RECONSTRUCTION OF EUROPE AND NEW TYPE OF STATE MANAGEMENT CRISIS

1. RECONSTRUCTION OF EUROPE AND NEW TYPE OF STATE MANAGEMENT CRISIS April, 2011

2. INTERNATIONAL STUDIES This presentation is based on three global explorations, which were undertaken by the Post-Crisis World Institute • April – May, 2009, 223expertsfrom51countries • THE FINANCIAL ARCHITECTURE OF THE POST-CRISIS WORLD: EFFICIENCY OF SOLUTIONS • POST-CRISIS DEVELOPMENT MODELS: GLOBAL WAR OR A NEW CONSENSUS • REMODELING EUROPE: COMPETITION, SECURITY, EXPANSION • November, 2009 – January, 2010, 247expertsfrom53countries • July – September, 2010, 247expertsfrom53countries • Economists, financial analysts, owners and top managers of leading companies, journalists covering economic and political topics, academics, politicians and government employees, who live and work in states of CIS, Western and Eastern Europe, Asia, Middle East, Africa, Latin America as well in USA, Canada, Australia and Japan participated in the survey. The Post-Crisis World Institute Foundation is an independent analytical centre established in Moscow in early 2009, at the initiative of several well-known Russian organizations, including the Public Opinion Foundation (www.fom.ru), Stock Market Development Centre (www.crfr.ru), the non-commercial partnership “Business Solidarity” (www.kapitalisty.ru) and others. The Institute's activities aim to foster dialogue among representatives of expert community, business circles, civil society and government structures in order to support efficient anti-crisis and post-crisis decision-making, at the first place concerning generation of favorable environment for successful small and medium business activity. Current project is the fourth international exploration of the Institute.

3. THERE WERE SUCH PERSONS AMONG RESEARCH PARTICIPANTS… • ANSALONE Gianluca, Italy, Advisor of the President of the Italian Republic • BENAYON Adriano, Brazil, Professor of Economics at the University of Brasilia, author of Globalization versus Development • BRADFORD Colin I., USA, non-resident senior fellow, expert on the global economy and development, Brookings Institution • HEYETS Valeriy, Ukraine, Academician of the National Academy of Sciences of Ukraine, Director of the Institute for Economics and Forecasting of NAS of Ukraine • GRINBERG Ruslan, Russia, Corresponding member of the Russian Academy of Sciences, Director of the Institute of Economics at RAS • DAVIDSON Paul, USA, Editor of The Journal of Post Keynesian Economics, Professor of Economics in the Bernard Schwartz Center for Economic Policy Analysis • EEDLE Simon, UK, Head of Islamic Banking at the Credit AgricoleCIB • INOTAI András, Hungary, General Director of the Institute for World Economics of the Hungarian Academy of Sciences • PETRAKOV Nikolay, Russia, Academician of Russian Academy of Sciences, Director of the Institute of Market Issues of RAS • PINEDA Mikka D., USA, Analyst at Roubini Global Economics LLC • PRADIER Pierre-Charles, France, Jr. Vice President of Université Paris 1 Panthéon-Sorbonne; President of Conference of the Deans of Economics and Management Departments • RAHR Alexander, Germany, Director of the Berthold Beitz Centre at the German Council on Foreign Relations • URBAN Waltraut, Austria, Professor of Economics at the Vienna Institute for International Economic Studies • HARDOUVELIS Gikas, Greece, Chief Economist and Head of economic research at Eurobank EFG and many others…

4. GLOBALUNDERESTIMATION OF THE RISKS The new risk of the 21st Century – for both investors and politicians– is the failure of the traditional system of forecasting itself • Global economic crisis of 2007-2010 and beyond • In 2007 people “overlooked” it; they couldn’t grasp its global scale; at the start of 2010 they declared it was over. • It was considered essentially “financial”, while the world’s non-financial problems were growing. • Global crisis developing into a crisis of states • Finances are considered separately from politics, while geopolitical conflicts are increasing. • Defined as strictly “Greek” for a long time. • Its systemic nature and the ensuing risks for other countries are still underestimated. • European crisis of 2010 and beyond • Trends weren’t foreseen (Davos World Economic Forum report “Global Risks 2011”). • Seen as a purely Arab phenomenon, outside the context of the global economic-political crisis. • Revolutions in the Arab world 2011 • Fukushima2011: earthquake, tsunami, nuclear power plant disaster • Seen as a “local” problem, not linked to the change of technological mode in the global energy industry. “Old forecasting” doesn’t work, because it is designed forlinear “extrapolation of trends that already exist” 4

5. CRISIS OF EMPIRICAL POLITICAL SCIENCE Not a single regime fall was predicted in advance The sociology of a stable society doesn’t apply in the age of instability • Kyrgyzstan: 76% of the electorate voted for Bakiyev in 2009. • Tunisia: 89.62% voted for Ben Ali in 2009. • Egypt: 88.6% voted for Hosni Mubarak in 2005. Even after the unrest started, CIA analysts said regime change wouldn’t happen. • Traditional survey methodologies miss latent protest potential. • A positivist approach dominates in the evaluation of trends. • The “epidemic” nature of “social viruses” is not taken into account. • The absence of an organized opposition is seen categorically as “anti-revolution insurance”. • Non-linear forecasting is needed: the age of “formal majority democracy” is over; the age of “advanced groups democracy” has come. • The “Arab revolutions” are a manifestation of a more general and global process of states in crisis, affecting both democracies and authoritarian systems. The “global survey of experts” method makes it possible to spot current trends in the worldview of elites and predict how events will develop in the near future STUDY OF EXPECTATIONS 5

6. GLOBAL RECONFIGURATION Diagram 1. Continents most likely to see outbreak of conflict(November 2009 – January 2010) • NEW FACTORS OF INSTABILITY IN THE WORLD • Uncontrolled transition to multi-polarity:generally accepted rules of behaviour and adequate international institutions are lacking • Crises of states:“gap” between theold world order which is already failing (accumulated disparities and aggregate national debts) and the new world order which is not working yet • Crisis of legitimacy:the international legal system for ensuring the legitimacy of states does not work • Frailty of previous mechanisms for maintaining stability: economic (GDP growth, etc) and geopolitical (US support) Global conflict Regional conflict Asia Europe Africa North America South America • “Domino effect” in countries of the Arab world since December 2010. • “Crater of instability” will grow,taking in Asia. • Growing threat of political crises along the EU border, including in the former Soviet Union. 6

7. A NEW KIND OF SOCIAL REVOLUTION GENERAL FEATURES • Revolutions without leaders or an opposition. There is no dominant political force leading the protests, there are no particular organizers, there is no conspicuous religious or nationalist component. • Conflicts of the masses, not conflicts of class. Young people take to the streets, then the middle class joins them. A political agenda appears at the second stageand is often superimposed. • The opposition joins in after the start of the unrest • Unrest ends in regime change without system change • Spontaneousbut instantaneous “eruption”. Events began with protests by an initiative group. Then local unrest quickly grew into a popular spontaneous uprising. • Role of social networks to mobilize the masses. Active use of Facebook, Twitter, and the Flickr video hosting system. • Television acts as an effect multiplier • The internet demonstrates its political effectiveness POST-SOVIET COUNTRIES • Middle strata becoming active, young people becoming politicized • “Webification” of politics and the self-organization of citizens • Rise of nationalism in politics and the common consciousness RISING RISK OF IMPORTED REVOLUTIONS 7

8. MIDDLE STRATA IN POST-SOVIET COUNTRIES “PROTO-MIDDLE CLASS” IN THE FORMER SOVIET UNION “PENDULUM EFFECT” • The middle class is the guarantor of stability in society and the engine of economic growth, as the main consumer of technical innovations and services • The middle class initiates the emergence of totalitarian regimes at times when its situation is deteriorating • In developing countriesthe middle strata are an unpredictable and unstable group, which may initiate large-scale protests itself • Following the global economic crisis at the start of the 21st Century, economists hope for a new middle class in developing countries (above all, in Asia) PREREQUISITES OF REVOLUTION • Motive– to avoid slipping into the lower classes • Goal– anti-corruption reforms, protection of private property, accessibility of education etc • Opportunity– intellect, education and ability to self-organize • Not the dominant section of the population • High level of economic uncertainty, and consequently, anxiety (“the unhappy group”) • Ready to sacrifice some traditional liberal ideals for the sake of economic prosperity Catalyst • Agflation and new outbreaks of economic crisis Recipe for stability • Representatives of this stratum making mass transition to a higher stratum, i.e. the category of property owners 8

9. GENERATION NEXTAND SOCIAL NETWORKS DIGITAL TECHNOLOGY FUNDAMENTALLY CHANGING GLOBAL SOCIETY POST-SOVIET YOUTH: POLITICIZED IN THE COURSE OF SOCIALIZATION • A generation socialized after the end of the USSR is reaching political age. A generational gap of values and motivation is emerging. • For many, the economic crisis was a crisis of life and career plans. • The “digital generation” possesses official and non-official information to an equal degree (the young internet). • Proportion of young people aged 16-25 with interest in politics has been steadily growing in the past 2 years • Two vectors of young people’s political socialization: a search for “vertical lifts” and genuine politicization • The field of available information, and thus the field of choice, is expanding significantly • New evaluation criteria are forming, alternatives to the official ones. • The “social virus” effect is emerging • Social networks: • are becoming an important tool for decision-making • are creating conditions for rapid mobilization of citizens. In post-Soviet countries, the trend towards “parallel” self-organization by citizens is being superimposed on a deficit of mobilizing and unifying ideologies. Europe remains the model for democracy and a modern economy, and the reference point for quality of life.Its condition is an important indicator of where the world is heading 9

10. Regarding the economy Regarding politics Regarding advanced innovations Crisis of growth Regarding culture Conflict of interests Aging civilization Crisis of genre Political weakness EUROPE’S “BORDER CONDITION” Diagram 3. A metaphor: Symbol of today’s Europe Diagram2. How the EU’s position changed during the crisis • Trend of “bad expectations”: Europeans predominate among optimists; representatives of the rest of the world predominate among pessimists. WARNING SIGN! • Deterioration of the EU’s economic and political position, while civilizational potential is maintained • Europe remains a model for social order, but at the same time, a “litmus test” of problems shared by the world

11. Budget deficits Conflict of interests between strong and weak states Lack of agreed development strategy Decline in the competitiveness of European economies Demographic crisis Insufficient political will among governments “DIFFERENTIAL DIAGNOSIS” Diagram 4. Main problems of the EU (summer 2010) • The main issue is a strategy for Europe’s future development. The lack of strategy is the primary cause of the “illness”, while other problems (competitiveness, conflicts of interest, debts) are just the outward symptoms. Limitation of the resources of the previous model of European unity • Ratings agencies are threatening a new wave of lower ratings for peripheral countries. • Europe is at risk of energy shortages due to events in the Middle East. • Three outstanding economists – Paul Krugman, Joseph Stiglitz and NourielRoubini– say that the EU’s financial problems will not disappear in 2011, and the measures taken so far will only slow economic recovery. • Crisis in the EU’s ethnic policy: Germany, France and the UK have acknowledged the failure of the multicultural project. 11

12. Sensible measure • Way to stagnation «Conservation» • Removal of weak countries • Review of countries’ “weight” «Polarization» • Donations in exchange for “correct organization of the economy” «German supremacy» • EU– Beijing • EU– Moscow «New axis» RE-BOOT OF THE EUROPEAN PROJECT Diagram 6. How events are likely to develop in the EU up to 2020 • THREE SCENARIOS • Conservation –keeping the status quo; dangerous if protracted. • Split– separation of strong nucleus or uncontrolled disintegration; will launch new integration processes on different grounds. • Consolidation and further EU integration – tightening control over budget discipline of member-states, strengthening of supra-national institutions. • In March 2011 the Libyan issue once again demonstrated a split in the positions of countries within the EU, including in the “nucleus” (France– Germany). On the other hand, the Germany-BRIC axis strengthened. • Meanwhile, elements of a single economic government are effectively being introduced. In exchange for adopting a tough set of measures, the “Euro-plus pact”, France and Germany agreed to expand the EU stabilization fund (creation of the ESM). 12

13. Loss of economic competitiveness Paralysis of EU’s supra-national bodies Influx of migrants Terrorism Explosion of radical separatism Rise of popular neo-Nazism Natural and man-made disasters NEW CHALLENGES TO EUROPEAN SECURITY Diagram 5. Main threats to European security • The main threats are not military in nature • The main threat to the EU is loss of competitiveness • In a multi-polar world, competition between economies is competition betweencivilizations. Europe’s competitiveness is an issue of Western civilization’s role in the future world. • Europe’s own resources for increasing competitiveness are limited,while expansion includes new factors of development. It is impossible for the EU to maintain its leading positions within the framework of an inert “limited” model: losses will be more significantand resources more limited. But expansion is accompanied by new geopolitical risks. 13

14. Ukraine Moldova Belarus Russia Kazakhstan None EASTERN VECTOR OF THE EU Diagram 7. Prospects for EU accession (in 5-7 years) • The former USSR has passed an historic boundary:Estonia has joined the Euro-zone, Kyrgyzstan has joined the “failed states”. In the crisis of future self-determination, attitude towards the EU becomes a key issue. • Indicator– The EU’s policy towards Turkey. If Turkey becomes a fully-fledged EU participant, this will open “the gates to the East”, above all for further expansion in the post-Soviet space. FORMATS OF INTEGRATION AND COOPERATION ALONG THE EAST-WEST LINE • 60%of European experts do not believe the new post-Soviet countries will join the EU in the near future. • In the eyes of Russian experts themselves, there is no prospect of Russia becoming an EU member. • Russia and Kazakhstan cannot be integrated into the EU and included in the Euro-zone according to the model of the Baltic states and the small states of Eastern Europe. • Future economic vector:technologies in exchange for energy resources (in light of the EU’s energy crisis). • Future political vector:joint security systems, including against non-military threats. Possible areas of “crisis-type” European expansion: Moldova, Belarus and Ukraine. 14

15. CUSTOMS UNION OF RUSSIA, KAZAKHSTAN AND BELARUS Diagram 9. Customs Union’s effect on integration with Europe Diagram 8. Will the Customs Union develop into a Eurasian economic union? Yes, in the short term Only in the long term No, never It helps It has noeffect It hinders • Europeans take the Customs Union’s prospects more seriously than others Diagram10. Nature of Customs Union • The post-Soviet space will become a field of competition: the SCO is strengthening and expansion of European policy to the East is inevitable. • The Customs Union commission starts working as a supra-national body of the CES from 1 Jan 2012. • To successfully construct the CES, countries’ macroeconomic policies need to be coordinated on the basis of a common development strategy. Reintegration of post-Soviet countries Reciprocal strengthening of two similar economies Russia’s Asian integration The EU’s role in Eurasian integration projects needs to be defined. In future, a symbiosis of the EU and CES is possible, based on strong partners complementing each other. Utopia Economic expansion of rising Kazakhstan 15

16. 55 45 32 24 24 18 17 17 16 RUSSIA: IN THE DANGER ZONE Diagram11. Is Russia part of European civilization? Diagram12. What hinders Russia’s European modernization? ! Source of energy resources and raw materials Corruption Equal partner Lack of strategic planning • Corruption and lack of strategic planning are the main obstacles to the development of Russia’s middle class. Vulnerability of private property Security buffer Ineffective state governance Source of instability Transit country Weak management culture • Russia can remain a “mere raw materials supplier” to the West,or use its energy resources to modernize its own economy. Europe’s strategic competitor Lack of protection for human rights Testing ground for innovations “Natural resources curse” Anti-Western prejudices • The main slogan of the new social revolutions is “Down with corruption!” • The proto-middle class and educated young people are at a crossroads of future possibilities: break into the bourgeois or slip into the lower classes Anti-Russian prejudices in the West 16

17. CURRENT TASKS FOR CIS COUNTRIES SOLVING THE “GENERIC PROBLEMS” OF THE POST-SOVIET STATES • Models of state management created in the 20th Century cannot meet the challenges of the 21st Century. • ESSENSE OF CRISES • COMMON FRONT OF STATE CRISES • Greece and the whole European periphery; Kyrgyzstan, Moldova, Ukraine and possibly other CIS states; the Arab world and possibly Asia. • INTELLECTUAL AND POLITICAL TASK • Development of models for an effective state in the face of the threat of new state crises. • Strategic planning and ethnic policy.In the USSR these functions were within the remit of the political centre. Most CIS countries that evolved from the Soviet republics still have not acquired them. • Creating a mass class of property owners.An effective structure of property has not been created in the post-Soviet countries. All the privatization projects conducted in the course of 20 years have not solved the task of democratizing property ownership. • Creating a fully-fledged political class.There is a political elite in the post-Soviet countries, but there is not a large “political class” to unite the elite and politicized strata of the middle class. Therefore, states “stall” when systemic changes are demanded. 17

18. NATIONALISM IN POLITICS Crises of states inevitably lead to the political strengthening of mobilizing ideologies POST-SOCIALIST NATIONALISM NATIONALISM AT THE DAWN OF THE INDUSTRIAL AGE • Mobilizing ideology: linked to strengthening of states and development of capitalism; unites various social strata, irrespective of conflicting class interests. • Bourgeois idea: ensures sales markets for national corporations, which guarantees profit for the national bourgeoisie and employmentfor the working class. • Socio-cultural phenomenon: has a lot in common with ideology and religion, to a significant degree defines the contours of one’s worldview, allows an individual to feel protected in the world of historical traditions. • Fulfils the same mobilizing functions as early bourgeois nationalism in developed countries. • Ethnic rather than civil nationalism predominates; this is a perfect filler for an ideological vacuum. • Often acquires extreme forms of expression, fraught with the risk of extremist and separatist tendencies • Christian countries: rise of uncontrollable xenophobia Alternative self-organization (jamaats, right-wing Slavic associations) TRANSFORMATION OF SOCIAL DISSATISFACTION • Muslim countries: rise of radical Islam 18

19. Rationalism and science Human rights Supremacy of the law Freedom of entrepreneurship Democracy Striving for progress National sovereignty None EUROPE: STRIVING FOR PROGRESS EUROPE: STRIVING FOR PROGRESS Diagram 13. Values being lost Diagram 14. Values for the future Other countries, including Russia Europe National sovereignty Striving for progress Freedom of entrepreneurship Rationalism and science • In 2010 Europe was still demonstrating willingness to sacrifice national sovereignty for the sake of integration Democracy Human rights Supremacy of the law None • The slogan “Liberty! Equality! Fraternity!” is still relevant. Formation of a new cultural-civilizational code on the basis of striving forprogress is interpreted by European elites as Europe’s traditional historical mission on a global scale. 19

20. SEARCH FOR NEW IDEOLOGIES • There are no “ready examples” of ideal model states. • There are no reliable international systems to ensure the security of states. • Traditional political battles are being overtaken by a battle of values. • Political risks – leading to a new stage in history • An ideological crisis has struck both the former USSR and Europe • The Soviet idea has left the former USSR, and there is no replacement state platformfor the brotherhood of nations. • In Europe the failure of the multicultural project is leading to a rise in nationalism. There is still no new platform for integration. THE WORLD AND ISLAM: DIALOGUE INEVITABLE • By 2030 the global Muslim population will reach 2.2 billion, against 1.6 billion in 2010; i.e. it will rise by over 35 per cent. • The fall in GDP per capita and exacerbation of the employment problem in the Arab world will prompt a new wave of migration. • Within the Muslim world, a progressive force for development has arisen: it advocates democracy and social justice while still adhering to the Islamic identity. • Islamic civilization is capable of making a leap towards development,if the №1 problem is solved: the problem of security • The most important political task isto establish inter-faith relations with moderate Islam 20

21. THANK YOU FOR YOUR ATTENTION!The Post-Crisis World Institute Foundation117447, Russia, Moscow, B. Cheremushkinskaya, 13, bld. 4Phone: +7(499)789-0134, +7(495)926-5188Fax: +7(499)789-0148 www.postcrisisworld.orginfo@postcrisisworld.org