment, social exclusion, and even

corruption (Pratt 2014: 40). What is more, according to Feixa et al., “The past


two decades the world is witnessing the rise of a new global cycle of collective

action not only organized through the Internet and made visible during mass protest

events, but also locally shaped by diverse organizations, networks, platforms and

groups” (Feixa et al. 2009).

The number of such examples is impressive. From Bolivia to Zimbabwe, from

Brazil to the Philippines, and from Argentina to Jamaica, there have been vibrant

causes emerging from civil society. Even in the United States, movements demand-

ing improved wages have arisen. Thus nowadays, the dynamism of social

movements is something undisputed. For instance, according to Voss andWilliams,

in South Africa in 2003 there were 58,000 CBOs, of which 55 % (32,000) were

informal and voluntary and only about 17 % (10,000) were NGOs (Voss and

Williams 2009: 4). The numerical difference between informal organizations and

formal ones validates the theory of a shift within society towards participation in

less professionalized organizations.

8.3.3 Public Spending in Greece and Other European Countries

The previous section provided an overall picture of the main developments in the

international arena in which NGOs are functioning. When focusing on Europe, a

major distinction has to be made between countries that are undergoing significant

economic problems such as Greece, Portugal, Ireland, Spain, and Italy and those

that were not as affected by the global economic crisis. Overall, member states of

the European Union, and especially those of the European Monetary Union (EMU),

chose the implementation of austerity measures in order to overcome the side

effects of the financial crisis. Throughout the continent, public spending began to

decrease as governments attempted to ameliorate their balance sheets—a develop-

ment that brought Europe into a confrontation with other Western countries, such as

the US and Japan who had selected more loose economic policies.

Austerity measures in Greece, Portugal, and other European countries meant that

public funding of the “luxuries” of the past was no longer feasible. This was made

more apparent by the sharp decline in development assistance from almost all

relevant countries.


Indeed, bilateral ODA from Greece, Portugal, Spain, and Ireland reached its

peak during 2008 when all four countries disbursed more than 9.5 billion USD in

development assistance. Since then, due mainly to the harsh economic conditions in

all four countries and the subsequent austerity measures they were forced to

implement, total ODA has reached around 3.7 billion USD; a more than 60 %

decrease. Cuts were sharper in Spain, where a 70 % decrease took place. In Ireland,

ODA decreased by 39 % from the 2008 levels. As these countries were among the

most prominent funders of NGOs (see previous section), cuts in their spending

significantly impacted the sector (OECD Data, 2013, authors’ analysis).

In Greece, the situation for NGOs became even worse as several scandals and

cases of corruption concerning NGOs became apparent. A judicial investigation on

public funding to NGOs was initiated during late 2010, as several cases of civil

society organizations being funded for projects outside Greece based on loose

procurement rules and procedures were revealed. Moreover, as final outcomes

were, essentially, never monitored by government officials, there was no evidence

that all funded projects were truly implemented and that any mismanagement ever

took place. The then deputy foreign minister, Mr. Spyros Kouvelis, had reported to

the Greek Parliament in 2010 that around 26 million euros were allocated to

528 NGOs, for which an investigation was in process. Following significant public

resentment, Prime Minister Antonis Samaras had ordered, “the stop of all public

funding to NGOs” for projects inside and outside Greece, thus creating a significant

rise in funding to numerous Greek organizations (Kathimerini 2012).

Likewise, Spain’s funding of NGOs was drastically reduced. In reality, public

funding until 2011 was not significantly altered, with Spanish NGOs receiving

more than 8 billion euros, most of which came directly from the Spanish govern-

ment (central and regional), while some was channeled through the existing social

welfare programs of the country’s savings banks. One year later, though, the overall

picture was altered significantly: while 14 % of Spain’s population was donating to

NGOs in 2006, only 9 % was still doing so in 2010. While the state took over the

position of primary financial contributor to NGOs, the economic crisis seems to

have deteriorated its ability (and, most likely, willingness) to support civil society


organizations in a period of imposed austerity measures. Thus, 8.5 billion euros of

Spain’s total NGO funding decreased to 8.1 billion euros in 2011 and, according to

a PWC report, is expected not to surpass 5 billion euros in 2012 (ESADE 2012).

One solution to overcoming these funding dilemmas seems to be to focus on the

available funding from the European Union and European Commission. A rough

estimation sets the EC’s available yearly funding at 1 billion euros, with a major

proportion of these funds dedicated to projects supported by EuropeAid. Interest-

ingly, it is not easy to calculate how much aid the EC directs to NGOs each year—

more recent estimates indicate that the accurate figure is at about 1.5 billion euros.

According to a New Direction report (2013: 10), “In 2008 at least €1 billion and in

2009 at least €1.4 billion were allocated to NGO projects by just four of the

Commission’s departments (Directorates-General): EuropeAid co-operation Office

(EuropeAid), European Community Humanitarian Office (ECHO), Environment

(ENV) and Education and Culture (EAC). Grants were awarded to approximately

3,000 NGO’s.” Nevertheless, EC programs seem to represent a significant source of

funding for European NGOs, especially in a period of constrain on the budgets of

national governments.

Indeed, available data shows a clear increase in NGO applications for EU

funding. For example, Action 2 Measure 3 “Civil Society Projects” subprogram

of the “Europe for Citizens” program (2007–2013): since 2008 when yearly calls

for applications were introduced, the number of applications received has increased

nearly every year. In the 2008 call, there were just 287 applications for funding

across Europe with 131 final grantees and 4 million euros being disbursed. Three

years later, in 2011, the number of total applications reached its peak with 665 civil

society organizations applying for funding from this specific subprogram—a 131 %

increase! Even if one disregards 2008 data based on the argument that it was the

subprogram’s first call and was thus not well-known to the general public, the

upward trend develops in parallel with the gradual evolution of the European Debt

Crisis that instigated austerity measures in most EU countries. In the 2009 call,

366 organizations applied, putting the percent of increase in applications between

2009 and 2011 at approximately 82 % (EC Citizenship Program, authors’ analysis).

Data from the European countries that are facing the most troubling economic

issues is even more revealing of the aforementioned situation. The total amount of

NGO applications to this subprogram coming from Greece, Ireland, Italy, Portugal,

and Spain for the 2008–2011 period reached 303. The last 2 years of the subpro-

gram (2012 and 2013), i.e. the years that the crisis heightened, total applications

reached 278. Finally, despite a slight decrease in total applications in 2011,

applications from the aforementioned countries increased in 2013, representing

24 % of total applications (from 15 % in 2011) (EC Citizenship Program, authors’

analysis).

Is this the solution to the funding problems experienced by NGOs throughout

Europe? Even though the multiannual EU budget during 2014–2020 did not reach

the high levels anticipated by some analysts, it still represents a pool of funds of

almost a trillion euros, some of which are dedicated to civil society organizations.

Nevertheless, data from the Citizenship program shows that success rate have


sharply decreased during the last 2 years of the previous programming period

(2007–2013). Success rates fell from 45.6 % in 2008 to 5.4 % in 2012 and 4.9 %

in 2013. This means that NGOs are now facing significant competition and that only

the very best applications are being approved (EC Citizenship Program, authors’

analysis).

8.3.4 From Young Social Movements to Specializedand Professionalized Contractors

The history of NGOs is a rather interesting one. In its early years, organized civil

society came to exist and develop essentially as a bottom-down movement. Occur-

ring primarily in developed nations, citizens sensitive to a variety of issues would

come together to work on providing relief, offering assistance, and raising aware-

ness of issues around the world. Initially, selected causes related to human

suffering, poverty, and victims of war. Later, environmental issues also became a

major part of the agenda. An example of said organizations is Oxfam, a UK based

organization created to help Greeks suffering during the WWII.

Of course, during this early period, not many NGOs were created and

representatives of organized civil society were not present in all countries of the

world, not even in the West. The process of NGO expansion (both in numbers and

in size) occurred during the last two decades of the twentieth century. As Salamon

(1993) puts it, NGOs represent, probably, the most significant “social and political

development” of the latter period of the twentieth century.

During the 1990s, many new NGOs were created across the world, as public

funding from national governments and multilateral agencies responsible for the

distribution of ODA (e.g. the World Bank) began to increase. Rademacher and

Tamang (1993) highlight the increase of NGOs in Nepal: from just 220 in 1990, in

3 years they surpassed 1,200 due to a donor “spending spree”. In Bangladesh, more

NGOs were created during the first half of the 1990s than ever before, while in

Tunisia NGO numbers more than tripled from the early to the mid 1990s. Even in

developed parts of the world, the number of NGOs significantly increased during

the same decade. In Spain, organized civil society thrived during the 1990s, partly

due to an increase in public funding. In Greece, the creation of HellasAid in 1999

(an agency of the Greek Ministry of Foreign Affairs responsible for ODA) led to the

subsequent creation of an NGO registry with approximately 600 Greek NGOs

(2007 data)—many of which did not exist prior to this agency.

Furthermore, the increase in available funding also had an impact on existing

NGOs—they used these excess resources to increase their size and, at the same

time, their dependency on the state. Edwards and Hulme (1998) highlight this

development: in the UK, dependence on government spending to NGOs increased

from 7–15 % to 18–52 % between 1984 and 1994. Similarly, state funds were

responsible for between 50 and 90 % of the budgets of NGOs in other countries

such as the Nordics, the Netherlands and Canada. This trend spread to NGOs in the


South. Likewise, Spanish NGOs came to increasingly rely on state resources during

the 1990–2000 period (ESADE 2012).

How has this development changed the overall structure of the civil society sector?

Various studies have produced a set of the apparent effects of the

“officialization” of the sector, i.e. the growing dependence of a great proportion

of NGOs on official funding.

As they become more dependent on receiving state grants for maintaining high

levels of operations their work is directly affected by the new environment they are

operating in: they are driven more by the targets of official donors—as in many

cases NGOs tend to apply for particular grants designated to specific causes. This is

partly due to the nature of official funding: as funds disbursed constitute public

resources, they must be allocated through a transparent and competitive process.

National authorities use specific procurement practices calling for organized civil

society to apply for available funding. In some cases, these procurements leave

open issues such as what cause will be funded and in what geographic area said

funding will take place. This is the usual case for new agencies that have little

funding and/or do not have significant administrative capacity to plan the use of

their available funds. Larger and older agencies tend to tie their funding to specific

causes and geographic areas based on their respective planning. It should be

emphasized, though, that such planning is most usually the product of:

(a) Desk research that ignores real needs, done by state officials who may never

have set foot in the field,

(b) Political calculations regarding both funding inside or outside the country. In

the case of ODA, the disbursement of funds is understood as an instrument of

foreign policy. It serves, above all, the interests of the donor as is highlighted by

the increased allocation of ODA to Afghanistan just after American interven-

tion in the country in 2001. Likewise, in the case of funding within a country,

the disbursement of state grants may be influenced by political preferences of

the governing party,

(c) Media coverage.

Thus, NGOs that are dependent on public funding need to make sure their

actions are not skewed towards the preferences of their donors. Such behavior

may lead to a decrease in their legitimacy. In effect, their legitimacy is a byproduct

of their values, not the byproduct of being contracted to a specific agency. In a way,

the importance of altruism and voluntarism is downplayed, as the need to be viewed

as an efficient service provider takes priority. It should be stressed that the issue of

legitimacy is not a new one. It was mentioned as early as the mid-1970s by Lissner

(1977) in his book “The Politics of Altruism.”

This new funding environment has also brought about changes in accountability.

NGOs that originally selected the path of public funding have partly moved away

from their grassroots origins and their constituencies, overemphasizing short-term,

quantitative outputs that can be presented to their donors (Edwards and Hulme

1998).


NGOs have also changed the way they understand the media and their relation-

ship to the media. Cottle and Nolan (2007) argue that NGOs are seeking to attract

the media’s attention and thus tend to organize specific communication strategies.

NGOs tend to align themselves with the agenda of the media. Through this process,

NGOs “symbolically fragment the historically founded ethic of universal humani-

tarianism” (Cottle and Nolan 2007: 864).

Unquestionably, the evolution of the organized civil society sector brought about

by the increase in public funding has significantly influenced the way the sector

operates. Furthermore, it should be stressed that although some NGOs have avoided

becoming dependent on state funding—and some, such as the Medecins Sans

Frontieres, have refused to take part in this new funding scheme—they have too

often been affected by the preferences of their counterparts. Dreher et al. (2009: 21)

has argued that, “NGOs have incentives to follow official donors and NGO peers,

rather than trying to excel and swim against the tide.”

The global financial crisis has also affected the environment in which NGOs

operate. Indisputably, the major issue is that of the decrease in available funding.

Throughout the world, donations by individuals have been reduced, while some

states (see previous section) minimized their available funding to NGOs. On the

other hand, some multilateral agencies increased their disbursements, while private

foundations emerged.

Today, NGOs compete for the same financial resources (of which there are less)

and thus are more prone to use publicity to achieve one of their main goals:

maintaining funding levels. Hence, they tend to seek televised exposure, which

they cherish due to the size of the audience they are able to reach (Powers 2014).

This means that they may follow natural disasters, dispatching their officers along-

side journalists, equipped with visible items such as hats and t-shirts containing

their logo.

Furthermore, as the type of main funding sources has changed, NGOs have

shifted their attention from simply justifying expenses to measuring results—a

long-term request from institutional donors. Additionally, the economic crisis has

prompted NGOs to prioritize the charity activities favored by donors (Fowler

1993).

As highlighted in a DOCHAS report (2008: 2), “Aid is increasing, but patterns

for NGOs are changing, potentially squeezing out the small NGOs and putting

pressure on big NGOs to conform to donor priorities.” This leads to an inescapable

trend towards the professionalization of the NGO sector (Lang 2013). NGOs

constantly need to take into consideration issues such as publicity, accountability

towards donors, measurable effectiveness, etc. Additionally, they now need to

employ professional staff with extensive experience in proposal writing,

fundraising, and reporting, in order to maintain funding levels.

However, the crisis has subsequently instigated another lateral development: the

increase of importance of grassroots organizations that have maintained their direct

connections with society and are still able to project an image of an organization

loyal to its original values and beliefs. Due to their proximity to society, such

organizations are perceived to be truly altruistic in nature. The fact that they are


directly tied to society means they are able to formulate and implement measures

that answer real and pressing needs. In contrast to many NGOs that have tied their

operations to government initiatives, most of the time perceived and designed by

officials without much attention paid to societal needs outside those emphasized by

the media, there are a growing number of small organizations that are increasingly

making their presence felt. One such example is “Atenistas” in Greece who,

through small-scale initiatives throughout the city of Athens, is attempting to

make life easier and happier. They even have a section on their website which

allows anyone to propose new activities.

These organizations, due to their proximity to society, are believed to be more

prone to receiving a large part of the limited funding available in this turbulent

economic environment. But their main strength lies elsewhere. Due to the small

size of their professional staff, they are able to keep their real costs low. They also

have instigated a rise in volunteerism in countries that have been impacted by the

crisis across Europe. Indeed, despite a decline in public funding in Spain during the

last 2 years, time spent by civilians volunteering and helping those in need has

increased. According to ESADE (2012: 30) during 2011, “17.2 % of Spaniards

stopped donating to NGOs, made a smaller-than-usual donation or chose to volun-

teer instead of donating.” Overall, as a result of the economic crisis, peoples’ ability

to donate money has decreased. Thus people feel compelled to donate more of their

time in order to compensate.

Likewise, Greek society seems to have become more empathetic to the needs of

others. While the Greeks’ ability to give money has also decreased since the

economic crisis and austerity measures, their tendency to offer some of their time

increased. As Bourikos and Sotiropoulos (2014) argue the “intensity” of volunta-

rism in Greece has increased. Although there is currently no available data,

scattered interviews have revealed the potential of grassroots organizations,

which “have stayed pure and true to their original values and beliefs.” Although

such organizations do not have the structure or capability of implementing large

scale projects and absorbing significant amounts of funding, they are able to absorb

the main resource offered today, i.e. volunteers. Therefore, during a time when

professional NGOs are searching for the best practices to safeguard them against

legal matters related to the use of volunteers (2013–2014, authors’ interviews with

NGOs across Greece), grassroots organizations can utilize the growing wave of

volunteers to make a difference in society.

8.4 Focusing on Greece

Various sources have indicated that in the past Greece has had low to very low

levels of social capital, associational density, and civic engagement.2 Various

scholars have explained the reasons for this. Huliaras (2014) summarized them

2 See: Sotiropoulos and Karamagioli (2006) and Hadjiyanni (2010).


by creating five categories. The first category has to do with the rapid economic

development that took place in Greece since the 1960s, which has not been

followed by equivalent social transformations. The second category is related to

the distorted Greek political system and the clientelistic networks that the Greek

political elites have created throughout the years. State dominance and particracy

halted the emergence of a modern Greek state and thus the rise of a healthy and

active civil society. The third category deals with the role of the Church in Greece

and its relations with the state. The religious homogeneity that exists in Greece, in

contrast with other western societies, is believed to be hindering the mobilization of

civil societal action. Another category has to do with the tax incentives for charita-

ble donations. Indeed, the Greek tax system endorses donations to the state, the

Church, and to cultural institutions, while offering limited incentives for donations

to NGOs and other CSOs. Last but not least, Huliaras points out that the lack of

civic education is considered a major factor as well.

Some of these factors, like clientelism, have become the “Achilles heel” for the

rise of a vibrant civil society. While the number of volunteer organizations has been

expanding since the late 1980s, this was accompanied by the expansion of EU

funding for citizenship programs. However, this funding was channeled through the

official state. The latter set the standards for eligibility for funding. Thus, while EU

funds have provided important incentives for collective action and citizen mobili-

zation, the involvement of the Greek state set the path for the professionalization of

voluntary organizations, which inevitably shifted them away from their original

nature towards becoming sub-contractors. Gradually, the further involvement of an

inefficient and somewhat corrupted state spread the “virus” of corruption to the

organized civil society and NGO sectors, creating tremors in the public sector. The

issue of the accountability of NGOs came to the forefront of public discussion. At

the same time, the press released numerous related economic scandals. As a

consequence, the credibility of NGOs was harmed. In addition to the decrease in

public spending and the stress that Greek society was faced with during this period

of tremendous economic instability, new civil society initiatives became crucial for

the protection of social cohesion.

Yet, according to some scholars like Sotiropoulos, there have been some positive

developments regarding the future of Greek Civil Society. According to him, there

is an active, unofficial, and informal civil society functioning in the shadows of the

problematic formal and institutionalized civil society.

Indeed, Greece being under financial siege, is a place where this ‘fourth sector’

mentioned earlier in this chapter has flourished during the last 5 years. The reasons

for such a development have been described within the previous pages and can be

concluded in two ways. The first reason for this development is the unprecedented

reconstruction of the social state due to the immense reduction in public spending.

The other reason has to do with the numerous scandals regarding NGO funding that

were published during the last years. These made the Prime Minister, Antonis

Samaras, as well as the public, very cautious and suspicious of NGOs. The number

of scandals, the lack of the proper legal framework, and the lack of mechanisms for

accountability have led the Greek Prime Minister, as previously mentioned, to


declare that no more public funds will be distributed to NGOs. As result, the pool of

funding for the NGOs dramatically decreased. The more professionalized ones

turned to other sources for funding, mostly by targeting European Structural

Funds or large private donors. Yet, others have completely stopped functioning.

Thus, while the needs of the people were increasing, the social state and the NGOs

that were attempting to fill in the gaps in the system were found on the retreat.

This atmosphere contributed to the emergence of a new era for civil society

organizations in Greece. This new era started in 2009 and, while it is still develop-

ing, we can begin to see its characteristics. The new era has been characterized by a

boom in various informal citizen networks and grassroots movements with a

common objective of providing solutions and Almost spontaneously after Greece’s

first bailout in May 2010, a variety of initiatives including protest movements,

solidarity networks and self-help groups came into surface.

This boom took place in a host of Greek cities and mostly took the form of

informal gatherings of citizens turning into local social movements attempting to

provide solutions to problems caused by the crisis. Their nature arises from their

promotion of alternative models of economy in an effort to restructure or redesign

the current one. Though not a new phenomenon—identical movements have

occurred in other countries like Argentina (during the economic crisis of 1999–

2002) where several citizen networks and parallel currencies developed—the pace

at which they have been developing in Greece is remarkable.

Yet, a long and vigorous debate continues concerning the real roots of these

movements. There are many who support the idea that such networks are simply an

after-effect of the crisis. Others believe they are an outcome of the shift in consumer

behavior and attitudes towards a more responsible way of living—far from the

current trend of passive consumerism and over-production. Lastly, there are those

arguing that these networks have emerged in order to fill the gaps between the needs

of the people and the inadequate social services provided by the state. In general,

when observing the basic features of these informal networks in Greece, they

somehow reaffirm all the previous assumptions. According to Garefi and Kalemaki

(2013: 9), “Starting from their objective, which is explicitly claimed by each one of

them, most of these grassroots movements aim to respond to the current crisis

through innovative ideas and joint solutions. They aim to modify existing thinking

and provide support to people in need in order to improve life in community, to

promote fair and equitable sharing and distribution of goods and services as well as

to promote and preserve resources and assets of their local communities.”

Attempting to categorize these networks is something quite difficult given their

nature and the degree to which they are spreading across the country. It is almost

certain that there are types that have yet to be identified. Nevertheless, there are

some common features of the “fourth sector” in Greece. The initial and perhaps

most vital characteristics are voluntary and democratic. They also promote fair and

equitable distribution of resources, while focusing on developing relationships

based on solidarity. Up to now there are two different categorizations of these

groups and networks according to the nature of their activities. The first one made

by Prof. Sotiropoulos introduces four categories:


• Exchanges of food, clothes and services

• Provision of food and services to people in need

• Provision of health care

• Community and educational work

Garefi and Kalemaki (2013) on the other hand distinguishes these networks in a

more descriptive manner

• Exchange and virtual currencies networks

• Cost cutting networks—“Without intermediaries”

• Social kitchens

• Social clinics-social pharmacies

• Social education networks

• Social/Cultural activism

• Self-management & self-control networks

• Networks for change

Striking examples exist for all the above categories, such as the exchange and

virtual currency networks, “Time Bank” 3 and “Tem.” 4 Both these networks, as

well as a number of others, provide an alternative way of exhibiting practical

solidarity. They promote a way of living and working without money

(Eleftherotypia, 15/7/2010).5

For cost cutting networks, the most recognized initiative is that of the “potato

movement”.6 Its impact was so immense that the ministry of development decided

to support it with the construction of a digital/web platform for all the offers and

demands to take place (SKAI, 03/03/2012).7

Social kitchens8 and other similar initiatives are included in the third category as

a product of the difficulties that contemporary families in Greece have in finding or

buying food. A striking example is “The Other Human.”9

Social clinics and social pharmacies make up the fourth category. They emerged

as an answer to the growing inefficiencies of the central state and the Greek health

system, which is stressed under the current economic conditions. The need for

radical cut-off in funding and a ‘rationalization’ of the number of public hospitals

3 http://www.time-exchange.gr/translations.html4 http://www.tem-magnisia.gr/5 http://www.enet.gr/?i¼news.el.article&id¼1832356 This movement started in 2012 and is a grassroots socio-agriculture initiative which consists of

Greek farmers selling potatoes and other agricultural goods directly to the public, leaving aside the

intermediaries.7 http://www.skai.gr/news/greece/article/196404/to-kinima-tis-patatas-exaplonetai/8 Social kitchens are organized by groups of citizens aiming to offer food to immigrants, homeless,

unemployed and poor.9 http://oallosanthropos.blogspot.gr/p/social-kitchen-other-human.html


http://www.time-exchange.gr/translations.html

http://www.tem-magnisia.gr/

http://www.enet.gr/?i=news.el.article%26id=183235



http://www.skai.gr/news/greece/article/196404/to-kinima-tis-patatas-exaplonetai/

http://oallosanthropos.blogspot.gr/p/social-kitchen-other-human.html

and medical centers has resulted in basic shortages. To combat this, initiatives have

been taken by doctors, nurses, and pharmacists in order to provide their services for

free. The “social health movement” has spread throughout Greece. Solidarity Social

Clinics have been established in different cities across the country, such as Athens

and Thessaloniki. These types of initiatives receive a lot of media support and

coverage due to their quick results and the size of their outreach (Ethnos, 28/01/

2014).10 Moreover, they receive support from the municipalities. Striking examples

of such are social pharmacies like the Municipality of Athens, which distributes

drugs for free to help people in need (To Vima).11

The education sector is also laden with inefficiencies. This is the result of both

the crisis and the dysfunctional basis upon which the Greek education system has

been constructed. The inefficiencies of the Greek public education system have

instigated the creation of private tuition centers that provide an extra education. The

effects crisis on family budgets has made it difficult for parents to continue sending

their children. In response to this situation, several social education networks have

emerged, which are organized by educators who provide their services to students

on a voluntary basis (To Vima, 04/09/2012 & Eleftherotypia, 01/11/2013).12

Examples of such are the social tuition centers that have been established with

the support of the municipalities in many cities across the country.

Social/cultural activism is a category composed of a network of artists;

musicians that either offer their services for free or contribute by developing new

concepts and values as a response to the economic crisis. An example is the ‘Social

Theatre Shop,’13 an initiative organized by a group of actors from the National

Theatre of Northern Greece.14

The self-management & self-control networks category consists of a group of

citizens who discover innovative ways to express themselves by developing new

ways of thinking about everyday life, while putting these ideas into action. Their

objective is to gain control over factors or situations in order to improve everyday

life. One of these networks, the ‘Atenistas’15 has gained significant presence in the

media.16

10 http://www.ethnos.gr/entheta.asp?catid¼24301&subid¼2&pubid¼6395249211 http://www.tovima.gr/afieromata/solidarity/solidarity-events/drasi/?eventid¼7312 http://www.tovima.gr/afieromata/solidarity/article/?aid¼473274

http://www.enet.gr/?i¼news.el.article&id¼39566213 Its purpose is, through the organization of theatrical performances, to invite the audience to

provide food products instead of paying for a ticket. These products are distributed later on to

social organizations.14 http://www.newsbomb.gr/prionokordela/ellada/story/156146/theatro-horis-eisitirio--mono-

emprakti-allileggyi15 Its members are citizens of Athens who love their city and they want to improve some of its

negative aspects. They draw their strength and energy from thousands Athenians citizens who

want to do something for their city.16 http://www.ethnos.gr/entheta.asp?catid¼25862&subid¼2&pubid¼63637885


http://www.ethnos.gr/entheta.asp?catid=24301%26subid=2%26pubid=63952492




http://www.tovima.gr/afieromata/solidarity/solidarity-events/drasi/?eventid=73

http://www.tovima.gr/afieromata/solidarity/solidarity-events/drasi/?eventid=73

http://www.tovima.gr/afieromata/solidarity/article/?aid=473274

http://www.tovima.gr/afieromata/solidarity/article/?aid=473274




http://www.newsbomb.gr/prionokordela/ellada/story/156146/theatro-horis-eisitirio--mono-emprakti-allileggyi

http://www.newsbomb.gr/prionokordela/ellada/story/156146/theatro-horis-eisitirio--mono-emprakti-allileggyi





Finally, the last category, Networks for Change, involves group of citizens who

want to inspire people to build a new future for their country. These networks are

composed of ordinary people, as well as prominent representatives of Greek

society, such as academics, entrepreneurs, and artists like ‘Forward Greece,’17

which focuses on social and political change (To Vima, 13/12/2012).18

To conclude, these kinds of bottom up movements and networks are becoming

the new way of solving the problems created by the crisis. They can help to

transform society and shape the general political thought of the Greek community.

Additionally, they seem to enjoy the support and trust of the Greek people. They are

more direct—based on pure principles of volunteerism—and they do not carry the

burden either of a failed social and political system or the scandals of NGOs

engaged in state funding.

8.5 Conclusion

Undoubtedly, the evolution of civil society throughout the past decades has been

remarkable. Particularly the evolution on a global scale of NGOs has impacted

global politics and development practices. NGOs have been prominent for several

years—an official and institutionalized representative of what civil society has

often described as the ‘third sector’. As this chapter has evidently proved, in the

case of Greece, civil society was not as vibrant as in other European countries. The

reasons for this have been described in detail; the most crucial being the relations

with the official state, which has been accused as being corrupt and ineffective.

While it is a common belief that civil society in Greece has grown significantly in

the past decades, including a boom in the founding of NGOs, their aforementioned

relationship with the clientelistic state has brought their bottom-up origins into

question. In fact, evidence demonstrates that the increase in civic engagement was

suffered from a top-down process. This became even more obvious during the last

5 years when Greece began to face a severe economic meltdown. The need for a

rationalization of public spending has had a severe impact on the institutionalized

civil society, particularly in the NGO sector. In fact, the pool of easy funding has

stopped, leading to the extinction of many NGOs. The situation deteriorated even

further when numerous scandals surfaced, causing severe cracks in the credibility

of the official civil society. Thus, while their needs are increasing, the people in

Greece are facing a double-retreat in regards to the social state and the official third

sector. This gap seems to be filled by informal grassroots organizations that are

popping up around the country in great numbers and frequency. While their range is

limited due to their lack of official structure, funding, and capacity for well-

17 It was founded in 2012 in Athens and its main goal is to aspire a change in Greece by

contributing new ideas and suggestions, encouraging cooperation and generally a change in

political terms.18 http://www.tovima.gr/politics/article/?aid¼488575


http://www.tovima.gr/politics/article/?aid=488575

http://www.tovima.gr/politics/article/?aid=488575

organized initiatives, their activities are well known due to media coverage. They

enjoy the trust of the people due to their purity and the lack of connection to the

central state. They seem to be able to deliver small-scale projects with high-level

outputs. Yet, as was discussed in the previous sections, their life cycle is relatively

small and, thus, their contribution limited.

It should be noted that this trend is not unique to Greece. Although in nations

suffering from economic turbulence and austerity measures such as in Greece,

Portugal, and Spain, the emergence of new, grassroots organizations to combat

the effects of the crisis is more than apparent, the same can be seen in more stable

economies, in which a certain level of social welfare are still present. In Belgium,

grassroots organizations are also making their presence felt across the country.

Hence, it seems that the financial crisis and its aftermath has further highlighted

the debate on whether large and “professionalized” NGOs or less formal types of

organizations are the future of the third sector. On the one hand, large NGOs are

becoming more and more effective and efficient service providers, especially in

regards to large, integrated projects—a current trend in the development aid

industry. On the other hand, grassroots organizations can spot actual and urgent

needs and offer the relief needed for the society to survive. It is not the aim of this

chapter to take a position on whether the grassroots organizations are more impor-

tant than large NGOs (in terms of efficiency for example they definitely are less

adequate), but to highlight new trends within the sector. To this end, our findings

indicate that the organized civil society sector is affected by a dual trend:

(a) On the one hand, many existing NGOs are going to become more

professionalized and expand. This will not be the future of all NGOs, as the

competition for institutional funding will become more and more fierce, leav-

ing no room for semi-professionals. Those that will not be able to adjust will

most likely cease to exist or they will retreat to their origins.

(b) On the other hand, people are placing more emphasis on grassroots

organizations that gain their strength from their devotion to philanthropy and

altruism—characteristics that are incompatible with the “large projects” men-

tality of the institutionalized donors. Such organizations are already receiving a

significant part of the available resources of individuals (primarily as

volunteers rather than fiscal donors) and are gaining the interest of both the

people and the media.

Acknowledgements This research has been co‐financed by the European Union (European

Social Fund—ESF) and Greek national funds through the Operational Program “Education and

Lifelong Learning” of the National Strategic Reference Framework (NSRF)–Research Funding

Program: THALES. Investing in knowledge society through the European Social Fund.


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Author Biographies

Dr. S. Petropoulos is a Postdoctoral Researcher at the Departments of Political Science &

International Relations and of Economics of the University of the Peloponnese. He holds a Ph.

D. from Harokopion University of Athens as well as a M.A. in International Political Economy

from Warwick University, UK. He has taught in several academic institutions in Greece while his

articles have been published in international academic journals and edited volumes.

Dr. Petropoulos has worked for more than 5 years as an International Donors Senior Consultant

at Ernst & Young. In addition, he has managed and participated in numerous research projects,


currently acting as project manager and researcher in two projects related to NGOs in Greece. His

research interests focus on NGOs, evaluation techniques, East Asian region, regional integration,

global governance and emerging powers.

Anastasios Valvis is a Junior Research Fellow at the Hellenic Foundation for European and

Foreign Policy (ELIAMEP), Southeast Europe programme. He is PhD candidate of Political

Science and International Relations, University of the Peloponnese. He holds a BA on political

Science from Athens National University and a MA in International Politics and Security Studies

from the department of Peace Studies, University of Bradford. He has been for more than 3 years

researcher at the Institute of International Economic Relations, and he has also participated in

research projects such as at the University of Athens (Jean Monnet European Centre of Excellence,

project on European and Greek foreign policy), and at the University of Peloponnese (Research

project: Exploring the Integration Opportunities and Prospects of African Immigrants into the

Greek Society). His main interest focus on political and social transformations in Southeast Europe

and in Greece, Civil Society and Environmental Security in the Balkans.


Energy Security and the Transformationof Regional Securitization Relationsin the Eastern Mediterranean

9

Constantinos Adamides and Odysseas Christou

Abstract

This article uses the theoretical framework of securitization in order to analyse

the discovery of natural gas resources by a number of states in the Eastern

Mediterranean region. We use the developments in bilateral relations among

pairs of states in the region as empirical tests of the theories; we identify the

under-exploration of energy securitization in the literature and the need for a

cross-sectoral approach for the referent object of energy in the widened security

agenda by analysing the effects of energy-related developments on existing

securitization relations. By comparatively assessing dynamics in these bilateral

relations prior to and following the discovery of significant quantities of natural

gas reserves in the region, the paper analyses the introduction and effect of

energy as an exogenous parameter on the securitization relations among the

various states. The paper ultimately illustrates that energy as a referent object

introduces a multiplier effect to the level of securitization in existing state

relations both in the positive and negative directions.

9.1 Introduction

The discovery and exploitation of natural gas could provide much-needed stability

to the war-ridden Middle East and the financial crisis-stricken South-eastern Medi-

terranean region. Foreign direct investment from multinational energy giants and

the associated financial benefits would provide an economic boost to the region and

provide incentives for states to resolve their bilateral political problems. While

energy could play a role in helping normalize relationships or prevent escalation of

conflict or conflict positions, we are yet to see anywhere in the world any ‘peace

C. Adamides (*) • O. Christou

University of Nicosia, 46, Makedonitissas Ave., 24005, 1700 Nicosia, Cyprus




189



pipelines’; that is energy-related investments the utilization of which contributed to

inter-state conflict resolution (Shaffer 2009). On the contrary, the risk associated

with the considerable investments necessary for such activities is particularly high

in the absence of political stability. As a result, multinational energy corporations

are hesitant to invest in areas with high political instability that could jeopardize

their multi-billion dollar projects. Investors do not seek to create stability through

an investment, but rather the reverse; they seek political stability in order to invest.

The same principle applies for states; in the absence of stability and normalized

political relations they are less likely to engage in energy-related trade. Thus, a lack

of regional stability may prevent states from acquiring the maximum possible

financial benefits from their natural resources.

The absence of regional or bilateral stability and a relatively low level of

securitization in relations forces states to diversify their energy strategies and

avoid dependency on one buyer or supplier, even if that means forgoing export

profits or incurring higher import costs. This seems to be the case even during

periods of economic crisis, primarily for two reasons. The first is that energy

investments entail commitments with an average span of over 15 years. At the

same time investments may require several years to be completed, meaning that

there should be no expectations for immediate financial benefits from such

investments. Thus, the decision-making calculus for such investments is unlikely

to be influenced by recessions and financial crises that do not usually persist for a

long period.1 The second reason is due to the fact that energy is a political tool just

as much as it is an economic one, meaning that political considerations and

potential benefits regarding energy agreements with companies and states may

exceed narrow financial cost-benefit calculations that might otherwise have been

more important during financial crises.

9.2 Characteristics of Energy and Impact on PoliticalTransformations

Energy and more specifically energy trade, unlike any other form of commercial

trading, has two important inherent characteristics that have the ability to influence

political and even military bilateral and regional securitization relations (Christou

and Adamides 2013). The two characteristics are imminence and immediacy, both

of which are based on the significance of energy insecurity, which can be defined as

the disruption of energy supply or the susceptibility to sudden and sharp price

fluctuations. Energy insecurity is typically experienced by the demand side, in other

words by importers and consumers. A similar logic, however, applies to the supply

side leading to a different kind of insecurity. Specifically, a sudden disruption from

1A typical recession lasts for 1–3 years, while a typical expansion from 5 to 15 years, https://www.

imf.org/external/np/seminars/eng/2012/fincrises/pdf/ch8.pdf, See also http://web.calstatela.edu/

faculty/rcastil/Econ462/Crises.pdf for the impact and duration of financial crises.

190 C. Adamides and O. Christou

https://www.imf.org/external/np/seminars/eng/2012/fincrises/pdf/ch8.pdf

https://www.imf.org/external/np/seminars/eng/2012/fincrises/pdf/ch8.pdf

http://web.calstatela.edu/faculty/rcastil/Econ462/Crises.pdf

http://web.calstatela.edu/faculty/rcastil/Econ462/Crises.pdf

a buyer, such as the discontinuation of imports, produces financial insecurity for the

producing state. This is especially the case if the exporter is heavily dependent on

the importer such as cases where the buyer is a major customer of the supplier/

producer and even more so in cases of monopsony. The impact could nonetheless

have similar effects on a state, as a disruption of energy-related income could have a

catastrophic impact on a country’s economy, especially if the economy is heavily

dependent on income from energy exports.

Imminence deals with the possibility that disruptions could take place at any

given time without necessarily prior warnings (Christou and Adamides 2013). The

timing of a potential energy security threat is therefore unpredictable and frequently

depends on the political stability between the supplier and the consumer, as well as

on regional stability and may have nothing to do with business-related variables

such as timely payments or favourable prices. Deterioration of bilateral political

relations could lead to a sudden disruption of energy supply by the supplying state;

an indicative example is the case of Russia and Ukraine where their political

problems have energy-related repercussions. If the receiving state is also a transit

state, as is the case with Ukraine, then the impact of such disruptions additionally

carries regional repercussions for states that may not have any relevant trade or

political disagreements with either the supplier or the transit state. The threat of

imminent disruption allows states to use energy trade as a political tool or weapon

to serve political and not necessarily economic or business goals. In such cases,

where energy agreements and trade are disrupted and used as political leverage, we

should expect to observe immediate escalation of political securitization and further

deterioration of relations.

An unstable regional political environment may also lead to sudden disruption of

energy supply due non-state actions. In Africa, South America, Asia and the Middle

East terrorist groups and local militia frequently sabotage pipelines and refineries,

disrupting thus the flow of oil or natural gas. Pipelines are easy targets and sabotages

using small explosives can stop the operation of critical sections of a pipeline for

weeks (Luft 2005). Pipelines linking the Egyptian natural gas to the Israeli markets

were repeatedly targeted by terrorist organizations that opposed Egyptian-Israeli

collaboration, despite the relatively stable bilateral relations between the two

governments. Saudi Arabia and Yemen energy infrastructure has also been the

target of terrorist attacks. Pipelines and other infrastructure in Nigeria, Angola and

recently Libya are also frequent targets in Africa, as are those in Pakistan, India and

parts of Russia in Asia (Global Gas Transport 2013). The threat of terrorist-related

disruptions and the associated cost is an inevitable consideration for states as well as

investors. Indicative of this consideration is Israel’s hesitancy to build LNG

terminals on its own territory or Floating LNG terminals in its EEZ, knowing that

currently the state is unable to fully protect such infrastructure (Good 2014).

The second characteristic of energy insecurity is the immediate and severe

impact it can have on the functioning of a state (Christou and Adamides 2013).

Given modern states’ energy dependency energy disruption, has an immediate

economic and social impact and potentially a political one as well. The economic

and social consequences of the Russian-Ukraine dispute in 2009 that left parts of

9 Energy Security and the Transformation of Regional Securitization. . . 191

Europe without natural gas is witness to the immediate impact of energy

disruptions. In Bulgaria the government was forced to take emergency measures

to tackle the shortage. The Former Yugoslav Republic of Macedonia (FYROM)

experienced 100 % gas supply cut forcing industrial consumers to stop using gas,

while Moldova was forced to cut off the supply to the district heating in Kishinev

(Kovacevic 2009). Energy insecurity and disruptions could also have severe politi-

cal consequences. Some analysts estimate that one of the main reasons that

Mohammed Morsi faced such opposition in Egypt was the frequent energy supply

disruption and the subsequent blackouts (Shaffer 2014). It is worth noting that while

the immediacy and the severity of the impact is likely to be much more immediate

and sharper for the receiving state, the impact is also likely to be immediate for a

producing state, especially if the latter relies on energy income to sustain its

economy. Indicative of such impact is the recent European oil embargo on Iran

that led to a huge reduction in exports—from 2.2 to 0.7 millions of barrels per day

(mbd) between 2011 and May 2013; as the Iranian oil minister acknowledged, the

reduction was costing Iran $4 bn to $8 bn each month (BBC 2014).

The two aforementioned energy characteristics play an integral role in

formulating a state’s political and economic strategies and alliances. For importing

states, energy dependency and the need for energy security require cooperation and

trade with reliable suppliers with whom their political relations are desecuritized;

thus, it is improbable that importing states would take risks that would jeopardize

their energy security. In other words, importing states are less likely to prefer

options that would make them heavily dependent on suppliers that may use energy

as a weapon to achieve political goals for the sake of cost-reduction. Thus, states

whose relations are deeply securitized are less likely to engage in energy trade,

especially if there is no interdependency; that is if the cost of non-cooperative

behaviour is equally high for both the supplier and the importing state.

Similarly, exporting states are less likely to sell oil or natural gas to states with

whom their political relationship is at a high level of securitization. However,

unlike the case of importing states, suppliers may be more willing to attempt such

relations if the receiving state is not the primary customer, meaning that the supplier

will not depend on this single buyer for most of its energy trade. In the absence of

such dependency, the supplier might be willing to attempt trade relations, as the

impact of non-collaborative behaviour is usually heavier on the importing state

rather than the exporting one. This is because the impact on the economy and the

society of not having sufficient access to energy is usually much more severe

compared to losing income from not selling enough oil or natural gas.

The countries in the Eastern Mediterranean constitute interesting case studies as

for decades they have been energy-importing states, but are now in a position to be

self-sufficient and even become exporters. However, their fortune to discover

natural resources is mitigated by the deeply securitized and even conflict-ridded

environment that could potentially hinder the development of the most economi-

cally beneficial collaborations. One of the most interesting questions that is yet to

be answered is whether the Levant states can engage in political transformations

that would be sufficient to desecuritize the bilateral and regional relations, allowing


thus for the development of the most efficient and beneficial energy trade

agreements. The absence of peace pipelines examples should mitigate the hopes

for radical shifts in the deep-rooted political positions of conflict parties. It is

therefore unlikely to see, for the sake of energy, political transformations that

would lead to the resolution of deep-rooted conflicts such as the ones between

Greek and Turkish Cypriots (and Turkey), Israel and the Palestinian authorities and

Israel and Lebanon.

Despite the absence of energy-induced conflict resolution cases, some academics

and political elite argue that energy exploitation can change the incentive structure

of the conflict sides and generate shared interests to the degree that desecuritization

and even conflict settlements are possible. Others however argue that the discovery

of natural resources will complicate further the already complex regional relations

of the Eastern Mediterranean, reignite old rivalries and heighten the security

concerns (ISN Security Watch 2013).

9.3 Political and Energy Securitization in the WidenedSecurity Agenda

What is argued in this paper is that energy trade can induce such political

transformations and they have been taking place over the past few years, albeit

this is not necessarily due to the ongoing economic crisis or the poor economic

conditions of some of the states in the region. The introduction of the energy factor

can be characterized as a facilitating condition for the promotion of bilateral or

multilateral cooperation, as well as for the attempts to reach reconciliation and

resolution in cases of pre-existing conflict. However, as we will illustrate through

the use of particular case studies below, it cannot simply be assumed that the

introduction of energy as a new variable in each case will have a positive impact on

existing securitization relations and necessarily favourable outcomes in a regional

context. Rather, we claim that this factor must be considered within the framework

of existing securitization relations in relevant sectors such as the political and

economic sectors and even the military sector in more conflict-driven frameworks.

This argument is based on the working assumption that the factor of energy cannot

simply be reduced to an economic variable as the Copenhagen School argues

(Buzan et al. 1998): potential securitizing issues that may arise within the context

of energy securitization are unlikely to deal exclusively with energy as an eco-

nomic asset and they are regularly prone to spill over into additional—and usually

more highly securitized—sectors such as the political and military sectors.2

A primary consideration in this respect is the extent to which energy can be

considered a dichotomous variable in terms of its impact on and interdependence

with securitization in the political sector. Nowhere is this consideration more

2 For an overview of the widened security agenda see Buzan (1991), Buzan et al. (1998). For

criticisms see Wyn Jones (1999), Booth (1991), McSweeney (1996) and Eriksson (1999).


prominent than in disputes which involve the contestation of sovereignty; as a

comparative example, we may contrast relations between Israel and Egypt where

political securitization does not involve outright sovereignty contestation with

relations between Turkey and Cyprus—and by extension Greece—where the con-

testation of sovereignty is at the heart of the severity of political securitization.

Thus, our argument is that if energy issues are enveloped by broader political

securitization relations—thereby effectively becoming components of those pro-

cess rather than being restricted to energy securitization processes—then the impact

of energy can be either positive or negative depending on the existing trends in the

securitization relations in the broader context. Thus, if securitization is already low

or attempts at desecuritization are successful and likely to lead to de-escalation,

then the potential for collaboration or conflict resolution that is inherently present in

the economic aspects of energy securitization may be realised. If, however, political

securitization is sufficiently high such that the economic component of the equation

cannot override political considerations, then energy could not only fail to provide

the necessary impetus for normalization of relations, but can actually lead

developments in the opposite direction by having negative impact in raising the

perceived stakes of interaction with other states either in a bilateral or multilateral

context. Thus, in either direction, the introduction of the energy factor can be said to

have a multiplier effect on securitization relations in a regional context.3

9.4 Regional and Bilateral Relations: Has Energy Transformedthe Political Dynamics?

This next section examines five cases to demonstrate how such energy-induced

political transformations are indeed possible. The scope of this section is not to

provide a literature review on the bilateral relations among regional actors, or to

analyse in depth the causes of their problems. Rather it is to demonstrate the impact,

or lack of it, the discovery of hydrocarbons has had on their political relations.

9.4.1 Case 1: Israel and Lebanon

Israeli-Lebanese relations have been politically and militarily deeply securitized for

decades; indeed, the two states are essentially at a state of war even with the

absence of violence for long periods. Hezbollah frequently attacks Israel from

Lebanese territory and the latter retaliates with airstrikes, while at the same time

holds the Lebanese government responsible for any attacks deriving from its own

territory. The presence of Hezbollah in Lebanon diminishes the chances of any

normalization efforts between the two states having any long-term effects. The

discovery of hydrocarbons in the two states’ Exclusive Economic Zones and the

3 For a regional approach to securitization see Buzan and Wæver (2003).


prospect for collaboration did not lead to desecuritization or even moderated

securitization; on the contrary, and in line with our hypothesis that energy can

exacerbate the existing securitization status, their relations worsened the situation,

primarily due to disagreements over their maritime border delineation.

Figure 9.1 demonstrates the disagreement between Israel and Lebanon regarding

their EEZs. The two neighbours essentially disagree on the angle of the line that

separates their EEZs. Israel argues that its EEZ extends to “Point 1” (dotted line),

while Lebanon argues that Israel’s maritime border is further south to “Point 23”

(solid line), with the disputed zone being approximately 854 square kilometres.

Three of the ten Lebanese exploration blocks are adjacent to Israel’s EEZ, and two

of them are located in the disputed zone.

Lebanon is set to commence its first licensing round within 2014 for its reserves

that early estimates show to be significant (Dziadosz 2014).4 Even a fraction of the

estimated findings would yield significant profits for the country. Yet the internal

Fig. 9.1 Israel-Lebanon maritime borders

4 Officials have said that there could be as much as 96 tcf of natural gas and 850 million barrels of

oil in Lebanese EEZ, even though there are no confirmed reserves at this point.


political instability coupled with the bilateral dispute with Israel have so far made

potential investors reluctant to invest. The US has been trying to mediate in order to

resolve the maritime dispute between the two sides, aiming not at the overall

resolution of the political problem between Israel and Lebanon, but rather at the

resolution of the specific dispute that hinders investments.

The example of Lebanon demonstrates the aforementioned argument that

investors are interested in stability before they invest and not the other way around;

namely, invest in an attempt to generate stability. More importantly perhaps, it

demonstrates that potential economic benefits from energy are insufficient by

themselves to lead to a political transformation powerful enough to desecuritize a

deeply securitized environment, at least not without significant external interven-

tion. On the contrary, the presence of natural resources in a disputed area is more

likely to exacerbate any political securitization. The prospect for desecuritization is

still possible in cases where there is external interventions by states that have the

capacity to alter the security concerns of the conflict parties and subsequently their

securitization relations bilateral calculus. The goal of such interventions in cases

like Lebanon and Israel is not necessarily to resolve the conflicts, but rather to

sufficiently desecuritize bilateral relations to the extent that investments become

less risky and subsequently more attractive.

9.4.2 Case 2: Israel and Cyprus

The second example demonstrates how in politically desecuritized environments

energy agreements can develop relatively quickly and usually lead to more pro-

found political relations and even create alliances that would not have been

otherwise possible. The Republic of Cyprus and Israel were quick to agree on

their maritime borders and have been discussing the prospects—but have not yet

agreed—of building an LNG terminal in Cyprus to export both Cypriot and Israeli

gas to international markets. Similarly the two sides have been negotiating an

interim solution for Cyprus’ energy needs, with the Israeli Delek Group and its

partner in Leviathan Noble Energy placing a bid for selling Israeli gas to Cyprus.

The desecuritized bilateral relations between these two states demonstrate how

energy can solidify further desecuritized relations and even create alliances that

extend beyond the energy sector. Indicatively, Cyprus and Israel have conducted

several common search and rescue drills in the Cypriot EEZ and military exercises

in the Cypriot airspace. The former Cypriot Minster of Defense, Photis Photiou,

noted that he was “confident that the strategic dialogue that began several months

ago will benefit both countries and will continue on all areas, including energy

security” (Cyprus Mail 2014). While the Minister presented the issue of energy

security simply as part of the overall strategic political reorientation of the two

states, in reality it is the prospect of energy collaboration that has led to the

development of these strategies and potential alliances. Suffice it to say that for

over six decades, and despite the short distance separating the two states, there was

never an official visit to the island by an Israeli Prime Minister. The first visit took


place in February 2012 when Prime Minister Netanyahu and President Christofias

met to discuss issues pertinent to natural gas cooperation and regional security.

The development of such relations seems to incorporate elements of energy-

induced political transformation as well as opportunistic behaviour. Without the

presence of natural resources the two states’ relations would have maintained their

neutral status, considering each other as neither a threat nor a partner. In cases

where bilateral relations are characterized by a neutral political status—i.e. neither

a threat nor an ally—energy provides the opportunity to develop collaborations

without necessarily engaging in profound political transformations that would

require, a shift in entrenched ideological positions vis-a-vis sensitive political

issues such as the Arab-Israeli conflict or the one between Greek Cypriots and

Turkey. At the same time however the nature of energy-related projects and

agreements which typically involve long-term and costly investments, requires

bilateral—if not regional—political alignment that would safeguard those

investments. To achieve such alignments, that were not present in the past, some

form of political transformation may be necessary.

The newly formed friendship between Cyprus and Israel is an indicative exam-

ple of such transformations. Cyprus, having in mind its good relations with the Arab

states, always kept a neutral stance vis-a-vis Israeli actions in the Middle East,

avoiding at the same time any deepening of their bilateral relations. Similarly, Israel

did not push for closer relations with the Republic of Cyprus either, fearing that it

would jeopardize its until recently good relations with Turkey. It is therefore no

coincidence that there was no Heads-of-States-meeting until 2012.

Even though the prospects of common energy exploitation helped the two states

discover each other, this does not imply a political alignment on the ongoing

conflict-related issues. On the contrary, Cyprus as well as Israel seem to avoid

taking positions on sensitive political issues, while at the same time they continue to

reiterate that this relationship is not mutually exclusive and should not be consid-

ered as hostile towards the Arab states and Turkey respectively. Thus, while the

prospects of energy trade helped diminish ideological and political concerns and

contributed towards the development of new relations, there is no evidence that

there is a complete political transformation. It simply demonstrates that states are

willing to deviate a little from their established positions—in this case a neutral

relation. Any transformation is limited to the regional security dynamics that pose

complex problems that cannot be addressed with, or limited to, bilateral relations.

Specifically for these two states it is the protracted Cyprus conflict that inevitably

includes Turkey in the equation that complicates the prospects of any radical

political transformation for either Cyprus or Israel.

9.4.3 Case 3: Israel Relations with: (1) Palestinian Authorities(2) Jordan; (3) Egypt

The third example examines the relations between Israel and three of its

neighbours, namely the Palestinian Authorities, Jordan and Egypt. Currently all


three states need natural gas for their energy needs, and they are all contemplating

acquiring it from Israel, despite their historically volatile political relations. Israel

perceives any exports to the Palestinian territories as an extension of the Israeli

local market due to the proximity and the relatively small quantities required.

Interestingly, the Palestinian Authorities are to be the first buyers of Israeli gas

following a 20-year long $1.2 bil deal with the Leviathan group (Times of Israel

2014). This deal was possible for two reasons beyond the fact that it is an

economically viable option: the first is that this agreement creates no dependency

by one or the other side—thus there is a relatively small risk in case of disruptions;

the second is that it does not jeopardize any established political positions. In other

words, this is possible because it does not require great political sacrifices and

subsequently major political transformations. Had significant political sacrifices

been the prerequisite, a deal would have been an unlikely scenario, as is the case for

instance with the exploitation of the GazaMarine field with an estimated quantity of

1.2 tcf of natural gas. The development of the Gaza Marine field could be a

mutually beneficial development for both the Palestinians and the Israelis, but

they have not managed to reach an agreement due to political disagreements

revolving around regulatory frameworks (and subsequently sovereignty) between

the Israeli government and the Hamas government in the Gaza strip (Shaffer 2014).

This example demonstrates how energy trade cannot eliminate or bypass high

levels of political securitization; on the contrary, energy agreements are possible

in the absence of severe political securitization.

Similarly, growing Jordanian and Egyptian energy needs, coupled with low

export costs, make energy collaborations between Israel and these two neighbours

possible. Noble Energy, taking advantage of the recent Egyptian energy supply

disruptions to Jordan, signed a $500 million agreement to sell natural gas to Jordan

from the Tamar field for the next 15 years (Reed 2014). This agreement was

possible for the same reasons of low cost and lack of dependency and demonstrates

that small-scale collaborations are possible if they do not require significant politi-

cal transformations by either the supplier or the receiving state.

Egypt, unlike the other two cases, has large quantities of energy resources,

making it the largest non-OPEC oil producer in Africa and the second largest

natural gas producer of the continent (http://www.eia.gov). However, the post-

Arab Spring turbulent domestic and regional political environment, coupled with

rising domestic needs, let to a sharp decline in production and inevitably a sharp

decrease of exports and subsequently income. Egypt stopped exporting to Israel in

2011 and now depends on imports—potentially from Israel—to meet its domestic

needs and export obligations. Hafez El-Salmawy, the managing director of the

Egyptian Electric Regulatory Agency, noted that Egypt requires 6.5 bcf of natural

gas per day to properly power its electricity plants (Al Monitor). With the current

domestic production, Egypt needs an additional 20 % natural gas, much of which

will be imported from Israel, with the new 8 bcm/year agreement (Al Monitor).

The existing infrastructure, the relatively low quantities to be exported and the

prospects to maintain an energy relationship between Israel and Egypt made this

proposed agreement an attractive deal for Israel. The long-term energy trade that


http://www.eia.gov/

has been in place for decades contributed to the stabilization of political relations

between the two states on a governmental level, despite some opposition from local

groups associated with anti-Israeli organizations such as Hamas and Hezbollah, and

a new agreement could potentially help maintain their relations at a relatively

desecuritized level.

The positive experience from the pre-existing agreements coupled with the

newly-reached deal allows for further collaboration between the two states despite

the political instability in Egypt and the region; specifically, Israel is contemplating

exporting part of its gas to two underutilized Egyptian LNG terminals rather than

building its own. Whether such agreements are evidence of a political transforma-

tion is debatable. We argue that they are rather simply a continuation of the same

strategy on a political level, namely the separation of any political disagreements

and energy trade with Egypt. In other words, the goal is to maintain a desecuritized

enough relationship that would allow for energy collaborations. Thus, while energy

may not force complete political transformation, it facilitates the perpetuation of

relatively normalized relations even in times of internal instability and enmity

towards potential trade partners. It seems unlikely that Israel would consider the

option of exporting gas to Egyptian LNG with the ongoing government instability if

it were not for the pre-existing energy-related relations.

9.4.4 Case 4: Israel and Turkey

The fourth example demonstrates how energy trade influences the orientation of

bilateral political relations, but at the same how it cannot prevent them from

becoming heavily securitized in the event of serious political incidents.

Turkish-Israeli relations suffered a severe blow with the 2010 Mavi Marmara

incident where nine Turkish activists were shot and killed by Israeli Special Forces

when a Turkish-owned ship attempted to breach the naval blockade of the

Palestinian territory. While the incident is perceived as a major causal factor for

the deterioration of their relations, the political divergence started taking place a

few years earlier when the Turkish Prime Minister Recep Tayip Erdogan

recognized Hamas as the government of the Gaza strip in 2006 (Migdalovitz

2010: 13–14).

The prospect for energy-related agreements between Turkey and Israel is driven

primarily by three factors: (1) Israel’s need for diversified export destinations;

(2) the US’ desire for stable and strong relations between its two strongest allies

in the region; (3) Turkish energy needs and its aspiration to enhance its role as a

major transit state in the region. Until the Mavi Marmara incident, when the two

states relations were at their best, an energy trade agreement between Turkey and

Israel would have been a major and feasible goal for both states; however, this is not

the case now. The post-2010 developments demonstrate that the prospects of

energy agreements alone, regardless of how profitable they may be, cannot by

themselves improve political relations; they can however provide incentives to

prevent further deterioration Local and foreign actors, most notably the US, use


the prospect of energy cooperation as a tool to limit or de-escalate the political

disagreements between the two states and to establish a workable relation that

would maintain some bilateral and subsequently regional stability. Energy in this

case has provided the incentives and tools for domestic and foreign actors to

prevent escalation of political securitization between two regional powers that

would make any cooperation highly unlikely.

In the case of Israel and Turkey energy is not the focus of their political

disagreements and it can therefore be used to mend relations or limit their deterio-

ration. In cases where energy is the subject of contestation, the former tends to

become part of the political securitization relations and has a multiplier effect,

leading thus to either more severe escalation of securitization when political issues

become more securitized or more desecuritization when political issues become

more normalized.

9.4.5 Case 5: Cyprus and Turkey

The final piece of the puzzle in the region revolves around another intractable

conflict in the area, namely that between Cyprus and Turkey. After four decades

without a settlement to the de facto division of the island, the hopes for conflict

resolution seem to have been placed primarily on the discovery of hydrocarbons in

the Cypriot EEZ. Specifically, the exploitation of the hydrocarbons with pipelines

via Turkey could create sufficient financial incentives for Greek and Turkish

Cypriots as well as the elite in Ankara to settle the conflict (Cilsal et al. 2008,

2009). However, the deeply securitized political environment reduces the impact of

such incentives and does not currently allow for energy cooperation between the

Greek Cypriot and the Turkish Cypriot/Turkish side.

This doubtfulness is also evident from the political discourses on the island;

while political elites on both sides of the buffer zone promote the benefits of energy

for a united Cyprus—especially amidst the financial crisis—their views on the

subject are significantly different. President Anastasiades and Greek Cypriot elites

adopt the position that the financial benefits from energy exploitation should benefit

all Cypriots, and even Turkey, and that the hydrocarbons could potentially contrib-

ute to the settlement of the Cyprus conflict (e-kathimerini 2014). At the same time,

and as noted by the House President, Yiannakis Omirou, the exploitation of the

hydrocarbons in the Cypriot EEZ will not be held hostage to either Turkey or the

developments of the Cyprus conflict negotiations (Evripidou 2014). Similarly, the

Minister of Energy, Giorgos Lakkotrypis, emphasized that pipelines via Turkey are

not an option without a resolution (Stevenson 2014), even if this option might be the

financially sensible choice, especially given the relatively small confirmed reserves

in the Cypriot EEZ and the current financial instability in the island. The Turkish

side (Turkey and Turkish Cypriots alike) on the other hand questions the RoC EEZ

and the latter’s bilateral agreements with neighbouring states (TRNC–MFA), While

the Turkish Cypriot leader Dervis Eroglu suggests that both sides should ‘suspend

the oil and natural gas exploration until a comprehensive solution is found to


Cyprus problem’ (Peixe 2011). Both sides acknowledge the importance of the

hydrocarbons, but at the same time all discussions are subsumed by the deeply

securitized political sector, meaning that neither side is willing to forgo established

political positions for the sake of energy-related financial benefits.

It is worth noting however that Greek Cypriots are willing to discuss the

possibility of exporting to Turkey in the future and in the event of a settlement.

As President Anastasiades noted, ‘a [settlement] deal would eliminate a key politi-

cal impediment against exporting to Turkey’ (Associated Press 2014). Such

discussions would have been extremely unlikely a few years ago and prior to the

discovery of the hydrocarbons. However, the fact that Greek Cypriots are

contemplating the possibility to export natural gas to Turkey should not be per-

ceived as a political transformation, but rather as a relatively simple trade-related

cost-benefit analysis that is possible only after the desecuritization of the two sides’

political relations. The same applies to the Turkish side; Turkey and Turkish

Cypriots seem unwilling to jeopardize their political positions and demands for

the sake of energy-related benefits.

As mentioned, the hopes for hydrocarbon-based settlement are to some extent

based on the renewed international interest in the conflict, especially by the

US. However, the latter’s incentives to become actively involved in the conflict

resolution efforts are frequently questioned by the media and politicians that do not

participate in the government, arguing that the US is interested in the Cypriot

natural resources wealth and in facilitating the restoration of the Turkish-Israeli

relations. As demonstrated in Fig. 9.2, Israel cannot export directly through

pipelines to Turkey without passing from either the Cypriot EEZ or those of

Lebanon and Syria. Given the current relations it has with Lebanon and Syria,

this option seems to be an unlikely scenario. Subsequently, without the approval of

the RoC, Turkey and Israel cannot be directly linked with a pipeline, limiting thus

the possibility for energy-induced reconciliation. Thus, the Eastern Mediterranean

natural resources have incorporated the Cyprus conflict into a broader regional

security complex that extends from Europe to the Middle East.

The RoC attempts to take advantage of these developments; thus the center-right

government’s turn towards the US should not be attributed to an ideological

transformation—following the leftist tenure between 2008 and 2013. It is the

renewed US interest in the region and the integral role of Cyprus due to its

geographical location that have allowed for closer ties with the US Greek Cypriots

feel that the RoC has acquired leverage which can be politically useful. The same

applies for the Turkish/Turkish Cypriot side that also feels that the growing

international interest could apply pressure to Greek Cypriots just as much as it

does to their side. This pressure is perceived to be much more severe due to the

ongoing financial crisis and thus the prospects of more profitable natural gas

exporting options via Turkey could change the two sides’ incentive structure that

would favor a settlement. As the aforementioned examples demonstrate, the pres-

ence of natural gas can change the incentive structure on an economic level, but it

does not necessarily do so on a political one. Unless there is desecuritization in the

political and military sectors, energy alone cannot lead to a political transformation.


Energy may also inadvertently have a negative impact on bilateral relations.

Indicatively, Israel’s reach towards Cyprus increases the chances of failure in the

reconciliation process between Israel and Turkey. The Cypriot-Israeli developing

relations demonstrate that energy may contribute towards a political reorientation

that would otherwise be ignored due to the high political cost associated with it—

i.e. the deterioration of its relations with the Arab states and Turkey for Cyprus and

Israel respectively. Energy in other words may not lead to a complete political

transformation, but it does provide sufficiently powerful excuses for actors to

justify their choices. For instance the Cypriot government can pose a solid argu-

ment to the Arab states that cooperation with Israel is energy-focused and not based

on ideological grounds; hence there is less risk to jeopardize relations. The same

argument is made by the Israeli government towards Turkey. In both cases however

there is no guarantee that the ‘energy excuse’ would be sufficient in safeguarding

their relations.

9.5 Conclusion

As the analysis of the case studies presented above illustrates, the introduction and

effect of energy as an exogenous parameter on the securitization relations among

the various states is intimately interrelated with the existing framework of

Fig. 9.2 Eastern Mediterranean exclusive economic zones


securitization relations especially with respect to the political sector and even more

prominently in cases that involve the contestation of sovereignty. The paper

ultimately illustrates that energy as a referent object introduces a multiplier effect

to the level of securitization in existing state relations both in the positive and

negative directions with spill-over from the narrowly defined economic aspects of

energy-related state interactions to other sectors in the widened security agenda. In

this way, we identify the under-exploration of energy securitization in the literature

and the need for a cross-sectoral approach for the referent object of energy in the

widened security agenda by analysing the effects of energy-related developments

on existing securitization relations.

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Author Biographies

Contantinos Adamides (PhD, University of Birmingham) is Assistant Professor of International

Relations, Department of European Studies and International Relations at the University of

Nicosia (UNIC). He also serves as the Director of the Diplomatic Academy at UNIC and as a

Research Fellow at the Research and Innovation Office. His research interests and most recent

publications are in the areas of energy security, ethnic conflicts, visual securitization in protracted

conflicts and on European foreign policy.

Odysseas Christou (PhD, The University of Texas at Austin) is Assistant Professor in Govern-

ment, International Law, and International Relations, Postgraduate Programme Coordinator of the

Department of Law, and Associate Faculty Member of the Department of European Studies and

International Relations at the University of Nicosia. He has previously taught at the University of

Texas at Austin, the Texas Lutheran University, and the University of Cyprus. He has held

research affiliations with the Department of Government and the Irma Rangel Public Policy


http://mideastafrica.foreignpolicy.com/posts/2014/01/13/defending_israel_s_natural_gas

http://mideastafrica.foreignpolicy.com/posts/2014/01/13/defending_israel_s_natural_gas

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http://www.ft.com/intl/cms/s/0/5db74ce8-9978-11e3-91cd-00144feab7de.html#axzz2znvMTK2i

http://www.gmfus.org/wp-content/blogs.dir/1/files_mf/1394551538Shaffer_NewEnergySupplies_Mar14.pdf

http://www.gmfus.org/wp-content/blogs.dir/1/files_mf/1394551538Shaffer_NewEnergySupplies_Mar14.pdf

http://cyprus-mail.com/2014/02/21/lakkotrypis-no-pipeline-to-turkey-without-cyprus-solution/

http://www.timesofisrael.com/palestinians-to-be-first-buyers-of-israeli-natural-gas/

http://www.timesofisrael.com/palestinians-to-be-first-buyers-of-israeli-natural-gas/

http://mfa.gov.ct.tr/cyprus-negotiation-process/natural-gas/

http://mfa.gov.ct.tr/cyprus-negotiation-process/natural-gas/

Institute of the University of Texas at Austin, CARDET and the Center for European and

International Affairs of the University of Nicosia. His research interests and most recent

publications are in the areas of energy security, political violence, conflict resolution, American

and European foreign policy and the effects of the ongoing global economic crisis.


Terrorism in Transition: The Implicationsof Cyber-Terrorism 10Trevor Calafato and Paul Caruana

Abstract

Terrorism is one of the fears that influenced the economic, political and security

transformations of contemporary societies. The effects of terrorism can be traced

back to ancient Greece and evolved en par with societies through the centuries.

The anarchist ‘propaganda by deed’ methodology was followed by other terror-

ist movements later on in history, as well as in the modus operandi of the

terrorist organization in the last decade. So the question remains, so now

what’s next? The Internet and its ‘natural habitat’ gave the possibility to develop

what has been recognized as cyber-terrorism. The services provided by the

Internet allow terrorists to adopt an entrepreneur approach to their business.

New products are quickly sought and customised to achieve defined goals like

any other enterprise. The Internet allows terrorists to spread their message to a

far wider audience than that permitted by other non-Internet environments.

Cyber-terrorism evolved from being the support infrastructure necessary to

commit an attack to the attack itself. This lethal cocktail kindles the need to

rethink the economic, political and security strategies in order to mitigate the

effects of cyber-terrorism.

10.1 Introduction

Societies are constantly undergoing transitions and security is not immune to such

changes. One of the main scourges that affected security on a global scale was and

is terrorism. After the event of September 11, 2001, authorities, policymakers and

academics inquired terrorism and its effects on different aspects of societies.

T. Calafato (*) • P. Caruana

Department of Criminology, University of Malta, FEMA Annex Block B New, Humanities

Bld, Msida 2080, Malta




207



This work intends to show that this is only a natural process and that the concept of

terrorism was always present and evolved, and keeps on evolving, to survive the

progress of time. After looking at the development that terrorism experienced

through history, this article will discuss how terrorism started to use Internet to

develop further and obtain more destructive outcomes with lesser efforts. This also

justifies the coined nomenclature of ‘cyber-terrorism’, which when searched on

Google Scholar provides over 51,000 scholar articles of which around half were

published in the last 10 years.

10.2 Terrorism: The Historical Perspective

Terrorism is a kind of warfare where various violent strategies are adopted and

aimed at realizing particular political objectives. Since most of the times the

definition of terrorism is coined by states, this term tends to describe violent acts

committed by non-state actors. However, defining terrorism remains a major

difficulty because of the negative connotations associated with this term, rather

than simply providing a description like in the case of other criminal activities.

‘Terrorism . . . emerged in many different forms and out of such various

motivations as religious protest movements, political revolts and social uprisings’

(Laqueur 1987: 12). History illustrates terrorism as a dynamic phenomenon, which

varies according to the culture and geography. Though perceived to be the product

of the twentieth century, terrorism evolved through years; adapted to cultures,

geography and social dynamics. This section discusses historical episodes of

violence that exerted political pressure on state and authorities.

In 356 BC, Herostratos, an arsonist, destroyed the Temple of Artemis one of the

Seven Wonders of the Ancient World. Herostratos, considered the first terrorist in

history, was ‘a shadowy figure of whose life nothing is known before he was

apprehended, tortured, and executed’ (Borowitz 2005: xi). Herostratos’s death

sentence included the domnatio memoriae. This clause implied a damnation of

the person’s memory imposing a ban on the mention of the name of that particular

person. ‘Herostratos became paradigmatic of the morbid quest for eternal fame

through crimes of violence’ (Borowitz 2005: xi). Herostratos was an example of

destructive political violence and his acts encouraged attacks on lives and

monuments, creating the ‘Herostratos syndrome’ (Borowitz 2005).

The Herostratic criminal manifested self-destructive desires aiming to achieve

goals with any means while simultaneously generating ‘self-glorification’ and

feelings of insecurity among the public (Borowitz 2005). Herostratos’s motivations

paralleled contemporary terrorist motivations, who aspire to seek fame and improve

his social situation from suffered experiences. In a Herostratic approach,

sympathisers worship contemporary suicide bombers as martyrs. Leung (2003)

reported, ‘It is something to aspire to be, a martyr . . . In all my teenage time, my

symbols were body-builders and movie stars and singers and people like that. Then

it changed . . . the guerrilla, the fighter, then it was the stone thrower, and today it isthe martyr.’

208 T. Calafato and P. Caruana

The sicarii, assassins and the Indian thugs also engraved their names in the

history of terror. These groups used rudimentary methods of attacks such as knives

or strangulations to spread terror. Weapons evolved and so did the methods of

attacks used by terrorists. In the nineteenth century Europe new ideologies and new

technologies such as the nitro-glycerine emerged, creating a glimpse of future

methods of attack. Carlo Pisacane, an extremist republican Italian and known

progenitor of the axiom ‘propaganda by deed’ (Hoffman 2006: 5), venerated the

use of violence as the ultimate means to attract attention and to publicise the acts of

a revolutionary group. Pisacane wrote, ‘the idea of propaganda is a chimera . . .Ideas result from deeds, not the latter from the former, and the people will not be

free when they are educated, but educated when they are free’ (Woodcock 1977:

43–44).

The group Narodnaya Volya also put into practice Pisacane’s dictum (Hoffman

2006) and confronted the Russian czar, senior officials and their tyrannical ruling

methods. Creating terror and horror to catch the attention of the public realised the

theory of ‘propaganda by deed’. After numerous failed attempts, the czar was

blown up in St. Petersburg in a suicide attack. The assassination of Czar Alexander

II led to the demise of this group because the police arrested most of the

conspirators and executed some of them bringing the extinction of Narodnaya

Volya (Hoffman 2006).

Soon other revolutionary groups motivated by the anarchist ideology that spread

over Europe and America. Jean-Jacques Rousseau was an aspiration for this politi-

cal doctrine. Rousseau’s quote ‘man was born free and is everywhere in chains’ is

one of the primary anarchist’s principle. Anarchists adopted the perspectives of a

primitive world and considered institutions the catalysts of corrupt human ideas

(Joll 1979). Revolutionary anarchist thinkers spread over Europe and the Americas

invoking fear through propaganda by deed and established the Anarchist Interna-

tional (or Black International) (Gearson 2002). Anarchist International aimed to

spread ‘a myth of global revolutionary pretensions, stimulating fears and suspicions

disproportionate to its actual impact or political achievements’ (Hoffman 2006: 7).

This movement annotated the move from tyrannicide to terrorism, from the dagger

to the bomb (Rapoport 1971). Anarchists exploited bombs to indiscriminately

attack and used fear as a political tool. This modus operandi and formed ‘the

impression of a giant international conspiracy . . .which in actual fact never existed’(Laqueur 1987: 18). This wave of terror made nineteenth century anarchism the

progenitor of modern day terrorism, even though it ‘made little tangible impact on

both the domestic and the international politics of the countries affected’ (Hoffman

2006: 7).

The political violence initiated in the nineteenth century instigated the working

class to fight and ‘terrorism became endemic’ (Laqueur 1987: 19). Laqueur (1987:

19) claims that Spain was a cove for ‘all sort of anarchists’ and also rippled into

Latin America. Attacks, prior to the First World War, were associated with extreme

left-wing dogma. In subsequent years terrorist manoeuvres were supported by right-

wing and separatist groups, which were often associated with Fascist groups in

various parts of Europe (Laqueur 1987). ‘Anarchism had long outgrown its terrorist

10 Terrorism in Transition: The Implications of Cyber-Terrorism 209

phase’ (Laqueur 1987: 20) as from both right and left focused on mass parties. After

WWII terrorism seemed to be a factor of indigenous nationalist groups that

emerged from various anti-colonial campaigns such as Israel, Cyprus and Algeria.

These campaigns supported wars for the liberation of their nation and formed the

maxim that ‘one man’s terrorist is another man’s freedom fighter’.

Among the terrorist activities outside Europe, the 1940s witness the activities of

the Muslim Brotherhood and other extremist groups (Laqueur 1987). In the 1960s

and 1970s, radical-left oriented groups predominated the scenes, such as, the

German Red Army Faction (Rote Armee Fraktion commonly known as ‘Baader-

Meinhof Group’), Italy’s Red Brigades (Brigate Rosse abbreviated as the ‘BR’),

and the French Direct Action (Action Directe abbreviated as the ‘AD’). In recent

years, the ideological terrorist flames of some of these groups, like the Red Brigades

were still alive and involved in assassinations (Gearson 2002). Ethno-separatist

groups also started to emerge in this period, and included groups like the Spanish

ETA (Euskadi Ta Askatasuna meaning ‘Basque Homeland and Freedom’). Terror-

ism in the 1970s and 1980s involved the activities of various groups associated with

the struggle against Israel. The activities of these groups included aircraft hijacks

and hostage-takings, which resulted in international terrorism. An aura surrounded

international terrorism indicated that some terrorist acts were state-sponsored with

the scope of affecting foreign policies. Terrorist methods of attack continued to

develop and started to employ suicide terrorism. Groups from various nations such

as Chechnya, Sri Lanka, Yemen, Lebanon and Israel, adopted this modus operandi.

The LTTE’s (Liberation Tigers of Tamil Eelam) suicide attacks provided signifi-

cant evidence that in extreme political and psychological circumstances groups can

resort to suicide terrorism even if they do not pertain to fundamental religious

terrorist groups (Hoffman 2006).

Al-Qaeda’s simultaneous attacks in the United States, in Madrid and later on in

London demonstrated the dynamism of this group in exploiting suicide terrorism

besides other tactics. Al-Qaeda’s versatility also incorporated the use of ‘the

internet to disseminate their views to a wider public, and they have come to the

realization that establishing their presence in cyberspace is nearly just as critical to

their long-term success as any military triumph’ (Weimann 2006: 63). This inno-

vative aspect of terrorism indicated the continuous dynamism of terrorists, which

security forces are not always able to anticipate. Chief of staff of President Bush’s

Critical Infrastructure Protection Board, stated ‘we were underestimating the

amount of attention [al Qaeda] was paying to the Internet’ (Gellen 2002, cited in

Weimann 2006: 64). U.S. Officials tried to control Al Qaeda by hacking their

original website but this group managed to open this webpage in more than

50 websites (Weimann 2006). The transition from the dagger to the bomb, to

suicide attacks and to the use internet to serve their aims, indicates how terrorists

evolve their methods according to the surrounding circumstances. This uncurbed

evolution of terrorism is resulting into a new kind of terrorism that looks at the

Internet as a tool, and exploits cyberspace to its own advantage.

Terrorists exploit the Internet like other users (Denning 2010). Heicker€o (2008)

and Noor (2011) argue that the main reasons why terrorists find the Internet so


alluring is the low cost of launching any form of cyber-attack. Yet it is important to

highlight that the technical skills necessary to initiate such attacks are on the

increase (Conway 2011). Ogun (2012) lists a number of attractors that make the

Internet an easy access tool that is not bound by any regulations or other forms of

state controls. Also the Internet is used by large audiences it facilitates interaction

in-between users as it creates a multimedia environment that allows a fast flow of

information with low costs of development, but most importantly it furnishes

anonymity to the user. Among that motivators that encourage the use of Internet

to commit crime Brunst (2010) identified: location independence, speed, anonym-

ity, internationality and cost-benefit ratio. The singular factors are also taken in

consideration by terrorists and exploit them to their advantage. Abdukadirov (2010:

614) claims those terrorists are ‘innovate and adapt to their environment . . . [and]change their tactics and targets as well as find new sources of funding and supplies.

They are alert to opportunities and are willing to take risks and seize those

opportunities’. The Internet offers them an ideal platform and a global audience

that would otherwise be impossible to reach.

The Internet has provided organised crime a new lease of life allowing it to

evolve adapting to its uniqueness along the way. The way such groups are loosely

and anonymously formulated, cutting down on expenses and attacking wider

audiences for larger returns mirrors the needs of terrorist organisations. Gordon

and Ford (2002: 641) suggested that the Internet “facilitates the creation of entirely

new terrorist groups [and] no monies would be required for actions, and members

could organize themselves quickly and easily in the anonymity of cyberspace”.

Terrorist organisations use the Internet also to research, coordinate training, raise

funds, launch media operations, attract more recruits and also to portray their

radicalized ideologies (Mantel 2011). Though it is interesting to explore how

different terrorist use the cyber-world to interface with the real world, the aims

of this paper are: to investigate what is cyber-terrorism; discuss the possibilities of

using this modus operandi to attack the real world; and provide a series of

recommendations to manage better the situations, as well as suggesting potential

future research.

10.3 Cyber-Terrorism

The fall of the Berlin Wall on the 9th November 1989 did more than simply trigger

a process that would liberate the people of the former Soviet Empire. The Berlin

Wall represented a struggle between capitalism and communism that effectively

divided the world into two economic systems. The demolition of the Berlin Wall

allowed for these two great markets to join up into a colossus opportunity to create a

single global market economy. Friedman (2006) argues that the fall of the Berlin

Wall coupled with the rise of the windows enabled PC set in motion a process that

flattened the global landscape. The rapid growth of Internet availability, usage and

services accelerated this global process even further. By the end of June 2012,

34.3 % of the world’s population were connected to the cyberspace (Internet World


Stats 2014). This translates to 2.4 billion of the world’s population having instant

access to global markets, resources and services irrespective of geographic location.

This Internet driven flattened global market represents an opportunity for business

but also fosters an ideal climate for criminal activity. While discussing

cybersecurity Yannakogeorgos (2011) highlighted that the fundamental Internet

protocols do not provide reliable security measures. To sustain this argument

Yannakogeorgos (2011: 257) echoed Leighton (2006: 44) stating that these flaws

were not designed for a globalized system and consequently can ‘imperil more than

individuals and commercial institution. Secure installations in the government and

military can be compromised’. Terrorism is not considered to be an exception and

cyber-terrorism is become more of a real threat since our lives are increasingly

wrapped and embedded in Internet based technologies (Blakemore 2012).

It is difficult to box a harmonised definition of cyber-terrorism particularly in

light of the fact that it has remained an elusive proposition to find a global definition

of terrorism despite numerous attempts (Schmid 2011). This lack of agreement has

overflowed into the cyber-world making a global definition of cyber-terrorism a

distant realisation. Claims that terrorism carried out in cyber-space represents a

mixture of cyber-crime and terrorism. Attacks carried out in cyber-space

representing a series of computer misuse tactics for terrorist purposes. Although

cyber-crime and cyber-terrorism might be perceived to be similar the distinctive

identifiers are the underlying motivations (Janczewski and Colarik 2008). Denning

elaborates further by stating that cyber-terrorism is generally understood to refer to:

. . .highly damaging computer-based attacks or threats of attack by non-state actors against

information systems when conducted to intimidate or coerce governments or societies in

pursuit of goals that are political or social. It is the convergence of terrorism with cyber-

space, where cyber-space becomes the means of conducting the terrorist act. Rather than

committing acts of violence against persons or physical property, the cyber-terrorist

commits acts of destruction or disruption against digital property.

This definition focuses more on electronic damages caused by terrorist attacks

on information systems carried out using cyberspace rather than physical damages

against conventional targets. However, the variety and dynamic essence of network

vulnerabilities, as well as the tactics available for criminals and terrorist makes it

impossible to identify and document all the threats that might be incurred through

cyberspace (Yannakogeorgos 2011). Denning (1998) classified a number of tools

and tactics that criminals, terrorists and other cyber-offenders might be using.

These tactics were namely: eavesdropping and packet sniffing; tampering or data

diddling; snooping and downloading; spoofing; jamming or flooding; injecting

malicious code; exploiting flaws in design, implementation, or operation; and

cracking passwords, codes, and keys. Yannakogeorgos (2011: 258) states ‘these

archetypical types of cyber-attacks have become enhanced and more widespread

. . . cyber-attacks are more complex . . . [and] may use all the above attack methods

to penetrate an information system.’ However, Conway (2011) claims that cyber-

space delimits the damages of cyber-terrorism in comparison with ‘conventional’

terrorist attacks. Conway (2011) argues that cyber-terrorism is at a disadvantage


with conventional terrorism because cyber-attacks are less spectacular and conse-

quently the audience is different from that linked to conventional terrorism particu-

larly after the devastating effect of the 9/11 incidents. This lack of audience also

limits that amount of propaganda; hence the number of potential recruits is lesser

than that of conventional terrorism. Conway (2011) also explained that the sources

of cyber-attacks are mostly anonymous and as a result these cyber-terrorist attacks

are most likely to be looked at as accident rather than a terrorist attacks.

Heicker€o (2008: 2) claims that “cyber-terrorism is a part of information warfare

and is a generic term that involves a number of hostile activities towards society

with political, religious, ideological and/or ethical aims”. This definition positions

cyber-terrorism within the context of information warfare. Warfare is considered a

conflict between state and non-state actors. Hostile activities referred to in this

definition could constitute any undertaking that supports the overall objectives of

the information warfare activists including the use of the Internet as a supporting

mechanism rather than the end itself. Schjolberg identified a number of elements

that constitute the characteristics of cyber-terrorism namely:

. . . an attack has to intimidate or coerce a government or its people in furtherance of

political or social objectives. An attack should result in violence against persons or

property, or at least cause enough harm to generate fear. Serious attacks against critical

infrastructures could be acts of cyber-terrorism, depending on their impact.

This approach introduces the concept of violence against persons and property as

a direct impact of cyber-terrorism. Additionally through this method cyber based

terrorist attacks are not threats limited to information systems but also look at the

wider possibility of inflicting direct harm to persons and property. This viewpoint

blends the physical and digital worlds because ‘cyber-terrorism may be used not

only to inflict damage in itself, but [also] in combination with conventional or

nonconventional terrorism’ (Ariely 2008: 9). Likewise, Goodman et al. (2007: 200)

agree that cyber-attacks ‘can be launched in conjunction with more traditional

forms of terrorist attacks in order to severely exacerbate the consequences’. Britz

(2009: 155) portrays cyber-terrorism as;

. . . the premeditated, methodological, and ideologically motivated dissemination of infor-

mation, facilitation of communication, or attack against digital information, computer

systems, and/or computer programs which requires advanced planning and is intended to

result in social, financial, physical or psychological harm to non-combatant targets and

audiences; or any dissemination of information which is designed to facilitate such actions.

These viewpoints on cyber-terrorism bring out a number of elements that

distinguish the different approaches terrorists adopt when exploiting Internet

facilities in support of their goal. Cyber-terrorists use the Internet to target elec-

tronic resources in support of their overall strategy, as well as a prelude to physical

and personal attacks. Reflecting on the fusion of the virtual world with the real one

it is possible to identify a transition in terrorism and these approaches imply a

myriad of combinations of potential new threats to economic, political and security

systems. These attacks are not visionary scenarios and the past cases of attacks on


computer systems indicate that the likelihood of occurrence of these attacks is

quite high.

10.4 Attacking Computer Systems

The distinct role that computer systems have in our everyday life and business

management raises the risk of being targeted as potential cyber-attack material

(Janczewski and Colarik 2005). Janczewski and Colarik (2005) highlighted the

possibilities use of physical intrusion (hacking), denial of services or distributed

denial of service (DDOS) attacks, web defacements and semantic attacks, domain

name server (DNS) attacks and routing vulnerability exploits.

Cyber attackers and terrorists are rational offenders and look for targets that

leave a significant effect in order to reach their objectives. Perhaps the most

reported cyber-attack against a state was the 2007 aggression directed towards

Estonia.1 For many attacks that resulted in distributed denial of service attacks, is

the ‘pure’ form of cyber based attack because it annihilates or seriously limits the

services provided by a state. Despite the serious impact, this attack was not always

expressed as cyber-terrorism (Charvat 2009) because the motivation behind the

attack was not been linked back to a terrorist motive. Nonetheless attack against

Estonia demonstrates the devastating the impact of such a cyber-attack, which

highlights that this threat should not be underestimated or overlooked. Technical

infrastructures are becoming increasingly attractive to terrorists as potential targets

because the majority of societies are more dependent these technological setups.

Cyberspace is continuously under assault and Denning (2007) indicated that

attacks that are not considered as cyber-terrorism have been the most damaging

DDOS attacks so far. These attacks have been carried out for financial reasons but

they were also linked to political and social goals even though their repercussions

had been minimal. As financially motivated individuals benefit from Internet based

opportunities, Brunst (2010) underlines that terrorists are also interested in financial

gain but from a different perspective. Besides the generation of income, that is

predominant in the support of ideologies, terrorists also aim at ‘the generation of

fear, the creation of economic confusion or a discrimination of the political

opponent’ (Brunst 2010: 56). Terrorists exploit system weakness for more than

1 Estonia was the victim of a nationwide sustained cyber-attack during a 2 week period in April and

May 2007. Its information critical infrastructure was the main focus of this attack. The targets

included government and parliament portals, financial institutions, ministries, media and news

broadcasters. A number of distributed denial of service attacks focused their wrath on the country’s

infrastructure forcing some of them to shut down for prolonged periods. These attacks were

supported by a number of defacement attacks that planted Russian propaganda on several Estonian

websites. In retaliation a number of Russian web pages were compromised and defaced. Estonia

blamed the attack on Russia after a period of fall out between the two nations related to the shifting

of a Soviet-era war memorial in Tallinn. The country appealed to European Union and NATO

partners to take firm action against this form of cyber threat.


monetary gain. Among the methods of computer misuse commonly related to

terrorist there is; hacking, data modification, defacements, data espionage, denial

of service attacks and hybrid attacks (Brunst 2010: 57–65). In discussing the effects

of cyber-attacks Heicker€o (2008: 5–6) quoted when indicating physical effects

(where whole data structures are destroyed or made inaccessible), syntax effects

(where the logic of a system is distorted) and semantic effects (where the trust in a

system and its information is obliterated). All of the three effects result in economic

and political repercussions as resulted from the terrorist attacks of Spain in 2004

(Montalvo 2010). Montalvo (2010: 201) also explained that terrorism increases

uncertainty, escalates political instability and in return this influences economic

growth and investments. This demonstrates that cyber-terrorism should not be

underestimated particularly when used in combination with conventional attacks

(Ariely 2008; Goodman et al. 2007: 200). Gorge (2007) adds to this list by

including virus attacks, regardless as to whether they are specific or let loose in

the wild, as another form of cyber-attack that may be used by terrorists.

An incident that was widely described as cyber-terrorism was the 2010 Stuxnet

attack on Iranian nuclear facilities in the city of Natanz (Conway 2011). During this

attack a malicious code deliberately damaged physical equipment. The attack did

not appear to have been launched via the Internet. As are most sensitive sites Natanz

nuclear facilities were air-bagged to eliminate access from the outside world.

According to Constantine (2011) the methodology used suggested that the mali-

cious code was installed through a USB memory stick. The malicious code was

designed to look for a specific software environment. Once identified, the malicious

code triggers a payload that manipulates specific industrial motors causing self-

destruction thus eliminating the targeted equipment (Constantine 2011). Farwell

and Rohozinski (2012: 108) contended that a malware like STUXNET,

demonstrates the possibility ‘to have the specific intended effect while avoiding

or minimising unplanned side effects by clearly differentiating between the propa-

gator, or boost-phase code that disseminates the program, and the actual payload

code that creates the physical effect on a target’.

These two cases of cyber-attacks outline delineate that computer systems can

and are attacked in different ways and also outline the evasive manoeuvres that

terrorists adopt to safeguard their operations and sharing information across the

Internet in order to protect their identity and geographic position. The possibility of

conducting an act of cyber-terrorism and remaining anonymous fits well with the

structure of the Internet and Goodman et al. (2007) sustain that this forms part of the

premeditation of terrorist actors. However, this point of view contrasts with

Borowitz’s (2005) ‘Herostratos syndrome’, where the terrorist actors aim at

generating ‘self-glorification’ besides spreading a sense of insecurity among the

public. Nonetheless, the Internet remains an environment that facilitates the forma-

tion and production of new terrorist groups that do not depend on substantial

financial needs to support their actions and the affiliates could organize themselves

instantaneously and without unnecessary hindrances through cyberspace (Gordon

and Ford 2002: 641).


Conway (2011) argued that terrorists lack the necessary technical skills to launch

any major shocking attack. However, there is nothing to hold from believing that

such possibilities are in the offing. The STUXNET incident demonstrated a glimpse

of the attack approaches and combinations that are possible. This recalls the number

of vulnerabilities and combination of attacks as highlight by numerous researchers

(Ariely 2008; Denning 1998; Goodman et al. 2007; Heicker€o 2008; Janczewski andColarik 2005; Yannakogeorgos 2011). Thus, the threat of cyber-terrorism, whether

for financial gain or ideological reasons is real and cannot be discarded or ignored.

Since most cyber-terrorism incidents have remained unclaimed or untraced cyber-

terrorists keep on being ignored or considered a distant threat. Nonetheless these

cases and related research provide solid evidence that the threat is present and the

effects can be devastating if not managed properly.

Denning argues that cyber-terrorist adopt a number of identity evasive

manoeuvres that include using “cyber cafes, anonymous email accounts, virtual

dead drops, coded and encrypted email, encrypted files and disks, hidden files and

directories, password-protected websites and forums, and anonymous web brows-

ing via proxies”. This indicates that terrorists operating and sharing information

across the Internet go to extremes to safeguard their identity, geographic position

and affiliation to a terrorist organisation. This fits well with the structure of the

Internet which was original developed as a largely unregulated and anonymous

information and technical platform available to all.

The possibility of working anonymously on the Internet cannot have been

overlooked by terrorist individuals or organisations. So much has been written in

the media about these possibilities that it is inconceivable that terrorists have not

taken note (Goodman et al. 2007).The advantages of remaining covert may out-

weigh the advantage of making a presence felt or by claiming an attack as being the

work of a specific individual or organisation. The “theatre of terrorism” can afford

to take a back seat to allow for greater riches in the form of more compromised

systems, larger information returns and exclusive intelligence than can be used to

formulate additional attacks. Terrorist organisations acquiring the necessary tech-

nical skills to launch major shocking attacks and incidents, like the STUXNET

incident, provide a glimpse of the possible approaches and combinations of these

attacks.

10.5 Managing the Cyber-Security

Most of the cyber-attacks are primarily conducted by non-terrorist hackers and only

a few have the potential to launch a serious cyber-attack (Weimann 2006: 164–

165). However, the threat of cyber-terrorism remains a real one and policymakers

and security managers needs to provide adequate protection against these

eventualities. Lewis (2006) explained that at both national and international levels,

policymakers recognized the need to address attacks coming from cyberspace. In

order to manage these threats it is necessary to harmonize legislations that protect

the interests of the state, the public and needs of other stakeholders.


The information society needs to trust the networks being used and to ensure

adequate management the EU integrated these matters within the counter-terrorism

legal framework. The Stockholm Programme addresses prevention mechanism

with particular emphasis on countering radicalization (O’Neill 2012). Among the

key areas of development under this programme is the threat of cyber-terrorism,

together with economic crime and corruption. On the problem of cyber-crime the

EU member states are demanded to comply the Convention on Cybercrime (2001)

by the Council of Europe which aims ‘to pursue a common criminal policy aimed at

the protection of society against cybercrime, especially by adopting appropriate

legislation and fostering international co-operation.’ Yet as O’Neill (2012: 258)

explained ‘a gap is clearly developing in the EU and member states’ legislative and

law enforcement responses to the twin issues of cyber-crime and cyber-terrorism.’

This emphasis on common legislative frameworks and law enforcement do not

necessarily create a panacea to all cyber-crimes. Hence, cyber-security remains a

relevant topic to the majority of businesses and critical infrastructures around the

world. Considering the number of threats mentioned by various researchers (Ariely

2008; Denning 1998; Goodman et al. 2007; Heicker€o 2008; Janczewski and Colarik2005; Yannakogeorgos 2011) it is necessary that cyber-security includes a multidi-

mensional approach. In order to maintain a secure cyber-environment, security

needs to face challenges that are constantly changing and to address threats that

come both from within and extends to threats that originate from outside the

organization.

Controlling these threats keeps on becoming a bigger challenge in safeguarding

cyber-environments especially when smart phones with advanced computing tools

are so common. Vulnerability assessments keep on improving cyber-security for

the stakeholders and the staff as well as helped in creating business continuity plans.

Analysing past cyber-crime and cyber-terrorism cases helps us in assessing

vulnerabilities with the aim to keep on minimizing cyber-risks. Yet, the multidi-

mensional potential of this threat requires that every member of staff and

stakeholders pass on their contribution to provide an adequate management (Land

2014). Private industries need to be responsible of meeting standards set by

governments, Internet service providers should be accountable to report any suspi-

cious activities and computer users necessitate to integrate proactive measures and

to be knowledgeable to avoid becoming preys of attackers. These measures will

ensure that networks are more protected. However, similar to other contexts where

the aim is to prevent and reduce crime, while securing particular assets, there will

always be attacks that are exceptional because they discover unusual vulnerabilities

and flaws, and cyber-space is no exception. Thus, assessments and re-evaluations of

potential threats to our systems need to be continuous and they should develop

accordingly. These incessant developments keep on changing our perception of

risks. This also demonstrates that the implications of cyber-terrorism are an inevi-

table reality and the related consequences could have devastating effects both in the

virtual and the real world.


10.6 Conclusion

After an overview of the development of terrorism through human history one can

only confirm that cyber-terrorism is a new evolution of this phenomenon. As

happened in the past this development affects politics, economies and related

securities, and will consequently imply transformations in our societies. However,

the impact of cyber-space on terrorism is bleaker than conventional terrorism and

this makes it more difficult to measure its effects. Being so unaware of the extent of

cyber-terrorism prompts different argumentations, some of which suggest that, the

threat of cyber-terrorism is widely exaggerated. On the contrary Conway (2011)

considers the threat of terrorism as incidental outcomes deriving from technical

faults and in some cases these incidents are also possibly covered up. As Nellis and

Savage (2012: 764) suggest that information may be withheld because ‘law

enforcement agencies may be reluctant to release information about terror plots

to “protect” the public and control public fear.’ Yet, cyber-terrorism keeps on

evolving and in order to manage this threat from every possible angle it is necessary

to address this issue in a collective way where different stakeholders and Internet

users combine their efforts to curb this threat minimising direct or collateral

damage emerging from a cyber-attack.

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Author Biographies

Calafato Trevor is a Lecturer at the University of Malta in the Department of Criminology.

Before moving to university he was a probation officer for more than 6 years, where he was also in

charge of the health, safety and security of the Department of Probation. While reading a M.Sc. in

Security and Risk Management at the University of Leicester he studied the potential responses

and preventive measures of terrorist incidents in Malta. He holds a PhD from the University of

Sheffield which focuses on security measures and terrorism research. He published articles and

book chapters on security, terrorism, criminology, criminal justice and on Cesare Lombroso.

Caruana Paul has just joined the University of Malta after a career in policing. During his service

within the Malta Police, he was responsible for police ICT infrastructure, cybercrime

investigations and criminal statistics. In 2002 he was appointed as head of a specialised cybercrime

team for the Malta Police. Participating in a number of international investigations and initiatives,

Paul led this specialist team until his retirement in 2012. During this period he managed to bring

together key stakeholders addressing eSecurity and cybercrime management through a holistic

approach. Working within the Department of Criminology, Paul specialises in cyber based

criminology. He is currently participating in the Commonwealth Cybercrime Initiative helping

member states in safeguard their ICT infrastructure from cyber related threats. He is also reading

for a PhD in cyberstalking and harassment at the University of Leicester.


http://dx.doi.org/10.1080/19361610.2012.656252

http://dx.doi.org/10.1080/19361610.2012.656252

http://www.rand.org/pubs/notes/2005/N1942.pdf

Economic Consequences of MilitaryExpenditure: Evidence from SouthernEurope and Turkey

11

Darshana Udayanganie and Evangelos N. Charos

Abstract

This paper presents an empirical evaluation of national economic growth and

military expenditures. A model that includes military spending and economic

growth indicators is used to analyze a panel of countries in the Southern

European region and Turkey from 1988 to 2012. Data was obtained from the

Stockholm International Peace Research Institute (SIPRI), the World Bank and

the Heidelberg Institute for International Conflict Research (HIIK). We found

that the primary variables explaining increases in military expenditures in the

region are the military expenditures in the previous year, the GDP growth rate

and the population growth rate. This paper also focuses on investigating whether

military spending is detrimental to developing countries’ economic growth. Our

results suggest an increase in military spending is detrimental to low income

economies, compared to upper-middle and high income economies.

11.1 Introduction

Many empirical studies over the years attempt to test the hypothesis that a nation’s

expenditures on national defense carries a substantial opportunity cost, that of

slower rates of Gross Domestic Product (GDP) growth which in turn lead to

lower levels of economic output. The findings of these studies until recently can

be best described as mixed. Benoit (1973, 1978) found that military expenditure and

development were positively correlated. Chan (1987) on the other hand found a

lack of consistency in the empirical results, he found little evidence of a direct

relationship between defense outlays and economic growth, even though his

research did not prove an inverse relationship between the two variables. Similar

D. Udayanganie (*) • E.N. Charos

Department of Economics, Merrimack University, North Andover, MA 01845, USA




221



results were found by Ram (1995) and Dunne and Uye (2009). Dunne (1996) found

that military expenditures had no effect on economic growth and were likely to

have a negative effect. Finally, Dunne and Tian (2013) surveyed 170 studies and

agreed that more and more evidence show that military outlays have a negative

impact on economic growth.

This paper attempts to explain the relationship between military expenditures

and economic growth in ten countries in Southern Europe: Albania, Bosnia-

Herzegovina, Bulgaria, Greece, Italy, Macedonia, Montenegro, Romania, Serbia,

Spain; and Turkey. Turkey was chosen due to its location at the crossroads of

Europe and Asia, and its historical association with the region.

In the paper, we address two questions for the 1988–2012 period.

1. How do the movements in economic growth effect military expenditures?

2. Are military expenditures more detrimental to low income economies than to

high income economies?

Income groups considered in the analysis are based on the World Bank’s Gross

National Income (GNI) per capita criterion for classifying economies (World Bank

2013) into low income, low-middle income, upper-middle income and high income

categories. Table 11.1 shows the country classifications based on World Bank’s

criteria. As shown, some countries, such as Serbia and Italy have been consistently

classified in the same group in the period of interest, where, all other countries have

been classified in different income groups in the study period. In our study, we track

these changes for further analysis.

We combined the low-middle income category with the low income category

due to the lack of variation between low income and low-middle income. There-

fore, in the analysis, we have only three income classifications: low income, upper-

middle income and high income.

In determining a country’s military expenditures in relation to economic growth,

we followed Castillo et al. (2001), Dunne et al. (2005), and utilized descriptive and

random effect unbalanced panel data analyses (Cameron and Trivedi 2005;

Verbeek 2008). To analyze the second objective, whether military expenditures

are detrimental to low income economies compared to high income economies, we

used a random effect multinomial logit analysis suggested in Zhu et al. (2010) and

Hartzel et al. (2001).

According to Castillo et al. (2001), for any given country, the best predictor of

military expenditures in any given year is the level of military expenditures in the

previous year. Therefore, in our model we have included the previous year’s

military spending along with GDP growth rate, GDP per capita, capital formation

as % of GDP, gross savings as % of GDP and population growth1 as the main

predictors of military spending. The additional variables are standard variables used

in these types of empirical studies.

1 Exponential rate of growth of mid-years population from yeart – 1 to yeart, expressed as a %.

222 D. Udayanganie and E.N. Charos

The economic effects of military spending also need to be evaluated based on

their opportunity cost, as there is a clear trade-off between a country’s economic

growth and its civil spending. For example, if capital formation is lower, it

negatively affects long-run economic growth of a country. According to Acemoglu

(2007), an increase in capital formation is an indication of long-run economic

growth, where an increase in savings would lead to an increase in investment

in an economy in the long-run. Following Acemoglu (2007), Barro and Sala-i-

Martin (1995), we assumed that an increase in capital formation will lead to lower

military spending, which aligns with production possibilities frontier models

suggested in the economic literature. As suggested in Acemoglu (2007), Barro

and Sala-i-Martin (1995), we also assumed that an increase in gross savings as

a predictor for an increase in gross investment in an economy, hence as a predictor

of a decrease in military spending. The variables capital formation as % of

Table 11.1 World Bank’s

country classificationCountry World Bank’s country classification

Albania 1990–92: LM

1993–95: L

1996: LM

1997: L

1988–2012: LM

2009–10: UM

2011: LM

2012: UM

Bosnia-Herzegovina 1992: LM

1993–97: L

1998–2007: LM

2008–12: UM

Bulgaria 1989–2005: LM

2006–12: UM

Greece 1988–95: UM

1996–2012: H

Italy 1988–2012: H

Macedonia, FYR 1992–2007: LM

2008–12: UM

Montenegro 2008–2012: UM

Romania 1998–1999: UM

1990–2004: LM

2005–12: UM

Serbia 2008–2012: UM

Spain 1988–2012: H

Turkey 1988–96: LM

1997–2000: UM

2001–03: LM

2004–12: UM

L low income, LM low-middle income, UM upper-middle income,

H high income

Source: World Bank (2013)

11 Economic Consequences of Military Expenditure: Evidence from Southern. . . 223

GDP2 and gross savings3 as % of GDP are used in our analyses to account for the

trade-off in military spending and a country’s spending towards economic growth.

Following the “ambition” hypothesis in previous literature (Castillo et al. 2001;

Abu-Bader and Abu-Qarn 2003; Dunne et al. 2005), we test whether countries

experiencing economic growth develop foreign policy ambitions that motivate them

to increase their military expenditures. We also test another hypothesis suggested in

the literature, the “legitimacy” hypothesis (Castillo et al. 2001; Dunne et al. 2005),

which suggests the governments faced with domestic threats to their political

legitimacy increase their military spending. To test the above two hypotheses, we

use two additional random effect panel data models with dummy variables to

represent countries involved in conflicts when there is no perceived threat to their

security and countries involved in domestic conflicts. Table 11.2 shows the list of

wars considered in analyzing “ambition” and “legitimacy” hypotheses.

Table 11.2 List of wars

Country Year/s Name of conflict

Albania 1997 Albanian rebellion of 1997

1998–1999 Kosovo war

Bosnia and Herzegovina 1991–1995 Croatian war of independence

1992–1995 Bosnian war

Bulgaria – –

Greece 1974–2013 Conflict over Cyprus and Aegean

Italy 1997 Albanian rebellion of 1997

1975–1990 Lebanese civil war

2003–2011 Iraq war

Macedonia, FYR 2001 Insurgency in the Republic of Macedonia

Montenegro 1992–1995 Bosnian war

Romania 1989 Romanian revolution

1992 War of Transnistria

Serbia 1992–1995 Bosnian war

Spain 1959–2011 Basque conflict

2003–2011 Iraq war

Turkey 1974–2013 Conflict over Cyprus and Aegean

1978–2013 Kurdish-Turkish conflict

2011 Libyan civil war

Source: Heidelberg Institute for International Conflict Research (2013)

2 “Gross capital formation (formerly gross domestic investment) consists of outlays on additions to

the fixed assets of the economy plus net changes in the level of inventories. Fixed assets include

land improvements; plant, machinery, and equipment purchases; and the construction of roads,

railways, and the like, including schools, offices, hospitals, private residential dwellings, and

commercial and industrial buildings. Inventories are stocks of goods held by firms to meet

temporary or unexpected fluctuations in production or sales”: World Bank (2013).3 Gross savings are calculated as gross national income less total consumption, plus net transfers

(World Bank 2013).


The next section presents the data sources and methodologies we used in the

paper.

11.2 Data and Methodology

Our data consists of annual measures of military expenditures (in 2011 constant

dollars), military expenditures as % of GDP, capital formation as % of GDP,

savings as % of GDP, and population growth. The sample period is 1988–2012.

Data sources of the above variables are summarized in Table 11.3. Accordingly, our

military expenditure data are from Stockholm International Peace Research Insti-

tute (SIPRI), which provides consistent time series data on military spending of

172 countries since 1988. This allows for meaningful comparison of various

countries military outlays. Economic growth indicator variables and population

growth data are from the World Bank (2013). Countries’ war information is from

Heidelberg Institute for International Conflict Research (HIIK).

The primary reasons for using the above data sources is that they provide

complete, consistent and detailed time series data. However, Bosnia-Herzegovina,

Macedonia, Montenegro, and Serbia did not have the required data for the initial

period of the study due to non-reporting or because the countries were not indepen-

dent in all or part of the years in question (SIPRI 2013).

11.2.1 Models

In determining whether countries’ military expenditures rise with economic

growth, we estimate the following model:

MEi, t ¼ f MEi, t�1,GDPGrowthi, t ,GDPCapita

i, t ,%Capitali, t,%Savingsi, t,PopGrowthi, t

� �

þ εi, t

ð11:1Þ

Table 11.3 Data sources

Variable Measure Source

Military Expenditure $ million SIPRI: http://www.sipri.org/

Military Expenditure % of GDP %

GDP Growth Rate % World Bank: http://data.worldbank.org/

Capital Formation as % of GDP %

Gross Savings as % of GDP %

Population Growth %

Countries Involved in Conflicts

Due to Foreign Policy (FP)

Due to Domestic Threats (DP)

Binary (1/0) HIIK: http://www.hiik.de/en/


http://www.sipri.org/

http://data.worldbank.org/

http://www.hiik.de/en/

Where,

MEi, t is military expenditures in country i in year t in 2011 constant dollarsð ÞMEi, t�1 is military expenditures in country i in the previous year

in 2011 constant dollarsð ÞGDPGrowth

i, t is growth rate in GDP in country i in year t

GDPCapitai, t is per capita GDP in country i in year t

%Capitali, t is%capital formation toGDP in country i in year t

%Savingsi, t is% savings toGDP in country i in year t

PopGrowthi, t is population growth, measured as% in country i in year t

εi, t is the error term in country i in year t

In order to avoid any potential problems, where a country’s GDP grows faster

than its military expenditures, we employed relative changes of military outlays to

GDP. Thus, we identified the model as follows:

%MEi,t ¼ f %MEi,t�1,GDPGrowthi,t ,GDPCapita

i,t ,%Capitali,t,%Savingsi,t,PopGrowthi,t

� �

þ εi,t

ð11:2ÞWhere,%MEi, t and %MEi, t�1 are military spending as% of GDP in year t and year t� 1:

All other variables in model 2 are as described in model 1.

To test the two hypotheses, “ambition” and “legitimacy”, we have included two

additional independent variables (dummy variables) to model 2, which indicate

countries involved in war due to foreign policies (FP¼ 1) and countries involved in

conflicts due to threats to their political legitimacy (DP¼ 1). The models are:


i,t ,Capitali,t,Savingsi,t,PopGrowthi,t ,FP

� �

þ εi,t

ð11:3Þ


i,t ,Capitali,t,Savingsi,t,PopGrowthi,t ,DP

� �

þ εi,t

ð11:4ÞRandom effect unbalanced panel data regressions were used to estimate models

1–4.


The second objective of this paper is to find whether military expenditures are

detrimental to economic growth in low income countries compared to high income

countries. A random effect multinomial logit model based on Kishi (2013), Hartzel

et al. (2001), Zhu et al. (2010), Hausman and McFadden (1984) is one alternative

that researchers use to evaluate probabilities of different possible outcomes of a

categorically distributed dependent variable, given a set of independent variables.

Dependent variable categories of our model are: low income, middle income and

high income country categories. Independent variables are: % military expenditure

to GDP, growth rate of GDP, per capita GDP, capital formation as % of GDP and

gross savings as % of GDP.

The random effect multinomial logit model is given in model 5.

πi, t ¼ p Yi, t ¼ j��Xi, t

� � ¼ exp βjxi, t þ αi þ εi, t� �

1þX2k¼1

exp βkxi, t þ αi þ εi, tð Þð11:5Þ

j0 ¼ Low income1 ¼ Upper � middle income2 ¼ High income

8<: k

1 ¼ Upper � middle income2 ¼ High income

�

The probability that a country is classified into one of the classifications ( j)based on GNI of a country at time t has the form as in Eq. (11.5).

Where,

i represents a unit of observation hereafter countryð Þxi, t is a set of independent variables as described earlierð Þ f or country i in year tαi, t are random effects that capture non� observable individual effects f or

country i in year t

βj and βk are slope coefficients f or various covariates of income classes

as described above

εi, j are random errors f or country i in year t

The above error terms are assumed to be independently and identically

distributed (Hartzel et al. 2001). In this model, there are three possible country

classifications; high income ( j¼ 2), upper-middle income ( j¼ 1), and low-income

( j¼ 0). Low-income is the reference category.

11.3 Results and Discussion

This research focused on exploring the relationship between war expenditure and

economic growth in ten Southern European nations, and Turkey. We focused on the

economic growth and military expenditure patterns, along with the World Bank’s


country classification based on GNI. We hypothesized an increase in economic

growth in a country would lead to an increase in military spending. This paper also

focused on testing the two hypotheses suggested in previous literature: the “ambi-

tion” and “legitimacy” hypotheses. To test the above two hypotheses, we used two

dummy variables to represent countries involved in a conflict due to their foreign

policies and countries involved in a conflict due to political pressure in the country

itself. Previous literature suggests that military expenditure could be detrimental to

the growth of low income countries compared to middle and high income countries.

We used a random effect multinomial logit model to test the hypothesis that there

would be an increase in probability of classifying a country as a middle and high

income country with an increase in military spending, compared to a low income

country.

Interestingly, in most of the countries, in year 2010, the % of military outlays to

GDP has a record low value compared to the initial study period. Figure 11.1 shows

military expenditures as a % of GDP for the countries used in our study. As shown,

Greece, Turkey and Serbia have spent between 2 and 3 % of GDP in military

outlays, where all other countries in the sample have spent less than 2 % in such

outlays. The ongoing Turkish-Kurdish war and the continuous tension with Greece

Fig. 11.1 Military expenditure as a % of GDP in 2010


over Cyprus and Aegean could be an explanation of the high military expenditures

of Turkey and Greece, compared to other countries in the sample (see Table 11.2).

Low outlays on as a % of GDP have not happened overnight in the countries in

question. But the declining trend has been clear in the region overall. Figure 11.2

shows declines in the % of military spending to GDP in most countries in the

sample from 1988 and onwards.

The results of the random effect unbalanced panel data and random effect

multinomial logit analyses are reported in Tables 11.4, 11.5 and 11.6. Table 11.4

shows the results of model 1. We found the previous year expenditures in military,

the GDP growth rate and population growth to be statistically significant at various

levels. A 1 million dollar increase in military expenditures in the previous year will

increase military expenditures by $999,000 in the current year. A 1 % increase in

GDP will increase military outlays by $41 million, where a 1 % increase in

population will increase military expenditures by $224 million. The important

finding is the positive relationship between GDP and military expenditures.

Table 11.5 summarizes the results of model 2. The same variables are statisti-

cally significant as in model 1, but the relationship between GDP and military

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1988 1991 1994 1997 2000 2003 2006 2009 2012

%

YearData from 1988-2012 for these countries

Military Expenditure as Percent of GDP

AlbaniaBulgariaGreeceItalyRomaniaSpainTurkey

0.0

1.0

2.0

3.0

4.0

5.0

2002 2004 2006 2008 2010 2012

%

YearData from 2002-2012 for these countries

Military Expenditure as Percent of GDP

Bosnia-HerzegovinaMacedonia, FYRMontenegroSerbia

a

b

Fig. 11.2 (a, b) Military expenditure as % of GDP


expenditures is negative. We found that a 1 % growth in GDP will cause a decrease

of 0.019 % in military spending. Furthermore, a 1 % increase in military

expenditures as % of GDP of the previous time period will increase military

spending in the current period by 0.086 %, where a 1 % increase in population

will increase 0.1 % in military spending as % of GDP. These findings suggest that

economies have grown faster than increases in military spending, although we see a

growth-led increase in military spending. Our results also confirm the theoretical

suggestion that military expenditures in the previous year as the best predictor of

military expenditures in any given year (see Tables 11.4 and 11.5).

In this study, we also hypothesized countries experiencing economic growth are

likely to develop foreign policies that could increase their military spending: the

“ambition” hypothesis. The foreign policy (FP) dummy variable model is used to

test this hypothesis and the results are shown in Table 11.6. The foreign policy

coefficient is positive, which suggests an increase in military spending in a country

in the sample due to foreign policies. However, above coefficient is not statistically

Table 11.4 Random effect panel data results—model 1

Variable Coefficient Std. error Pr (>|z|)

Military Expendituret – 1 0.999*** 0.009 0.000

GDP Growth Rate 41.137** 15.746 0.009

GDP Per Capita –0.011 0.010 0.311

Capital Formation as % of GDP –1.122 15.536 0.942

Gross Savings as % of GDP 7.334 9.995 0.463

Population Growth 224.169** 96.829 0.021

Constant –175.770 374.812 0.639

R-Square

Within: 0.726

Between: 0.999

Overall: 0.949

*denotes significance at 10 %, **denotes significance at 5 % and ***denotes significance at 1 %

Table 11.5 Random effect panel data results—model 2

Variable Coefficient Std. error Pr(>|z|)

Military Expenditure % GDPt – 1 0.866*** 0.024 0.000

GDP Growth Rate –0.019*** 0.005 0.000

GDP Per Capita –4.21E-06 2.06E-06 0.106

Capital Formation as % of GDP 0.005 0.004 0.225

Gross Savings as % of GDP 0.005 0.003 0.076

Population Growth 0.102*** 0.032 0.001

Constant 0.073 0.136 0.589

R-Square

Within: 0.854

Between: 0.977

Overall: 0.911



significant and therefore, we cannot prove the “ambition” hypothesis holds true in

Southern Europe and Turkey. We also tested the “legitimacy” hypothesis; the

governments faced with domestic threats to their political legitimacy increase

their military spending. We used a dummy variable (DP) in model 4 to test the

above hypothesis, and the coefficient of the dummy variable is found to be negative

and statistically insignificant (Table 11.6), suggesting the “legitimacy” hypothesis

also does not hold true for these countries.

In this research, we also wanted to find out whether military expenditures are

detrimental to low income economies in contrast to high income economies. In

order to answer the above question, we used a random effect multinomial logit to

find the probability of a country being classified as middle income or high income,

in contrast to low income, based on GNI used by the World Bank. The log-odds

ratios of the model are given in Table 11.7. If a log-odd ratio is greater than 1, then

we can suggest a greater likelihood of classifying a country as upper-middle or high

income, compared to low income with respect to the dependent variables used in a

study. A log-odds ratio less than 1 indicates less probability in classifying a country

as upper-middle or high income, compared to low income category. As shown in

Table 11.7, a log-odds ratio of 1.007 and 1.577 suggest a country is likely to be

categorized as an upper-middle income or as a high income country, compared to

Table 11.6 Random effect panel data results—model 3 and 4

Variable

Model 3 Model 4

Coefficient (Pr(>|z|)) Coefficient (Pr(>|z|))

Military Expenditure % GDP t – 1 0.874***

(0.000)

0.860***

(0.000)

GDP Growth Rate –0.018***

(0.000)

–0.018***

(0.000)

GDP Per Capita –5.91E-06*

(0.082)

–4.59E-06*

(0.080)

Capital Formation as % of GDP 0.005

(0.284)

0.005

(0.268)

Gross Savings as % of GDP 0.005*

(0.088)

0.006*

(0.059)

Population Growth 0.098***

(0.001)

0.129***

(0.001)

FP (FP¼ 1, if foreign threats) 0.064

(0.334)

DP (DP¼ 1, if domestic threats) –0.074

(0.267)

Constant 0.083

(0.545)

0.109

(0.435)

R-Square

Within 0.853 0.855

Between 0.977 0.976

Overall 0.911 0.912



low income, with increases in military spending. This confirms that increases in

military spending may be detrimental to low income economies.

As expected, an increase in real GDP per capita, increases the probability

of classifying a country into high or upper-middle groups. Our results also suggest

that increases in capital formation have helped countries to be classified as

upper-middle income and high income categories, compared to low income

countries, which confirms economic growth model predictions on capital formation

and economic growth association.

11.4 Conclusions

This paper focused on military expenditure in relation to economic growth using a

sample of 11 countries in the Southern European and Southwestern Asian regions.

We found that increases in economic growth have resulted in increases in military

spending, where the % of GDP outlays on military has declined as economies

experienced economic growth. This suggests the region in question has experienced

an economic growth faster than the increase in military spending. Our research

showed that the main variables explaining increase in military expenditures in the

region are the military expenditures of the previous year, the GDP growth rate and

the population growth rate. We were able to diffuse the “ambitious” and “legiti-

macy” hypotheses. We also hypothesized that military spending is detrimental to

economic growth in low income economies, compared to upper-middle and high

income economies, and our results supported this hypothesis. We finally found that

increases in real GDP per capita and increases in capital formation increase the

probability of a country to be classified as high or upper-middle income nation.

Table 11.7 Random effects multinomial logit regression log-odds ratios

Base category: low-income

Log-odds ratio Pr(>|z|)

Upper-middle income category

Military Expenditure % GDP 1.007 0.990

GDP Growth Rate 0.875 0.396

GDP Per Capita 1.004*** 0.000

Capital Formation as % of GDP 1.118 0.404

Gross Savings as % of GDP 1.052 0.718

High income category

Military Expenditure % GDP t – 1 1.577 0.751

GDP Growth Rate 1.377 0.604

GDP Per Capita 1.006*** 0.000

Capital Formation as % of GDP 1.725 0.167

Gross Savings as % of GDP 1.782 0.226

Log-likelihood Ratio: –20.713



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Author Biographies

Darshana Udayanganie received an M.A. degree in Economics, as well as her doctorate in

Economics from the University of New Hampshire. She also holds an M.S. in Resource Econom-

ics and Policy from the University of Maine and a B.S. in Agricultural Economics from the

University of Peradeniya, Sri Lanka. Her research interests are in Applied Microeconomics and

Development Economics.

Evangelos N. Charos holds a B.S. degree in Mathematics, an M.A. and a Ph.D. in Economics

from the University of New Hampshire. His areas of expertise are in Statistics, Econometrics, and

Managerial and Applied Economics. In 1983 he began his tenure at Merrimack College and

currently teaches Topics in Introductory Economics, Intermediate Microeconomics, Managerial

Economics and Econometrics. Professor Charos’ research interests lie in the areas of export-led

growth, human capital, and research and development. He currently serves on the Editorial Board

of the “Cyprus Journal of Sciences” and is Co-Editor to “Koinon: Social Sciences Interdisciplinary

Studies,” a book series whose contributors’ research resides primarily in the fields of labor and

industrial sociology, organizational theory and economic and social integration in Europe.

Professor Charos’ research interests lie in the areas of export-led growth, human capital, and

research and development. He has given many presentations at professional conferences and has

written numerous articles, some appearing in journals such as the: International Advances inEconomic Research, Journal of Economic Studies, Atlantic Economic Society, Journal of Eco-nomic Literature and Weltwirtschaftliches Archiv.
