Ulrich Niemann

“No time for wrong answers” – The Financial Crisis in Eastern Europe

by Ulrich Niemann

"Tumbling exchange rates, gaping current-account deficits, fearsome foreign-currency borrowings and nasty recessions" pictured the "Economist"¹⁾ the ingredients of the current crisis in east European countries, many of them now members of the European Union. Some time ago there was still hope that East European economies could escape the financial turmoil as their banks refrained from acquiring so-called "toxic" derivatives.

However, the events of the last 9 months have revealed the true extent of globalisation. Rising international economic activity since World War II - through trade, investment flows and migration - has bound the world´s 195 countries ever closely together. A financial crisis that began on Wall Street spread to "Main Street" and is now affecting every economy, regardless of its size, shape or location. Commodity exporters, manufacturers, sophisticated service economies - all have experienced sharp falls in output, for many the largest in decades. Between June and November 2008 alone, the volume of trade between OECD members and major emerging economies fell by 30%.²⁾

The sudden economic downturn comes to the ex-communist societies and their leaders as an unexpected, painful experience, especially as they worked hard to bring their countries into the European and global system of an unimpeded flow of capital and goods. But the integration into an increasing borderless world also has its bright side: it triggered continuous high growth rates in the CEE countries and gave a welcome stimulus to sluggish western economies.


Source: Sophia Photo Agency, Prof. Steve Hanke (left) discusses the global economic crisis with Bulgaria´s economy minister Petar Dimitrov The track record on integrating into EU economic structures also clearly shows that this was the best substitute for a Marshall Plan for Eastern Europe, which was debated in the mid-1990s. All CEE countries have registered substantial prosperity gains in the course of their assimilation. What is more, those that have achieved broadly based economic integration and adopted the EU culture of stability are finding themselves far less hard hit by the financial and economic crisis than their CEE peers.³⁾

Among the fears connected to the 2004 enlargement such as competition on the labour markets through migration ("social dumping"), job loss through delocalizations, budgetary burdens through financial transfers in EU agriculture and cohesion funds, none of these fears has materialized. In fact, overall economic growth in the period 2004-2008, before the global financial and economic crisis hit, is among the most spectacular in recent EU history. That goes for both the 12 new member states with annual GDP growth rates of often over 5%, sometimes even over 10% and old member states (EU-15), with still positive growth despite weaknesses in global competitiveness in economies like Germany, France and Italy.⁴⁾ Germany´s trade volume with the new members in the East tripled during the past decade to an impressive 193 billion Euro exceeding its trade with China, the U.S. and even its major trade partner France.⁵⁾

However, there is the other side of the coin. Compared with the West, central and East European nations are still in a much weaker position to respond. Worse, growth is set to fall in 2009 for the first time since the new democracies switched to open market economies, making it more difficult for them, to respond to the crisis (see our table Growth rate of GDP volume in EU countries). And their central banks and governments are simply not able to muster the financial power now being deployed in the big economies in the West, which eventually could be a blessing as the hastily introduced demand oriented stimulus packages will mostly have doubtful effects.

Growth rate of GDP volume in EU countries- percentage change on previous year
	2006	2007	2008	20091)	20101)
EU (27 countries)	3.1	2.9	0.9	-4.0	-0.1
EU (25 countries)	3.1	2.9	0.8	-4.0	-0.1
Bulgaria	6.3	6.2	6.0	-1.6	-0.1
Czech Republic	6.8	6.0	3.2	-2.7	0.3
Estonia	10.4	6.3	-3.6	-10.3	-0.8
Ireland	5.7	6.0	-2.3	-9.0	-2.6
Greece	4.5	4.0	2.9	-0.9	0.1
Latvia	12.2	10.0	-4.6	-13.1	-3.2
Lithuania	7.8	8.9	3.0	-11.0	-4.7
Hungary	4.0	1.2	0.6	-6.3	-0.3
Poland	6.2	6.6	5.0	-1.4	0.8
Romania	7.9	6.2	7.1	-4.0	0.0
Slovenia	5.9	6.8	3.5	-3.4	0.7
Slovakia	8.5	10.4	6.4	-2.6	0.7
1)Forecast
Source: Eurostat

The core of the problem lies in the gaping current-account deficits - the counterpart of a huge flow of foreign investment into these countries that fuelled the boom⁶⁾ (see our graphic Estimated current-account balance 2009 as per cent of GDP of CEE countries). A big vulnerability arises from this huge debt. Western banks have invested and lent heavily in the region, Austria alone about 230 billion Euro; in total, liabilities amounting 500 billion Euro have been built up.⁷⁾ The current-account deficits are no longer sustainable in the current environment. Dramatically falling currency exchange rates and higher interest rates are negative consequences. As the lending western banks are in trouble themselves, the much needed flow of credit to the private sector via their subsidiaries in the East came to halt.


                                                                                                                                                            Furthermore, as exports to crisis shaken Western Europe are faltering because of dropping demand, companies are scaling back and unemployment is starting to rise.⁸⁾ In better times, 20% of Slovakia´s exports went to Germany. In Czech Republic, the car industry makes up 20% of GDP and 70% of the exports are directed to west European countries. But the biggest casualty of the crisis could be the model of open market economy. For countries that have been told that privatisation, liberalisation and open markets are the sure path to prosperity, the crisis brings "an implosion in the idea of normality" (Ivan Krastev). As western leaders respond to the crisis by putting national interests first, notably over state aid for finance and industry, their East European counterparts may feel betrayed.⁹⁾ As a political fall out populist parties enjoyed growing support in the East and West during the recent European elections, which were preceded by mass protests in the streets and the collapse of governments in Latvia, Hungary and in the Czech Republic.

Surely every country in the region is different and different countries are likely to go through the crisis with differing results (please read the following CEE countries analysis by FNF´s Representatives in the region). Worst hit were countries which avoided needed reforms and wasted borrowed billions on construction and consumption booms - in such an environment political pressure to take painful decision is low. Also narrowly structured economies proved to be much more vulnerable to the external shocks. Other countries showed more stability, even in politics, when governments were strengthened as in Poland.

Hence, the solution lies in the ability to find the right policy mix to minimize the effects of the crisis. Rejecting the ideas of a fast introduction of the Euro as well as the creation of a massive European financial stability fund, government leaders agreed to triple IMF resources to support the CEE countries. In addition the credit line available to EU countries that do not benefit from the shelter of using the Euro was substantially increased.

These acts of solidarity and first aid will not be enough. To stop further currency collapse and to help banks with loans going bad, the leaders must point out that the recent failings in financial markets do not invalidate the huge advantages provided by the free movement of goods, capital and labour.¹⁰⁾ But they should not just propagate it, they must also act accordingly. Unfortunately, the leaders still doubt this.

The ongoing recession also reveals the cost of halted reforms in the past. Now more than ever CEE countries need to restart structural reforms such as public-finance reform, especially of pensions; raising labour-market participation, particularly by reducing the numbers of early retirees; and improving productivity by modernizing education. Many countries still have bad road systems. Officialdom choke business; corruption is virulent.¹¹⁾ In countries where corrupt and incompetent political elites rule the chances that the effects of the crisis will speed up reforms are rather dim. This is regretful as there are many examples of successful liberal market reforms in the region.¹²⁾ Non-Keynesian "survival tactics" may offer a better wayout.¹³⁾ At least, serious Euro candidates will have no other choice than to consolidate public finances in order to meet the Maastricht criteria - unless the EU´s big spenders such as Germany and France will soften them. Efficient remedies seem to be politically unpalatable.¹⁴⁾ The European Commission, guardian of the Treaties, is no longer an exception. On the contrary, Brussels pushes the members to run even higher debts, currently 200 billion Euro, to stimulate the economy. In the long run nobody will benefit from the violation of stability criteria and the distortion of free competition. The recovery, particularly in the CEE countries, will be even prolonged. That is definitely not the solidarity the CEE countries need and want.

References

Christian Christ-Thilo

Serbia - Risky Spending Policies Deepen the Financial and Economic Crisis

By Christian Christ-Thilo

There are two ways to examine the situation today in Serbia. One way is to look at its current economic indicators. In recent years, the country has numbered among those nations in the West Balkans that have demonstrated an impressive growth rate in GDP. This growth will certainly end this year and, the present circumstances will drive the economy into recession.

 

Recent growth rates of between 5% and 6% were unable to cover the structural deficits inherent in the Serbian economy. Contributing to this problem is the sizeable trade deficit resulting from a weak export sector overly reliant on subcontracting and basic industries, overdependence on FDI, and a colossally bloated public sector. Sizeable government deficits were not only unchecked but even encouraged by irresponsible monetary policies. The withdrawal of foreign investors in recent months has resulted in a persistent and growing lack of badly needed capital.

 

In the past, Serbia failed to understand how to use its revenues from privatisation to decrease its structural economic deficits through investment. Instead, revenues from privatisation were absorbed by consumption, with a large part of that wasted. This consumption, mostly credit based, is no longer sustainable. In the last few months, the Dinar has lost a fourth of its purchasing power. The consumer now feels the awkward effects of this in his everyday life, especially when he has to repay borrowings contracted in foreign currency. Even though the state might be able to help out - the IMF has in the meantime provided a financial injection of 3 billion EUR, the "average citizen" is left wondering where he´s gotten to.

 

Foreign Trade
(Millions of US dollars)
Year	2000	2001	2002	2003	2004	2005	2006	2007
Export	1558	1721	2075	2755	3523	4482	6428	8825
Import	3330	4261	5614	7473	10753	10461	13172	18554
Balance of Trade Deficit	-1772	-2540	-3539	-4718	-7230	-5979	-6744	-9729
Balance of Payments
(% of GDP)
Year	2003	2004	2005	2006	2007	2008	2009
Balance of Payments	-7,2	-12,1	-8,7	-10,1	-15,3	-17,3	-12,2*
* Estimation
FDI in Serbia
(Millions of US dollars)
Year	2003	2004	2005	2006	2007	2008
Amount	1071	796	1440	4286	2004	2362
Source: National Bank of Serbia

This leads us to a second way to examine the situation in Serbia. Indeed, for the citizens of this land, the situation is doubly hard. They have witnessed massive cuts in state spending as a result of conditions that the IMF imposed for any more "fresh" capital. One of these conditions calls for the halving of the government´s deficit to at most 3% of GDP. This can only be achieved with serious cuts to government spending. The Government has already approved a package of cuts measuring about 1 billion EUR or about 85% of the savings required. An example of one cut is that government employees will work fewer hours while receiving less pay. Monthly salaries of about 200 Euros are now encountered all too often. Thus it is not uncommon that a person, even if he finds a job, is forced to take on a second or even a third job. However, the potential for spending cuts in Serbia becomes readily apparent after a quick glance at the government´s organisational chart. With 27 ministers, more than 70 permanent secretaries, and over 110 deputy ministers, the government´s organisational chart most certainly does not represent the leanest possible form of government in the administrative history of the country.

 

Many Serbs, particularly the legion of unemployed as well as pensioners and a multitude of underpaid workers, are worried they will be unable to meet their daily living expenses. Recently, people in this category have been helped by the opening of a new type of grocery store which offers discounts of up to 50% on basic necessities when compared to a standard local supermarket. These stores are meant to help those citizens whose monthly wages are 160 EUR or less, pensioners receiving less than 200 EUR, welfare recipients and refugees. Since the opening of the first of these special grocery stores in Belgrade, 40,000 of their ID cards have already been issued.

Asparuch Panov

Bulgaria’s Banking Sector Remains Stable

By Asparuch Panov, Peter-Andreas Bochmann

Peter-Andreas Bochmann Although Bulgaria was the poorest new member of the EU when it joined on January 1st 2007, its economic indicators showed overall stability and growth. 2006 had been the best year for Bulgaria´s economy since the fall of communism in 1989. Macroeconomic stability had been achieved by the creation of the currency board in 1997, which pegged the Bulgarian Lev to the Euro, the consolidation of state finances including a reduction in foreign debt and a successful privatisation program, with private ownership contributing over 85% of total economic output. A moderate rate of inflation at 5.3% and economic growth at 6.5% were the hallmarks of success. Unemployment stood at 8.5% in 2007, while in 2006 less than 6% were registered as unemployed. In 2006, FDI reached 6.15 billion EUR and this strong level of foreign investment continued in 2007, when FDI reached 8.49 billion EUR. With the lowest tax rate in the EU, a 10% income and business tax, and a stable growth rate of about 6%, Bulgaria was flourishing.

 

In the second half of 2008 and in the beginning months of 2009, Bulgaria began to be affected by the world economic crisis. Thanks to a combination of financial discipline and currency rate stability (made possible by the successful policies of the currency board) the banking system remained relatively stable and secure.

The effects of the crisis are most keenly felt in the real estate sector. According to the National Statistical Institute, GDP growth slowed to 3.5% during the first three months of 2009. The slowdown continued in the second quarter and now the economy is already in a recession. Unemployment has risen from 5.5% in January 2009 to 6.5% in April and to 7.09 % in May. The Consumer Price Index fell to 99.7% in May, a monthly deflation rate of 0.3%.

Particularly troubling is the slump in foreign investment: from 8.49 billion EUR in 2007 to 6.17 billion EUR in 2008 and, in the first three months of 2009, to a mere trickle at 0.65 billion EUR. The most critical issue is tax revenue. In the first quarter of 2009, tax receipts totalled only 20% of the amount collected during the same period last year. This tax deficit resulted from the slump in exports as well as the drastic fall in oil prices and other energy sources.

FDI flows in Bulgaria
Monthly data
(EUR Million)
2006
1	2	3	4	5	6	7	8	9	10	11	12	Total
334.4	469.9	439.0	513.0	712.1	483.5	414.8	599.5	337.4	703.3	499.2	652.2	6158.4
2007*
1	2	3	4	5	6	7	8	9	10	11	12	Total
189.2	424.9	720.2	738.8	773.6	651.9	787.8	984.4	714.8	793.4	744.8	964.1	8487.9
2008*
1	2	3	4	5	6	7	8	9	10	11	12	Total
329.2	344.9	528.0	722.1	519.7	828.7	679.9	634.6	412.4	650.0	151.7	361.8	6163.0
2009*
1	2	3	4	5	6	7	8	9	10	11	12	Total
207.1	127.7	311.8										646.6
* Preliminary data
Source: Bulgarian Foreign Investment Agency

 

Until now, Bulgaria has never asked for any international financial help. The country´s

foreign exchange reserves have indeed shrunk recently, but as of April 2009, they are still about 4 billion EUR.

 

Milen Velchev, MP and vice-chairman of the liberal NDSV party has said "At present, Bulgaria needs no international financial help. We only need a "protective covenant" with the IMF. It´s like an umbrella. You always have one nearby, but you might not need to use it. However, if it does start to rain, you´ll stay dry."

 

08.04.2009, Nikolaj Vassilev, Minister of the Interior and for Administrative Reform (first from left) signals the start of the NDSV´s media campaign known as ''Rational through the Crisis.'' Dr. Wolfgang Gerhardt (third from left), Chairman of the Foundation for Liberty, attended during his Bulgarian visit the session with journalists at NDSV party headquarters. Not surprisingly, how best to combat the current economic crisis has become the main topic of the political debates preceding the general elections scheduled for July 5th. Under pressure from the liberals of the NDSV and the Christian Democratic opposition, the Government adopted a decree restricting non-interest expenditures by public-financed enterprises during 2009. These measures include a wage freeze, a prohibition of remunerations sourced in savings and wage bills; the suspension of personnel appointments to vacant positions (except for positions designated for permanently disabled persons or as required by law or structural changes); the reduction of business travel expense to a minimum; and a strict limit on telephone and seminar expenses. The measures also include a 15% cut in salary for the Prime Minister, the deputy prime ministers, state agency chairpersons, government ministers and cabinet members.

Heike Dörrenbächer

Ukraine - Hard Hit by the Global Financial Crisis

By Heike Dörrenbächer

Of Eastern European countries, Ukraine is one of the hardest hit by the current economic crisis. During the first quarter of 2009, its industrial production sank 31.9%. Ihor Burakowsky, Director of the prestigious Institute for Economic Research and Political Consulting in Kiev, expects GDP to fall 12% in 2009. This is a dramatically high number, considering the recent high growth rate of 7.9% in 2007. Ukraine has since been twice shaken by external shocks: Beginning in September 2008, Ukraine suffered an extreme drop in its external trade balance, the result of an enormous plunge in the price of metals and chemical products which brought Ukrainian exports to an abrupt halt. Negative capital flows completed the grim picture with new FDI nowhere in sight. The resulting lack of external capital for investment could not be replaced by private Ukrainian capital. The only alternative was the acceptance of IMF loans totaling 16.4 billion USD.

 

Other negative factors include the rapid devaluation of the currency, the Gryvna, in relation to the US dollar from 5 to 8 Gryvnas per USD during the tail end of 2008. From the standpoint of the domestic economy, devaluation was perceived as a positive development enabling the shrinking of the current account balance. However for the average Ukrainian citizen, currency devaluation has meant the depreciation of his or her buying power to the tune of 30% alongside a backdrop of higher prices for goods and services and stubbornly high inflation rates. Within a space of three months, unemployment rose from 5.4% in the 3rd quarter to 7.5% in the 4th quarter of 2008.

 

The Ukrainian banking system is threatened by a lack of liquidity and looming insolvency, exacerbated by deposit withdrawals and the banks‘ obligations to pay back foreign creditors. According to data provided by the German advisory group, the Ukrainian government‘s external debt will reach 83.9 billion USD or 68% of GDP by the end of 2008. While attending the Friedrich-Naumann-Foundation for Liberty‘s fund raiser in Kiev on May 19th the German advisory group recommended that the following steps be taken to help remedy the crisis:

 

- Strict implementation of IMF programs

- Maintaining a floating currency exchange rate that is not prone to

  political manipulation

- Fiscal discipline

- Continuation of privatisation despite the current global crisis

- The speedy and efficient recapitalization of systemically important

  banks

 

Especially important for the future development of Ukraine is the continuation of structural reforms which, however, are unlikely to take place given the political background of elections that are scheduled to take place in January 2010. Since a further increase in foreign indebtedness should be avoided at all costs, the lack of political will or political inability to transform Ukraine into a functioning market economy remains, at present, the greatest threat to its further economic development.

Borek Severa

The Global Financial Crisis in the Baltic States, Hungary and Poland

By Borek Severa

LATVIA

The only "tiger" among the Baltic States has been hit the hardest, especially when compared to other countries around the world. As recently as 2007, the Latvian economy boasted the highest economic growth in Europe at 10.3%. In the last quarter of 2008, it shrank to 0.3% - marking the deepest recession in the EU. Retail sales have fallen 20%, far steeper than anywhere else in the EU. Despite an approved loan by the IMF/EU totalling 7.5 billion Euro in December 2008, Latvia is expected to show a GDP decline of up to 15%. That would make it the worst decline worldwide.

 

In case the IMF/EU loan - as some analysts expect - will prove insufficient to prevent the bankruptcy of the Latvian state, then, according to existing studies, a severe currency crisis, meaning the abandonment of the fixed rate system of the Latvian Lats, is highly probable. The consequences of abandoning the exchange rate peg would be dramatic. Due to Latvia´s high levels of foreign debt, a steep devaluation of its currency would make it impossible to continue to service that debt and would most likely lead to default.

 

Protests against the government in Riga
Source:© AFP/ Ilmars Znotins

In the beginning of April, the Prime Minister who had just been elected in March, Valdis Dombrovskis, explained in an interview: "Latvia could go bankrupt if Riga does not receive the next credit instalment of 1.7 billion EUR in June." Already in March, the country did not receive 200 million EUR, since it could not adhere to the maximum allowable budget deficit of 5% of GDP as mandated by the IMF. The IMF insisted that the budget be cut by one fourth so as to keep the deficit under the 5% threshold. However, such a move would lead to new social unrest at a time when funds for the unemployed are already running out. Riga is attempting to renegotiate its maximum allowable budget deficit to 7%, which is still too high according to experts since the state must achieve budget savings of around 40%. Thus Latvia´s future ability to meet its payment obligations depends on IMF loans. At present, Riga´s financial obligations total 46 billion USD of which 12 billion EUR has short maturities. Latvia´s leading financial institution, Parex-Bank, was only nationalized to save it from certain bankruptcy.

 

The cause of Latvia´s current misery resides in the fact that for years the country had lived above its means, fuelled by credit financed consumption and a real estate investment bubble. A Latvian currency crisis would certainly have devastating effects upon the other two Baltic States.

 

An indirect victim of the crisis is our partner - Latvia´s LPP/LC party - which before the recent elections had held the premiership but now no longer forms part of the new "Crisis Management Government." Recent public opinion polls give the LPP/LC about two percent of voter support.

 

 

ESTONIA

 

Estonia, too, numbers among the EU member states whose economy has been hardest hit by the international financial crisis. The country´s most important industries - real estate and construction - are after years of rapid growth a shadow of their former selves. Many have lost their jobs: unemployment has risen from 6% to 10% within just one year. The economic downturn continues and the long term negative trend is no longer debatable: GDP in 2008 began to sink at a rate of 3.5% while in the last quarter it plunged 9.7%. In the first quarter of 2009, GDP declined by 15.6%, the worst showing since 1994. These awful numbers were seen as the result of a sharp cutback in domestic consumer spending. For the rest of this year, a negative economic growth rate of at least 3% is expected.

 

Estonia, the smallest of the Baltic Republics, must imitate their two neighbours´ draconian savings measures. For example, the capital city of Tallinn has begun turning off streetlamps during the night. However this country on the Baltic Sea, which has experienced an economic boom exceptional by historic standards and is by law forbidden to take on new debt, has more currency reserves than its neighbour Latvia. During its boom years, Estonia managed to achieve a savings rate equal to about 10% of GDP. The crisis also led to a fall in the inflation rate from 10% in 2008 to -0.6% in the first quarter of 2009. This development will allow Tallinn to more quickly implement the Euro. By the middle of 2010, the Estonian Krona should be replaced by the Euro, a full half-year earlier than originally planned.

 

The government of Prime Minister Andrus Ansip is, despite current difficulties, confident. He is convinced that Estonia will quickly recover from the present crisis. Finance Minister Juhan Parts has complained that one of the main problems is that the situation in the Baltic States is viewed as more critical than in other states. But Estonia´s situation is not comparable to the problems that Latvia faces.

 

According to experts, Estonia will experience a long economic dry spell, a result of its extreme debt load. Estimates of Tallinn´s debt levels run as high as 70% of GDP. Moreover, Estonia is highly dependent on Sweden´s major banks, which control nearly all of the country´s financial institutions.

 

 

HUNGARY - Debt deepens the Crisis

 

Post-Communism´s model pupil has been hit especially hard by the economic crisis. At least a third of the problem is home made, as Hungarian politicians themselves admit. In reality, the real trouble is that the country is experiencing a serious backlash because its previous economic upswing was based on years of free and easy credit.

 

The situation is so serious that the IMF, the European Central Bank, and the EU had to inject a 20 billion EUR credit package to save Hungary from bankruptcy. However, the country´s economic growth rate was already slowing even before the crisis began. GDP rose 1.1% in 2007, only 0.3% in 2008, and for 2009 a decline of -3.3% is expected. Debt levels (measured in GDP) have risen from 65.8% (2007) to 72.2% (2008) and should continue to rise to about 75.9%.

 

For the general population, both rising levels of unemployment, from 7.8% in 2008 to a projected 10% or more this year, and repayment of foreign currency credit loans have become significant problems. Most private loans and mortgages were taken out in Euros or Swiss Francs. Thus, the Forint´s fall from 230 Forints per Euro in 2008 to nearly 300 Forints per Euro today has pushed the effective cost of loan repayment up to 30% higher for the average citizen.

 

Hungarian Prime Minister Gordon Bajnai has defined himself as a ''crisis manager'' who will, despite public resistance and continuous attacks by the Opposition, successfully push through his reform program
Source: CTK/ AP The in April newly elected "Crisis Management" government led by the Prime Minister and Ex-Finance Minister Gordon Bajnai, unaffiliated to any party, will attempt to achieve significant savings of up to 3 billion EUR through changes in the social sector. Among these changes is a rise in the value added tax (VAT) from 20 to 25 percent. Since the beginning of the crisis, the previous Socialist government had attempted through various measures such as tax reform and attempted savings in the public sector to keep the budget deficit in check. Yet the results of these actions will only be felt later in the second half of 2009. At present, Budapest has very little room to manoeuvre, since it is obligated by agreements to its creditors the IMF and the EU.

 

Nevertheless, Hungarian experts, economists, sociologists, politicians, and the general public too, are convinced that neither high levels of national debt nor the costly state administration nor foreign-currency credit loans are the country´s major problem but rather the deep split between political parties and the society at large into two camps unable to communicate with one another.

 

The Liberal Democrats (SZDSZ), who had long remained true to the Socialists during their time in the governing coalition, are now also paying the price for this state of affairs; they now fear for their chances for re-election into Parliament.

 

 

POLAND - Weaker Effects from the Crisis

 

Compared to other countries worldwide, Poland appears almost untouched by the current economic crisis. However, the effects of the crisis have simply manifested themselves with a time lag yet are nevertheless appreciably weaker in comparison to other East European states. After a record GDP growth rate of 6.7% in 2007, and then a slowdown to 4.8% in 2008, the Central Bank has lowered interest rates to 3.75%, a historic low, in order to boost economic growth.

 

However the growing unemployment rate is a cause for concern, since the loss of employment for any Pole eligible to work belongs to one of their worst imaginable collective nightmares due to their experiences in the 90´s with the severe consequences of economic reform. Recent numbers do not bode well: while 2008 marked a noticeable decline in unemployment with the second half of the year after the elections showing a 7.4% unemployment rate; Warsaw, nevertheless, is expecting unemployment to reach 13.5% in 2009.

 

One of the reasons for Poland´s relatively good economic performance is its still unsaturated domestic market of 38 million inhabitants. Consumption along with exports and growing investment was the chief engine of Polish growth during the last several years. Besides this, the Central Bank in Warsaw was able to stave off attacks by speculators on the "high flying" Zloty. An additional advantage for Warsaw is that exports make up only 40% of GDP. In March 2009, industrial production rose in comparison to the prior month a full 15.5%. Although in comparison to the previous year´s figure this is still somewhat less, analysts had not expected a mere two percent drop. In February, industrial production compared with the same month last year had fallen by 14.6%. The new figures are not yet viewed as exhibiting a trend, yet Dariusz Filar, a member of the Monetary and Exchange Rate Board of the Central Bank, expressed the view that the Polish economy was effectively protecting itself from the world wide recession.

 

Despite the long standing dispute between the liberal conservative Prime Minister Donald Tusk and the arch conservative President Lech Kaczynski, Poland has enjoyed, even after years of revolving governments and the present crisis, an astounding level of political stability. Tusk´s "Citizen´s Platform" (PO) would win around 58% of the vote according to the latest polls, while the largest opposition party, "Law and Justice" (PiS), would barely receive 20%. At the start of April, the Government in Warsaw presented a crisis package focusing on "flexible work hours" and "jobs protection". Their main goal remains the introduction of the Euro in 2012, although a higher budget deficit will likely delay the process.

 

Real GDP growth rate

Growth rate of GDP volume - percentage change on previous year
	2004	2005	2006	2007	2008		2009		2010
Czech Republic	4.5	6.3	6.8	6.0	3.2		-2.7	(f)	0.3	(f)
Estonia	7.5	9.2	10.4	6.3	-3.6		-10.3	(f)	-0.8	(f)
Latvia	8.7	10.6	12.2	10.0	-4.6		-13.1	(f)	-3.2	(f)
Lithuania	7.4	7.8	7.8	8.9	3.0		-11.0	(f)	-4.7	(f)
Hungary	4.7	3.9	4.0	1.2	0.5		-6.3	(f)	-0.3	(f)
Poland	5.3	3.6	6.2	6.6	5.0		-1.4	(f)	0.8	(f)
Slovenia	4.3	4.3	5.9	6.8	3.5		-3.4	(f)	0.7	(f)
Slovakia	5.2	6.5	8.5	10.4	6.4	(e)	-2.6	(f)	0.7	(f)
:=Not available f=Forecast e=Estimated value
Source: Eurostat

Sascha Tamm

Economic Crisis in Russia – A Lack of Diversification Complicates the Situation including a Brief Comment about Central Asia

By Sascha Tamm

Russia is undergoing a deep economic crisis. The IMF predicts that GDP will shrink 6% in 2009. Some Russian estimates are even worse. Industrial output may decrease 20%, in some sectors like engineering it may reach 50%. The Russian Ruble has lost about one third of his value against the Euro and even more against the US Dollar. The inflation rate is 13-14%. Unemployment is rising dramatically; the official figure of 8.5% seem to be too low. You can see a video here of Mr. Tamm´s complete comments  "The View from Abroad: Russia´s struggle with the economic crisis and why the West should take notice" organised by the Virtuelle Akademie.

Dynamics of industrial output decrease in Russia, 2008 - 2009

Months	Index of industrial output (December 2007 = 100 %)	Decrease of industrial output compared to the peak in December 2007, %
Jan-07	100,0	0,0
Jan-08	99,5	-0,5
Feb-08	98,2	-1,8
Mar-08	97,4	-2,6
Apr-08	97,6	-2,4
May-08	98,3	-1,7
Jun-08	98,7	-1,3
Jul-08	98,6	-1,4
Aug-08	97,7	-2,3
Sep-08	95,3	-4,7
Oct-08	91,1	-8,9
Nov-08	85,8	-14,2
Dec-08	80,7	-19,3
Jan-09	77,3	-22,7
Feb-09	76,6	-23,4
Mar-09	78,9	-21,1
Source: Institue for Economic Analysis in Russia

Russia was affected by two external factors at the same time: the decrease in commodity prices and the drying-up of global credit markets because of the financial crisis. Russia´s economy depends on commodity exports to a huge extent. However, the country´s earnings from exports have nearly halved since the beginning of 2008. Russian companies and investors are deeply indebted, and their loans are mostly from foreign banks, usually with a short maturity. The collapse of commodity prices and the credit contraction have fueled the current recession in Russia.

 

However, the global financial crisis and its effects on the credit and commodity markets aren´t the only things driving the Russian crisis. Industrial output began to contract as early as January 2008. After a short recovery from April till June, the shrinkage resumed and has continued till now. Therefore it is obvious that the only driver of economic growth in Russia were high commodity prices, which peaked in mid-2008. The capital that could help grow the Russian economy is scarce and overly concentrated in the oil and gas industry. The Russian banking sector is still very weak and ineffective. Foreign banks are focused on construction projects and the oil and gas industry, which had seemed resistant to crises. The Russian government´s policy to require diversification has not worked. These are additional reasons for the Russian crisis.

International Reserves of the Russian Federation, 2008 - 2009

(Billions of US dollars)
Monthly values as of the beginning of accounting date
Official reserves
01.01.2008	479
01.02.2008	488
01.03.2008	495
01.04.2008	513
01.05.2008	532
01.06.2008	546
01.07.2008	569
01.08.2008	597
01.09.2008	582
01.10.2008	557
01.11.2008	485
01.12.2008	456
01.01.2009	427
01.02.2009	387
01.03.2009	384
01.04.2009	384
01.05.2009	384
01.06.2009	404

Source: Central Bank of Russian Federation

The Russian government has finally reversed its long held public renounciation of macroeconomic stabilisation measures and taken decisive action to defend the ruble. The Russian Central Bank´s policy of "controlled devaluation" has proven very costly. Russian financial reserves are now approximately US$ 200bn, or one third lower than at the start of the crisis. The stabilisation fund, which was stocked with money from oil and gas exports, is now used extensively for investment and social purposes. Russian experts estimate that under current conditions, the fund will only last until the end of 2009. So far, the Russian government has failed to slow inflation. Inflation is now at 13-14% and seems to be accelerating. However, by their careful and rational financial policy, the Russian authorities do still have room to maneuver which many other governments in Eastern Europe don´t have.

 

The most obvious symbol of the crisis in Moscow is that nearly all major construction projects are at a standstill. They lack capital. However, much more dangerous is the dramatic rise in unemployment. Its impact is much more noticeable in the regions of Russia other than Moscow. In Moscow, in most cases, it is immigrant workers who lose their jobs. In many smaller industrial towns, those with an industrial monoculture, the bankruptcy of one big company causes serious, widespread unemployment. In the course of one day, a significant part of the population, up to a half, may lose their jobs. This has lead to social protests and a decline in approval rates for the government. Until now, the government has been able to finance social programs to help citizens affected by the crisis.

 

Only a significant and sustained rise of commodity prices could fuel a fast recovery of the Russian economy. Otherwise, social tension will become more intensive. In the long run, only a broad diversification of the economy, driven by private investment, will make Russia less vulnerable to economic crises.

Global Financial Crisis grips Central Asia

The Global Financial crisis has finally caught up with the countries of Central Asia. Along with the general negative effects of harder to get foreign loans, declining FDI rates and sinking levels of raw material exports to the West and to Russia, there is an additional problem: the drop in remittances from Central Asian citizens working in Russia which constitute an essential part of GDP, more than 20% according to some analysts, in Tadzhikistan and Kyrgyzstan. At present, the serious economic crisis gripping Russia has had two substantial effects on Central Asia: Russia pumps less oil and gas and thus migrant workers are able to send less money abroad to support their families. This has had a considerable impact on private consumption. The government of Central Asia, hemmed in by their lack of monetary resources, are totally unable to combat the present financial crisis. They can only hope for an improvement of the global, and especially Russian, economic situation.

Guido Westerwelle

Guido Westerwelle Meets Foundation Partners in Moscow

During his visit, the leader of the Free Democratic Party of Germany (FDP) met with leading intellectuals and paid a visit to the Memorial Foundation

During his visit to Moscow to talk with the Russian government, Guido Westerwelle, Chairman of the FDP and his party’s leader in parliament, found time to stop by the Friedrich-Naumann-Foundation for Liberty‘s Moscow office. Through a series of detailed discussions with leading political analysts, all of whom have worked for years with the Endowment, Westerwelle was brought up to date concerning the current political and social situation in Russia. The Russian participants were Lilia Shevtsova, Senior Associate with the Carnegie Foundation for International Peace in Moscow, one of the most quoted analysts of Russian domestic politics, and Mark Urnov, Dean of the Political Science Faculty at the Centre for Advanced Studies in Economics at Moscow State University. Guido Westerwelle was especially interested in the effects of the current financial crisis on Russian society.

An additional item on Guido Westerwelle’s itinerary was a visit to one of the Foundation for Liberty’s oldest partners, the Memorial Foundation. After his tour of the Foundation‘s archives and the exhibition dedicated to the memory of the victims of terror and repression in Russia, Westerwelle appeared deeply moved. During discussions with Memorial’s Director, Arsenij
Gennadij Roginskij Roginskij, Westerwelle assured him that the FDP and the Foundation for Liberty would in the future, as it has in the past, seek to support and to strengthen civil society in Russia. The FDP, as it has continuously demonstrated throughout its history, stands for the protection of human rights all over the world. Guido Westerwelle also visited other locations in Moscow, always emphasising that a value-driven foreign policy and one that is led by interests are not mutually exclusive but, from a liberal point of view, belong together.

At the end of his three days in Moscow, Guido Westerwelle thanked Dr. Falk Bomsdorf, the retiring Resident Representative for the Foundation for Liberty, for his 16 years of successful work under conditions that were not always optimal. He also wished Sascha Tamm, who will be replacing Dr. Bomsdorf on the first of May, the best of success in his future post.


Sascha Tamm

Sascha Tamm

Sascha Tamm

Sascha Tamm was born in 1965 in East Berlin. He lived like any average East German and in 1987, had started to study Physics. When the Berlin wall was torn down in 1989, he decided to study Philosophy and Political Science instead, which had been almost impossible for non-communists to do before. He was Speaker of the independent Student Council of the Philosophy Department at Leipzig University. From 1993 until 1995, he received a scholarship from the Friedrich-Naumann-Foundation for Liberty. During his studies, he became familiar with the works of the great liberal writers. His master thesis was titled “The Minimal State as a Utopia” and dealt with the work of Robert Nozick, one of the most eminent political thinkers of the 20th century.

After graduating from Leipzig University, he worked as a freelance coach, author and ghost-writer for almost 6 years. He then joined the Friedrich-Naumann-Foundation for Liberty, working for the Liberal Institute for more than 6 years before joining the international division in 2007. Sascha Tamm has conducted analysis in various fields of politics, written speeches, articles and papers, and edited books. For example, among his publications are readers on “Liberal Social Policy” and “Liberal Education Policy” as well as the paper “Freedom and Competition – the Future of Europe”. He is a regular contributor to liberal and libertarian blogs and publications. His book about the theory of property will be published in May. In 1996, he joined the Free Democratic Party of Germany, where he has worked at the local level until this year.

His interest in Russia and Eastern Europe goes back to his youth in East Germany. In those days, Eastern Europe was the only region of the world where he could travel. He was particularly interested, as an avid reader, in Russian and Polish literature. Due to his Russian language skills, which he acquired in school, it is easy for him to communicate in all countries of the former Soviet Union.


Handover in Moscow


Falk Bomsdorf with all the guests The inn in Moscow called “Vinzavod”, or “the Wine factory”, provided a beautiful and inspiring setting for an event called “Goodbye and Welcome”. Almost 200 guests had accepted invitations to celebrate the handover from Falk Bomsdorf to Sascha Tamm of the Moscow office of Friedrich-Naumann-Foundation for Liberty.

For more than 16 years, Falk Bomsdorf worked as Project Director of the Foundation office in Moscow. Under often difficult circumstances, he provided much support and inspiration to the development of Russian civil society. The evening’s attendees were the best proof of his eminent reputation. Among the guests were leaders of the liberal party “Yabloko” as well as representatives of “Memorial”,
Falk Bomsdorf “Liberal Mission” and the Moscow based “Higher School of Economics”. Guests from cities as far away as Astrakhan, Perm and Irkutsk made the effort to travel to Moscow to help celebrate. The top ranking member of the German community in Moscow, the German Ambassador Walter Schmid, also paid a visit to “Vinzavod”.

In short speeches, Falk Bomsdorf and Sascha Tamm expressed their feelings at this emotional moment. Bomsdorf paid tribute to all his partners and friends in Russia. During his speech, he recalled some of his favourite memories of his work in Russia. Sascha Tamm, at this first evening of his in Moscow, said that the basic liberal beliefs of skepticism and optimism will guide his work in Russia for the next 3 years. He added that he wants to continue the successful work of his predecessor and explore new fields of activities.


From left to right: F. Bomsdorf, B. Bonwetsch and S. Tamm Then the Russian colleagues from the Moscow office surprised Bomsdorf with an on-screen picture presentation of memorable moments of his work. Although the official handover of the responsibilities of the Project Director will be only effective on May 1, the event was a beautiful opportunity for all the guests to say “Thank you and goodbye” to Falk Bomsdorf and “Welcome” to Sascha Tamm.

Left to right: S. Hartig, J. Maaten, F. Sabbati and U. Niemann

The 2nd ELF Spring Academy 2009: “Europe in Practice”

Liberal European politicians have to achieve some important goals now to ensure continued success in the future:
• To convincingly present the relevance of Europe and of the European Union to the daily life of the citizens of their respective countries,
• to explain why liberal policies are especially important for the future of a common Europe and, last but not least,
• to find the best way to conduct liberal policy in Europe.
To discuss these goals, to share experiences and new ideas, liberal politicians from the United Kingdom, Lithuania, Denmark, Latvia, Slovakia, Germany and the Netherlands came to Brussels to participate in the 2nd ELF Spring Academy 2009, “Europe in Practice” from April 3rd to 4th, 2009.

The two-day event was organised by the European Liberal Forum (ELF) with the support of the Friedrich-Naumann-Foundation for Liberty (FNF), and the European Liberal and Reform Party (ELDR). Funded by the European Parliament, the 2nd ELF Spring Academy was established to assist the creation of a modern European liberal leadership by providing participants with information about liberal viewpoints on EU policies and the opportunity to interact with high European-level representatives such as Siim Kallas, Vice President of the European Commission, Neil Corlett, Spokesperson and Head of Press of the ALDE Group in the European Parliament, Jules Maaten, MEP and Member of the ALDE Group, Federica Sabbati, Secretary General of the ELDR Party and Ulrich Niemann, Head of the Regional Office of FNF for Central and Eastern Europe in Sofia.


S. Kallas, Vice President ot the European Commission Siim Kallas, Vice President of the European Commission, focused his presentation on the global financial crisis. He emphasised that the financial crisis is not a failure of the free market but rather a failure of the state’s efforts to try to organise the free market. The EU has achieved a lot in terms of regulating the market and should continue its efforts in that direction so that every market inside the EU will be open to free competition. The EU should encourage people to start new enterprises and new projects. The ‘new economy’ and small business should have the courage and ability to innovate. Mr. Kallas explained that the most important dialogue at this moment is that between policymakers and financial people..

With the view towards the upcoming elections, Neil Corlett, Spokesperson and Head of Press for the ALDE Group in the European Parliament, held an information session on his group’s policy achievements during the 2004-2009 Parliamentary session. The most important achievements were on key issues like creating a legislature committed to transparency and against discrimination, able to improve cross-border health care, defend human rights, to increase access to medicines for inhabitants of developing countries, to better manage Structural Funds, and to provide more open information about EP activities and expenses.

Jules Maaten, also an MEP from the ALDE Group, led with a discussion with the audience about which decisions by the EP most impact the everyday life of EU citizens. In his opinion, the Liberals’ accomplishments towards European Integration are not always recognised by EU citizens. That’s why the Liberals should strengthen their efforts to promote a better understanding of liberal policies. Mr. Maaten also outlined the work of a MEP, the internal operation of a parliamentary group and how the EP’s decision-making process really works. Since there are no fixed majorities or minorities in the EP, the decision-making process is a permanent political competition among different ideas and positions. With each political issue discussed, a new majority is formed. The ability to compromise is therefore a very important skill for every MEP.


The Participants of the Second ELF Spring Academy 2009 Dr. Stefan Melnik, a consultant on liberalism in Germany, elaborated on the liberals’ strengths and weaknesses and on ways to address them. Dr. Melnik argued that in order to fight euro-scepticism, we should present a ‘united Europe’, with all its achievements, as a single idea. It is also very important for the internal life of a political party to have the kind of working political platform which provides party members with unity of purpose. Liberals can have a significant influence on important issues like tax policy, migration policy and fighting the financial crisis. It is crucial to stand up for your beliefs, not in an antagonistic way but instead by using liberal principles. Dr. Melnik underlined that getting a pro-European vote out is a goal for liberal politicians because this is the way to create more democracy in Europe.

Kai Lücke, Lecturer of European Economic Integration at the Institut d’Etudes de Paris (Sciences Po) in Germany, held a presentation on the benefits of European economic integration, in particular, the Single Market and the Euro. Mr. Lücke spoke also about climate change and its economic considerations. “The EU is about a framework, not about money”, stressed Mr. Lücke.


Neli Kaloyanova

The ‘Liberty Speech’ before a large audience in Sofia. From left: Dr. M.Vassilev, Dr. W. Gerhardt, G. Passy and U. Niemann

Speech on Freedom in Sofia - Wolfgang Gerhardt Meets Bulgarian Partners of the Foundation

The Chairman of the Management Board of Friedrich-Naumann-Foundation for Liberty, Dr. Wolfgang Gerhardt, Member of the Bundestag, gave a speech in defence of freedom before 150 guests and media representatives on April 7th in Sofia. At this event, organised together with the German-Bulgarian Chamber of Industry and Commerce, Dr. Gerhardt stood up in defence of free thinking and of the free market economy, especially during times of crisis such as we are presently experiencing. Guests at this important event included leading representatives of the Foundation’s liberal partners, prominent Bulgarian public figures and well-known Germans living in Bulgaria, including Ambassador Mr. Michael Geier. Next, the floor was given to Ms Gergana Passi, the Bulgarian Minister of European Affairs and member of the liberal National Movement for Stability and Progress (NMSS), who spoke on the European dimensions of Bulgarian politics. The Bulgarian Government’s policies have followed liberal concepts and the nation’s economy and finances are relatively stable despite the world crisis.

During the second day of Dr. Gerhardt’s visit, the Foundation delegation, including Mr. Michael Roick, head of the Division responsible for Central, Southeast and East Europe, South Caucasus, Central Asia and the Mediterranean Region, and Ms. Kirstin Balke, head of Freedom Editorial, the Foundation’s press service, had talks with representatives of the two liberal parties, NMSS and MRF. The parties’ joint resolution to continue their support for the successful liberal policies of the current governing coalition was impressive. Both parties have prepared their programmes well for the two elections scheduled for this summer: for the European Parliament and for the Bulgarian Parliament. But both will have to fight the strong populist forces now gathering momentum in Bulgarian politics.


The former Prime Minister of Bulgaria, Simeon Saxe-Coburg Gotha, is presented with a medal from the Foundation. Another high point of the visit was the meeting with Simeon Saxe-Coburg Gotha, Chairman of NMSS whose decisive leadership while Prime Minister laid the foundations for Bulgaria’s accession to the EU and NATO. After a lengthy discussion of the effects of the financial crisis and the region’s geopolitics, Dr. Wolfgang Gerhardt presented the former Bulgarian tsar with the Friedrich-Naumann-Foundation medal as a sign of honour.

The working dinner, where four ministers from the two liberal parties joined the representatives from the Friedrich-Naumann-Foundation for Liberty, became an occasion to appreciate the successes achieved in Bulgaria. Mr Daniel Valchev, Vice Prime Minister and Minister of Education and Science, thanked Chairman Gerhardt for the Foundation’s long standing support for Bulgarian liberalism.


Chairman Dr. W. Gerhardt with the team of the regional office in Sofia The Foundation’s Sofia office not only coordinates relations with liberal partners in Bulgaria but is also responsible for the entire region of Central, Southeast and East Europe, South Caucasus, and Central Asia. That is why the Foundation’s Chairman used the occasion to meet with twelve representatives from regional offices to discuss the challenges faced by the Foundation in its work in this area.


Peter-Andreas Bochmann

Heike Dörrenbächer

Heike Dörrenbächer Heads East

I have always dreamed of going to Kiev – and now I am here for six weeks! I have the feeling I am in one of the places with the most interesting politics in the entire world.

Meanwhile, the Ukrainian Parliament has announced the date for presidential elections - October 25 - I think we will face a hot political summer in Ukraine. The country is on the edge between democracy and an autocratic state.

The task of the Friedrich-Naumann-Foundation for Liberty will be to support democracy and liberalism in the country.
I am a political scientist and the focus of my entire career has been Eastern Europe. I started in 1992 as Project Manager at the East-West Academy Berlin.

From 1992 to 1994, I worked as a Researcher at the German Society for Foreign Policy (DGAP).

From 1995 to 1999, I worked at the European Academy Berlin, first as a Project Manager and then, in 1997, as Deputy Director.
In 1999, I devoted my professional life entirely to Eastern Europe, becoming the Managing Director of the German Association for Eastern European Studies in Berlin.

It was in Berlin that I began to work closely with the Friedrich-Naumann-Foundation for Liberty. We organised some very successful international conferences on Russia and Central and Eastern Europe.

Being a specialist on Ukraine and Belarus, I was offered the opportunity to apply for the position of Resident Representative in Ukraine and Belarus.

Since February 15, 2009, I have been in Kiev and I now have the chance to assist Ukraine to develop as a democratic and liberal country. It will be a challenge to help the Ukrainians build up a liberal party and a liberal minded public and civic society.


“Ukraine, Russia, & the EU: A Strategic Triangle?“ - Handover of the Kiev Project Office of the Friedrich–Naumann-Foundation for Liberty


Heike Dörrenbächer introduces herself “My voters in Germany did not understand why their gas shipments through Ukraine were blocked”, said Alexander Lambsdorff, Member of the European Parliament, speaking about the recent strain in relations between Europe and Ukraine at the handover of the Foundation’s project offices for Ukraine on January 27th, 2009 in Kiev. It is important for Ukraine to avoid giving the impression that, in case of a conflict with Russia, it could put the EU’s gas supply at risk.

This position was directly endorsed by the Ukrainian Government when the Minister of Economy, Bogdan Danilischi, spoke at the same event, sponsored by the Friedrich–Naumann-Foundation for Liberty.

During Alexander Lambsdorff’s visit to celebrate the handover of the Friedrich-Naumann-Foundation for Liberty office by Manfred Wichmann to Heike Dörrenbächer, the Foundation cooperated for the first time with the local German Economic Delegation, the most important economic delegation posted in Kiev. This collaboration between the Foundation and the German Economic Delegation has established a base for future work in Ukraine.

Karin Ra, Germany’s Economic Delegate to Ukraine, accompanied Susanne Schütz, Permanent Representative of the German Ambassador, as speakers at the event. All the speakers emphasized the fact that Ukraine had already made significant progress towards strengthening European-Atlantic institutions. The evening’s main discussion topic was the gas dispute with Russia. The consensus was that this dispute did not benefit the EU and that Ukraine’s internal political crisis, which has been smouldering since July 2008, was not understood in Europe. In addition, Lambsdorff outlined his concerns that although Ukraine was one of the countries most affected by the recent global financial crisis, the political elite had so far taken few measures to fight it. The Ukrainian Minister of Economy, as well as Karin Rau, saw the crisis as an opportunity for Kiev to finally initiate essential economic reforms, which would make enable the country to remain attractive to investors.

Lambsdorff recommended that Ukraine use the European Football Championship, Euro 2012, as a milestone on their road towards Europe. A successfully organised Championship would catapult Ukraine’s popularity rate up among the European public, allowing the country to become an essential part of Europe, “to belong to it”. The Ukrainian Government should definitely sieze take this chance to improve their country’s image.

At the end of this large event, attended by about 250 German, Ukrainian and international political, economic and corporative representatives, Manfred Wichmann turned over leadership of the Friedrich – Naumann Foundation project office to his successor, Heike Dörrenbächer, effective March 1st.

As of that date, the Kiev office in Kiev has a new mission – responsibility for Belarus has been added to that for Ukraine.

Wolfgang John

The South Caucasus Crisis Continues

Insecurity in the South Caucasus increased again following the Five-Day War of August last year. The truce which followed the war, concluded with the support of the European Union, is more than fragile because it has not been fully ratified by Russia and because Georgia continues to insist that the international community guarantee its territorial integrity. It regards the presence of Russian troops and military bases within its territorial borders as illegal and Russia itself as an occupying country. Russia’s recognition of the two separatist regions as independent states make any further negotiations over the regions’ status impossible. The situation has been further complicated by the fact that during the hostilities many Georgian refugees have been forced to leave South Ossetia and have failed to return. Large, ethnically Georgian settlements in South Ossetia, such as the town of Akhalgori, which stands only 35km away from the Georgian capital of Tbilisi, are totally depopulated. Under such circumstances, Georgia’s media have been continuously speculating about circumstances which would result in the resumption of military operations. It has been feared that in case of a new war, Russia could occupy parts of Tbilisi itself.


Tensions between Georgians and Armenians

The August War also severely strained the relationship between Georgia and Armenia. It has become clear that, despite the great reticence of both countries, Armenians consider the South-Ossetians to be the victim, not the aggressors, in this war. Levon Ter-Petrossian, the Opposition leader and former President of Armenia, even expressed the opinion that genocide might have been committed against the South-Ossetians had Russia not intervened. He compared Georgians’ actions in South Ossetia to Croatia’s occupation of the predominately Serb-populated Krajina in 1995.

Armenia’s national authorities took advantage of the war to indoctrinate the Armenian public with two messages: one, that due to the Turkish-Azerbaijani blockade, their country has become increasingly economically dependent on its Georgian neighbour and two, that hundreds of thousands of their countrymen living in Georgia, in the crisis areas of Abkhazia and Javakheti, have been exposed to countless dangers. The situation was aggravated further when Georgia detained groups of Armenian activists, charging them with the illegal possession of weapons, with espionage and with the instigation of riots and turmoil.

Armenian nationalists in turn accused the Georgian government of using “demographic terror” to drive Armenians out of Georgia. Charge and counter charge led to the resumption of old conflicts between Georgians and the Armenian minority in the Javakheti region, that had seemed resolved following the closure of Russian military bases in the region’s administrative center, the city of Akhalkalaki. For Georgians and Azerbaijanis, ethnic conflict in Javakheti brings to mind the clash at the beginning of 1990’s over the Nagorno-Karabakh region, which lies within the territorial borders of Azerbaijan, although the majority of its inhabitants were Armenians. This clash escalated into a war, with more than 2,000 casualties and hundreds of thousands of refugees.


Democratic deficits threaten political stability

Lapses in democratic development during the years after the dissolution of the Soviet Union are today leading to the accelerating erosion of political stability in all the South Caucasus countries. Among the reasons for the dangerous aggravation of the situation in the region are the violent suppression of the demonstrations of the Georgian Opposition in November 2007 in Tbilisi, the bloody slaughter of followers of the former President, Ter-Petrossian, during the 1st & 2nd of March 2008 in Armenia, as well as criticism by international observers of the presidential elections in all three countries during 2008.

Meanwhile in Armenia, the people’s distrust of the authoritarian regime in Yerevan has triggered a continuing crisis with far-reaching consequences for the nation’s economy. The national currency recently collapsed - the exchange rate of the dram against the Euro and US Dollar plunged by more than 20% in the beginning of March 2009 which, with the consequent threat of galloping inflation amid the overall conditions of the global financial crisis, threatens the internal cohesion of the country. The conciliatory signals by the Opposition leader Ter-Petrossian in a meeting on March 1st, 2009 and the announcement of an amnesty for political prisoners by a representative of the Government could lead to a positive change at the last minute.

The internal political situation in Georgia is as dramatic as Armenia’s. Former high-ranking representatives of President Saakashvili’s government have joined deputies of the Opposition to call categorically for the resignation of the current state president. A petition requiring him to resign is now being circulated. Massive demonstrations are being planned across the whole country in April. It is worth noting that, along with the opposition parties, the campaign to force the President to resign has also been joined by a former Chairman of the Parliament with many years of service, Nino Burjanadze, the ex-Prime Minister Zurab Nogaideli and Irakli Alasania, who recently resigned from the office of Georgia’s Ambassador to the United Nations. The next few months will bring both a massive opposition campaign and deep financial hardships which will hardly help President Saakasvili realize his plans to stay in office till 2013. Despite the nation’s massive crisis, political debates tend to focus on questions of a personal nature rather than on real problems such as the security of private property, of reconciliation with neighbouring countries and the fight against “subconscious Stalinism”.

Some commentators have stated that Azerbaijan is a feasible example of a state that has achieved political stability without democracy. The abundant financial resources from the trade of oil and natural gas were enough, at least for now, to gloss over the country’s problems. High employment and generous social welfare programs, supported by State funding, has appeared to win peoples’ support for the country’s quasi-monarchal ruling system. The regime has hopes for successful relations with its western partners and in the fight against terrorism. A referendum on the issue of amending the Constitution is scheduled for March 2009, its main purpose is to remove term limits and allow the current President to be re-elected without end, thus continuing the tradition of the constitutional supremacy of the Aliyev family, set by the current President’s father some 40 years ago. However, this concept of stability without democracy now seems threatened by the fall in oil prices, the rise in inflation rates and the dangers of the smouldering conflict over the Nagorno-Karabakh region. The recent assassination of the Head of Azerbaijan’s Air Force, Rail Rzayev, in February 2009 has fueled speculation that the stability of Azerbaijan is eroding from inner conflicts.


The rapprochement between Armenia and Turkey provides new hopes

The conditions for a rapprochement between Armenia and Turkey are the best in 15 years, since the beginning of the armed conflict over the Nagorno-Karabakh region. The war over South Ossetia emphasised like no other event how vulnerable Armenia was to the Turkish-Azerbaijani economic blockade. When neighbouring Georgia deliberately blocked the transit routes to Armenia, cutting off the supply of basic commodities, the population was seized with panic. In the meantime, Turkey admitted that Armenia’s dependence on Georgia as a transit country could prove counterproductive in the long run. This was an important motive for both countries to undertake definite actions for a rapprochement, first and foremost for the opening of their joint border. The visit of Turkey’s President, Abdullah Gul, to Yerevan on the occasion of a soccer game marked a new stage in the relationship between the two countries. The recent statement by Armenia’s Foreign Minister that the USA may not raise the First World War genocide issue so as not to harm the process of rapprochement between Armenia and Turkey would have seemed absurd months ago. Until now, the principal aim of Armenia’s foreign policy has been to enlist as many countries as possible in a peremptory condemnation of the genocide against Armenians committed by the Ottoman Empire.

The opening of the Armenian-Turkish frontier would not only be an important step towards secure transit. It would also be a victory for common sense and perhaps the beginning of fundamental internal political changes in Armenia itself. Under the conditions of an open border with Turkey, Armenia could finally say goodbye to the monopolisation of its economy. More competition and economic development could help overcome the deadlock situation between the Opposition and the Government in Armenia and enable new democratic reforms. Turkey’s increasing influence in Armenia could, in the meantime, offer new opportunities for the settlement of the Nagorno-Karabakh conflict with Azerbaijan. The poverty-stricken Turkish border regions, populated mainly by Kurds, would also benefit. After many years of economic boycott and diplomatic opposition in the South Caucasus, this could prove the first positive example for a settlement of conflict through constructive collaboration.


The Foundation works under extraordinary conditions

The activity of the Friedrich-Naumann-Foundation for Liberty in the South Caucasus has been considerable impeded by the tragic events of 1st and 2nd of March 2008 in Armenia and the 2008 August War in Georgia. For months on end, its work in Armenia was limited solely to some very small undertakings, while in Georgia it was stopped altogether during the war. Now, the situation in the region has returned to normal and the Foundation can continue its work in Armenia and Georgia.

The activity of the Friedrich-Naumann-Foundation for Liberty in Armenia, Azerbaijan and Georgia focuses on the encouragement of reforms in the sphere of market economy through political education and dialogue. Its ultimate goal is to win over as many young specialists as possible to the policies of private property, open frontiers, low taxes and the negotiated settlement of conflicts. The Foundation’s partners should regard the region’s diversity of peoples and languages as an advantage rather than a problem. Economic cooperation is a precondition for the settlement of conflict, not the result of it. Using the example of Europe, the Foundation will explain to its partners how, through joint economic efforts, the countries in the region could not only overcome poverty, but also secure peace. Dialogue in the region is a central theme of the Foundation’s meetings. Since 1998, Armenians, Azerbaijanis and Georgians have been meeting at regular intervals within the framework of a South Caucasus dialogue, organised by the Foundation. Since 2005, participants from the Abkhazia region, though not recognised diplomatically, have also been asked to attend these meetings.

The Friedrich-Naumann-Foundation for Liberty supports a network of liberal party politicians and youth organisations that are actively campaigning for a market economy, democracy, peaceful conflict management as well as putting an end to the armaments race and hate propaganda., During this time, two political parties in Azerbaijan and Georgia have become members of the European Liberal Democrat and Reform Party (ELDR). Furthermore, four South Caucasus youth organizations have joined the International Federation of Liberal Youth.


Wolfgang John

Michael Link, MP

The Common Foreign and Security Policy (CFSP) and the ‘Trouble Spot’ – the South Caucasus – a Test for EU Foreign Policy in the southeast corner of the Continent

The author is a Member of Parliament for the Free Democratic Party (FDP) in the German Parliament (Bundestag) since 2005. He serves on the Committee on the Affairs of the European Union, and is Deputy Chairman of the Parliamentary Friendship Group for Relations with the States of the Southern Caucasus. Mr. Link also represents his country in the Parliamentary Assembly of the Organization for Security and Cooperation in Europe (OSCE)

 

The Common Foreign and Security Policy (CFSP) of the European Union and the South Caucasian ‘Trouble Spot’ – a test case for the EU’s Foreign Policy in its Eastern Neighbourhood

With the recent war over South Ossetia and Abkhazia, the South Caucasus has yet again become a focal point for international crisis mediating efforts. The 2008 flare-up of the Russian-Georgian conflict redirected international attention to a small, but strategically important region that forms part of the European Union’s Eastern Neighbourhood. Yet, although this was hardly covered by the German media, in 2008 not only weapons had a say in the South Caucasus, but also voters went to the polls. According to international and local observers, the presidential elections of January 5 in Georgia, February 12 in Armenia and October 15 in Azerbaijan were deemed important reference points for the region’s future development. Thus, the year 2008 offered a singular opportunity to make a long overdue step in the right direction towards more democracy and freedom. Unfortunately, this chance was missed rather carelessly. As a consequence, the South Caucasus will slowly but surely become a major ‘trouble spot’ at the EU’s borders, increasingly involved in organized crime, chaos and maybe even war.

 

Elections without Democracy

The list of misdemeanours had already been long in the run-up to the elections: Election campaigns were marred by the incumbent regime’s attempts to intimidate journalists and members of the political opposition. The executive branch of the government secured and excessively employed substantial administrative resources that were denied to the opposition – such as media coverage or control of the accreditation as well as the registration of the list of candidates. Strong pressure on public servants was the rule and national resources were abused unscrupulously. On polling day, the situation worsened even more. In all three countries international monitoring missions have ranked the vote counting system quite negatively, ranging from unsatisfactory to insufficient.

To put it briefly, the elections have demonstrated significant deficits in all three countries. Despite more than 15 years of independence, democracy falters in the South Caucasus. In this respect Georgia’s laggardness is of particular disappointment. Although the country’s ambitions for membership in the Euro-Atlantic institutions are most welcome, President Saakashvili’s aggressive demeanour toward South Ossetia has unfortunately proved previous reservations correct. This conduct sheds light on the lack of democratic progress in Georgia and renders the country immature for the NATO Membership Action Plan, let alone EU candidate status.

 

Stuck between Democracy and Dictatorship

By now it has become obvious that the post-Soviet transformations of Armenia, Azerbaijan and Georgia are stuck between democracy and dictatorship. The three countries no longer proceed straightforward toward democracy but rather get lost in regime cycles, spiralling downward to (pseudo-) democracy and authoritarianism.

The primary causes for this are informal power structures that pervade the entire political system. These structures use formal institutions created by the constitution and legislation not for their prescribed purposes, but for their own benefits. National resources are often misappropriated to strengthen informal power networks and to secure influence. Monopolies in both economy and political power serve to control and to oppress freedom, while political opponents are either co-opted or eliminated.

This development is utterly devastating for a region whose sole chance for a peaceful future lies in the stability provided by democracy. Democratic stability certainly does not mean safeguarding the status quo of the ruling potentates, but requires a modern understanding of stability, which is deeply rooted in the rule of law and committed to free media and pluralism.

The violence that broke out during the elections in Armenia and Georgia not only demonstrates the increasing discontent among a large part of the population in both countries. It also makes clear how unstable their political systems are. Neighbouring Azerbaijan seems to be an exception, but only at first glance. Its strong authoritarian system is apt to oppress and control its political opponents, for now. However, authoritarian ‘stability’ is old-fashioned and inefficient. Only democratic legitimacy can sustain long-term stability that is conducive to peace, security and prosperity. Domination based not on freedom and legitimacy but on oppression and coercion inevitably will lead to violence and chaos in the long run.

The violent conflicts in Abkhazia, South Ossetia and Nagorno-Karabakh, as well as the war between Russia and Georgia are a case in point for the aberrations in the South Caucasus with regard to the democratic development in the past few years. However they also shed a light on the policy failures committed by Western countries, especially the EU.

The CFSP Should Not Be Reduced to a “Great Game”

The credibility of the European Union was challenged already in the run-up to the region’s recent elections. A major reason for this was the reluctant and ambiguous attitude of the EU and its member states. According to some cynical observers, the European pragmatists were likely to accept a sham election in Georgia and Azerbaijan for the sake of their energy security interests and would deem Armenia of rather little economic importance. Hence, in all three states democracy and freedom were to be sacrificed in the name of strategic interests.

It is of no importance whether this reproach seems exaggerated or not, because credibility is the most valuable asset of EU’s foreign policy: the shared values of democracy, human rights and freedom are essential attributes to our Union. Therefore, the EU has to take a clear position with regard to the political situation in its Eastern neighbour countries. Furthermore, future co-operation with ENP partner countries has to call much more for substantial reforms that aim at strengthening democratic principles, the rule of law and a social market economy. The ENP must not be reduced to a mere European answer to Russia’s, China’s or others’ geopolitical “Great Game” in the Caspian region. By contrast it should provide a comprehensive policy framework for peace, stability and prosperity based on the principles of democracy, the rule of law and freedom.

Precisely because Georgia is a possible future candidate for membership, the EU ought to send a clear and distinct message to its leadership. A closer partnership with, even more a membership to the EU, may only be bestowed upon the full implementation of a liberal democratic constitutional order as well as the unconditional commitment to peaceful means of conflict resolution. In this regard, Georgia’s martial rhetoric of the past few months is not appropriate at all!

Likewise, co-operation between the EU and Armenia should not remain a one-way street. The presidential elections of early 2008 demonstrated clearly how unstable and precarious the situation in Armenia is. Mass protests in the aftermath of the highly contested presidential elections, casualties mostly among protesters and the declaration of the state of emergency shook the country. Furthermore the recent war between Georgia and Russia further aggravated Armenia’s ambivalent position between the two countries. On the one hand, Russia is a strategically important political partner for Armenia. On the other hand, however, the country’s economy is highly dependent on Georgia since 70% of her imports arrive via the northern neighbour.

In Azerbaijan, the unlimitedly re-electable President, Ilham Aliyev, has noticeably grown more self-confident over the last few years. The reason for this is Azerbaijan's importance for the energy security of Europe, Based not only on the size of its oil and gas reserves but also on their economically advantageous location, Azerbaijan offers a great potential for the diversification and independence of Europe’s energy security strategy. However, this potential should not cause the EU to turn a blind eye to breaches of democratic principles in Azerbaijan, as was demonstrated by the obvious manipulations during the presidential elections in October 2008.

 

Relations with Eastern Europe: A Test Case for the CFSP

The European Union’s ad-hoc management of the Georgia crisis has clearly demonstrated the lack of a coherent Common Foreign and Security Policy framework. Despite their commitments made at EU summits, several member states still prefer to play a lone hand regarding policy. Separate initiatives, like those of Germany (the Baltic Sea pipeline) and of Italy (the partnership of ENI and Gazprom), harm the EU’s capacity to act in concert. This enables Russia to apply its usual policy of divide and rule. The Baltic Sea Pipeline Project is a case in point. It furthermore has seriously strained Germany’s relations with such important EU partners as for instance Sweden, Finland, Poland and the Baltic countries. Berlin’s action has prompted strong protest from Warsaw, which echoes the silent but deep discontent over Germany noticeable in Stockholm and Helsinki. This inconsiderate German conduct introduced by Chancellor Schröder and continued (in a nicer tone) by Chancellor Merkel acts against the very idea of a common CFSP, as it seeks bilateral co-operation with Moscow at the expense of other EU member states.

In addition, the consequences of the war between Russia and Georgia are disillusioning. The CFSP may be considered successful only in a very superficial manner, as there is only slight hope for a peaceful conflict resolution in the near future and for the time being, Russia’s position in Abkhazia and South Ossetia seems (but only seems!) to have strengthened. The EU made a critical error in not acting in a determined and united manner from the very beginning of the crisis. Later during the crisis the EU was not able to make up for this loss of time. Sarkozy's hyperactivity barely plastered the bricolage crisis diplomacy. All the mutual backslapping among the Council members in Brussels as the armistice was signed, in retrospect, seems ridiculous. In fact, despite all the mutual affirmations given at the Council, the crisis painfully demonstrated how easy it is again to change borders and to exercise ethnic cleansing on European soil. This cannot be seriously called a success.

 

The EU Has to Become an Autonomous Actor

A coherent CFSP is needed now, irrespective of the Treaty of Lisbon. Moreover, the uncertain future of the Treaty’s provisions with regard to the CFSP should not serve as an excuse for any EU member state to remain inert with regard to the eminent task to form a coherent CFSP. On the contrary, regardless of the constitutional paralysis, mechanisms such as the EU Foreign Service should and must be activated in order to strengthen the EU as an international policy actor. The recent developments in the South Caucasus as well as the new power balance that materialised in the aftermath of the Russo-Georgian war render the pooling of multiple and disparate EU member interests in a coherent CFSP framework more important than ever.

Hence, the EU member states have to jointly define and maintain their relations with Russia, an important energy partner for Europe. The partly artificial controversies among the so-called old and new European states, offer third parties favourable opportunities to drive a wedge between EU members. The Caucasus crisis therefore also is a chance for the EU to become aware of its weaknesses with regard to foreign policy and, at last, to establish structures, which can react to crises swiftly and adequately.

 

Russia in the Caucasus – an Exhausted Giant

The war between Russia and Georgia has deeply divided the EU, mainly concerning the policy toward Russia. Drawing on their historical experiences with Russia and based on the assertive co-operation with the USA, one camp advocates a strong and assertive policy-line towards Russia. As a consequence of the past events, this group demands the employment of sanctions on Russia. The other camp is opposing sanctions and advocates a dialogue with Moscow. Yet, the question is whether sanctions would produce any effect on Moscow? Presumably not, since at the moment Moscow feels strong enough to ignore them, despite the financial crisis. However, the financial crisis has shown that Russia is weaker than the Putin/Medvedev duumvirate would like her to be. Due to the recession-induced fall in energy prices and Moscow's cash injections for oligarchs in financial difficulties, the country’s enormous liquidity reserves are melting away like ice under a hot sun.

Furthermore, since August, the Russian war ‘success’ increasingly shows the signs of a Pyrrhic victory as the difficulties to control the situation in the troubled region of the North Caucasus have become greater than ever. At its southern borders, the seemingly giant Russia rests on feet of clay. Thus sooner or later, Moscow will have to realise that friendly and stable neighbours are by far preferable to weak and instable mini and proxy-states, installed from the outside. This also entails the understanding that small satellite states such as South Ossetia, Abkhazia, Transnistria or Nagorno-Karabakh, in the long run, do more harm than good. However, Moscow can realise this only if the EU conveys a clear message. However, the communication with Russia has to meet two criteria, it should make use of the public channel prudently and it should avoid inappropriate cold war rhetoric. In this context the expression “modernisation partnership” coined by German foreign minister Frank Steinmeier could be of some use; yet only if the message was sent en claire and in a way impossible to misunderstand by the Russian side. For far too long, we have imagined Russia as we wished it to be, not as it really is. Today, Russia is the ‘furthest away’ from the process of becoming a democracy, as in the Yeltsin era. A strategic partnership with Russia will only be possible again if Moscow sets a steady course towards the rule of law, media freedom and pluralistic democracy.

 

A Role for the OSCE

 

A suitable forum for determining and implementing a strategic partnership between the West and Russia already exists: the OSCE. However, both sides should engage the organisation more actively. Because the OSCE represents an acceptable institution for all partners, in which the participating countries may engage an act if they wish to do so. In future, the new US administration will probably begin to play an active role again in the OSCE, whose importance was dangerously underestimated by the Bush Administration. Let's hope that the EU will eventually begin to play an active role there as well. Medvedev has repeatedly tried to bring the OSCE back into play. We should take him at his word but without compromising, as Moscow might wish, the OSCE’s role in promoting democratisation, media freedom and impartial election monitoring. Especially in the South Caucasus, the OSCE could provide the only mutually acceptable means for establishing peacekeeping forces and conducting peace conferences.

 

 

Conclusion

An analysis of the recent Caucasus crisis in all its complexity should motivate the EU to define a clear policy towards Russia and the three South Caucasian countries. This can only be done with the creation of a coherent CFSP. A clear policy should recognise, but not be limited to, economic interests; our dependence on oil and gas should never induce political blindness. The developments at Europe's southeast corner in the Caucasus showed us once again that the EU should not allow external actors to co-operate with individual member states without paying regard to EU institutions. The EU should not allow itself to be divided.

 

 

Michael Link, MP

Rainer Stinner, MP

Bosnia needs international commitment, not dictatorial authority

Rainer Stinner, German MP (FDP), made the following statement regarding the recent resignation of the High Representative for Bosnia-Herzegovina, Miroslav Lajcák:

“Bosnia still needs the commitment of the international community, but the institution of the High Representative has outlived its usefulness. In fact, the High Representative’s mandate now exists only on paper. Since the international community, and especially the EU, have called for democracy in Bosnia, they cannot continue to insist on the right to enact laws in a dictatorial way or to depose democratically elected politicians from office. This approach is contradictory and no longer acceptable in that country.

International guarantees to protect the country’s security are still necessary. Such guarantees could be similar to the emergency government arrangements in the ‘Germany Treaty’ of 1952. Under these arrangements, the EU could be entitled to take all necessary measures in order to restore security and order in case of a serious disturbance of law and order or a serious violation of the implementation of the Dayton agreement. This measures would include the political power to remove officials and regulate actions in a way similar to the ‘Bonn Powers’. However, the threshold for implementation of this authority would be considerably higher.

Both the security protection by the military missions EUFOR and EUPOL and the protection of the rule of law by the EU has to continue. In this way, the need for protection frequently expressed by the citizens of Bosnia and Herzegovina is taken into account without obstructing the democratisation process.”

(Press Release)

The panelists

Some Successful Ideas for a Liberal Education

How can liberal ideas be better promulgated? What role can a think tank  play in this process? These were the two primary questions addressed during  the "Think Tanks and Liberal Education" discussion organised by the Friedrich-Naumann-Foundation for Liberty during the European Resource Bank Meeting held in Tbilisi, Georgia.

Ulrich Niemann, Head of the Regional Office for Central, Southeast and Eastern Europe, South Caucasus and Central Asia, had the honour to open the meeting. Then Jiri Schwarz, President of the Liberal Institute in Prague, and Jan Oravec, President of the F. A. Hayek Foundation in Bratislava, presented the educational programmes of their organisations. These two speakers have  wielded considerable influence over the political reform processes in their countries for a long time. Their target audience is mainly young people and journalists and they promote their work in diverse ways, from workshops about their own publications to an intensive schedule of publishing in the media.

Next came the presentations by Wolfgang John, Project Director for South Caucasus, and Sascha Tamm, Head of the CEE Department at the Friedrich-Naumann-Foundation for Liberty. They explained the main principles of the Foundation´s activity and described its different forms and methods. Sascha Tamm presented the fundamental goals of the Foundation´s work worldwide: promoting freedom and property rights, freedom and the constitutional state, freedom and civil society. He made it crystal clear that their success depends on what is going on all around the world.

Wolfgang John showed how the Foundation for Liberty and various think tanks have been working together to disseminate liberal ideas in the countries of the region. He emphasised that the Foundation is working actively throughout these countries, not just in their capital cities. He also stressed that during seminars, considerable weight is laid on active collaboration and dialogue amongst participants.

The final presenter was Tom Palmer, from the renowned CATO Institute in WashingtonDC. He explained that for educational programmes to achieve an impact, the audience must be addressed emotionally as well as intellectually, that the personal can be as important as statistics and theories. In his opinion,  Liberals construct strong intellectual arguments yet neglect the emotional component.

 

The discussion produced some interesting ideas for liberal education. Participants from the USA and more than 10 other countries received moral motivation for their work. The Foundation´s suggestion, announced at the meeting, to issue a handbook with the discussion´s best ideas was enthusiastically endorsed.


Sascha Tamm

The authors

Learning a Lesson from History: A Publication of Reform Projects in Eastern Europe

As presented to the European Parliament

"We are happy that in these times of crisis, we have some good news for you today", was how Ulrich Niemann, Head of the Regional Office for Central, Southeast and Eastern Europe, South Caucasus and Central Asia (CEE), welcomed the 60 guests who had come to the European Parliament building to witness the presentation of a publication dealing with some successful examples of liberal reforms. The Friedrich-Naumann-Foundation for Liberty and a network of market-oriented think tanks have selected the best practical ideas from the many liberal reform projects applied in Eastern European countries undergoing  transformation to market economies. Co-editor Remigjius Simasius, President of the Lithuanian Free Market Institute, describes the book as "a clear account of how reforms could be successfully performed despite all hurdles and resistance met on the way" then added humorously, "Followers wanted!".

 "I am h
Siim Kallas by introducing the Book Launch appy not only about how these important reforms are presented here but also about the fact that this book is published at such a critical moment", said Siim Kallas, Vice-President of the European Commission, a former Prime Minister of Estonia, and a major contributor to the book. Commissioner Kallas, who managed to enact key political reforms in his own country, shared his formula for success: "You need to have a good idea in mind, find the best way to put it into practice, hit the right moment for its realisation as well as receive social support".

Jiri Schwarz, President of the Liberal Institute in Prague and author of the book´s report on Bond Privatisation in Czechoslovakia in the early 90´s, pointed out the adversities faced by these trailblazers of economic reforms: "Back then, there was a lack of know-how concerning the privatisation of state-owned economies. Due to the obvious lack of foreign interest in the process, we decided to solve the problem by auctioning stakes in those branches of the economy. We got good results and corruption was almost absent". Jan Oravec of Slovakia, Schwarz´s colleague and co-author, reminded the audience that in the primary stages of his country´s economic transformation, Slovakia did not perform well compared to other countries. "The reforms and the introduction of a flat tax, first and foremost, revived the country´s economy". He added that an economic crisis was precisely the right moment for introducing reforms.

Oravec, who is also President of the Slovakian Employers´ Union and head of the F. A. Hayek Foundation in Bratislava, was acclaimed by Andres Arrak, a Professor and liberal economist from Estonia, and by Dimitar Chobanov, from the Bulgarian Institute for Market Economy in Sofia. Their contribution to the book was a clear account of the tax and financial reforms conducted in their countries. Chobanov emphasised that the hard period of hyperinflation in Bulgaria was a direct result of poor political management. "The introduction of real financial reforms and fiscal discipline was the cornerstone of change", explained this renowned economist from Sofia.

The publication The participants unanimously agreed that market economy reforms should become the immediate priority of every country. Siim Kallas reminded the audience of the historical example of the creation of the European Common Market, whose four main freedoms have still not come to their full realisation. Kallas called for the participants to stand up to the current economic problems and turn their back on state intervention and protectionism. "The present financial crisis should make us think and talk about market reforms as the way out of this complicated situation". This new publication of the Friedrich-Naumann-Foundation for Liberty should give us the courage to act and some fresh ideas for solutions.

Ulrich Niemann

 

Peter-Andreas Bochmann

Our new colleagues

Despite being born in the socialist German Democratic Republic (GDR), I found my way to the Liberals at a very early age because my father had helped found our home region´s branch of the Liberal Democratic Party (LDP) in 1946. During the GDR era, I too was an LDP member and spent my political life under socialism in this small party.

After the great changes of 1989, I became very active politically and was a founding member of JuliA, the young liberals in East Germany. Later I worked as the Managing Director of the Free Democratic Party (FDP) in Saxony, one of the new federal states in re-united Germany. During that time it was my task to establish and restructure the regional party organisation.

 

In 1996, I commenced my work with the Friedrich-Naumann-Foundation for Liberty (FNF) by being appointed as Director of the WolfgangNatonekAcademy. From 2000 to 2003, I was head of the regional office responsible for FNF activities in the federal states of Saxony, Saxony-Anhalt and Thuringia. During all these years, my essential task was civic education. Nevertheless I also developed expertise in local government issues.

 

In 2003, I changed my focus a bit and started an "international career" as the FNF Resident Representative in Pakistan. What a challenge for a Liberal! However, even in Pakistan one can find excellent Liberals who want to make a difference. It was a wonderful job to support their efforts and ideas and to create liberal networks and programs.

 

Returning to Europe in Summer 2008, I assumed my current position as FNF Resident Representative in Sofia, responsible for Bulgaria, Macedonia, Romania and Moldova. Although all these countries already exist within what could be called a "European entity" there is a lot of space to develop new, and most importantly liberal, ideas to improve the integration process of these states and to help them form liberal civic societies. I´m sure that liberal Balkan states are the best foundation for a successful, prosperous and powerful Europe which can be a strong actor in world politics and economics. 

Neli Kaloyanova Ms. Neli Kaloyanova is the new Coordinator for the Regional Dialogue Programmes and Project Management at the Regional Office for Central, East and Southeast Europe, South Caucasus and Central Asia (CEE) of the Friedrich- Naumann Foundation for Liberty (FNF) in Sofia.

Ms. Kaloyanova has two Master of Arts degrees, one in Theology, the other in Cultural Studies and Political Science. She studied at Kliement Ohridsky University in Sofia and Humboldt University in Berlin. From autumn 2006 to the end of October 2008, she worked as an assistant at the German Federal Parliament.

Ms. Kaloyaniova will assist the Regional Director in project management and will co-ordinate the Regional Dialogue Programmes.

 

Dr. habil. Peter Roehlinger

Liberal Strategies for Bulgaria

Dr. habil. Peter Roehlinger, a Member of the Board of Directors of the Friedrich-Naumann-Foundation for Liberty, visited Bulgaria from October 16^th to the 21^st. His visit was organised in accordance with the Foundation´s program for the political education of, and consultation with, newly elected liberal mayors and city council members. The Bulgarian representatives had been elected in October 2007. As the Lord Mayor of Jena for 16 years (from 1990 to 2006), Dr. Roehlinger has  acquired valuable experience by helping develop and implement of one of the most successful economic transition models in the former East Germany. Today, the metro Jena region is one of Germany´s fastest growing, with low unemployment and a young population. Its industry is modern and diverse, including bioinformatics, biotechnology, software and photonics, and supported by world renowned research institutes. 

 

The debate in Bulgaria over decentralisation and, as a consequence, the growing importance of municipalities, became more intense after the country´s accession to the European Union. The European Commission´s final reports on Bulgaria were severely critical, especially of its inadequate administrative capability, a striking absence of convincing results in the anti-corruption fight, and the lack of accountability and transparency in public procurement when spending EU funds. Dr. Peter Roehlinger entered a highly charged political environment, where the social-liberal Government faced complex problems. He visited Sofia, Trjavna, Gabrovo, Lovech and Plovdiv and met with leading liberal politicians from the local, regional and national levels, and with activists, members and supporters of both the liberal parties collaborating with the Friedrich-Naumann-Foundation for Liberty - the National Movement for Surge and Stability (NMSS) and the Movement for Rights and Freedom (MRF).

A panel discussion on the "European Dimensions of Local Self-government - the Experience of the City of Jena" was held in two cities, Trjavna and  Plovdiv, with  groups made up of mayors, council members and governors of both liberal parties. These discussions provided an informal setting for Dr. Roehlinger to share the "know how" he acquired as a mayor for 16 years. He in turn had the opportunity to hear from the local Bulgarian authorities about their problems - insufficient decentralization, flawed public-private partnerships, and the lack of reforms in healthcare and education. Furthermore, Dr. Roehlinger, as a former East German, won the full sympathy of the participants by encouraging a very open discussion about their shared communist heritage.

Dr. Roehlinger was invited to address the fourth Congress of the NMSS in the city of Gabrovo by its leader, Simeon Saxe-Coburg and Gotha. He delivered an emotional congratulatory speech, in the name of German Liberals, to more than 1,500 enthusiastic delegates and guests. Among the guest speakers were the Prime Minister, Sergei Stanishev, the Vice-President of the European Liberal Democrats, Vesna Pushich, and the Secretary General of Liberal International, Emil Kirjas. With this Congress, the Party´s highest level assembly, the NMSS started its preparation for the 2009 Parliamentary and Euro MP elections. The Congress re-elected Simeon Saxe-Coburg and Gotha as their leader, who declared "I believe that it is precisely the Liberals who can advocate a policy which will make Bulgaria stand out from the background of the common European family".

 

Asparuch Panov

Sascha Tamm

Russia and the Financial Crisis

Until a few weeks ago, Russia´s government still pretended to be optimistic about the world financial crisis: according to many experts, it would hardly affect the country. But today, the situation is quite different, for the world crisis did not bypass Russia. Over the last six months, the Moscow Stock Exchange has reported huge losses, large companies in the raw material industries have been offered government aid, Russian oligarchs have been feverishly selling bonds and shares, and a shortage of finance has suspended many building projects. The causes of this are numerous and complex.

 

The world´s dependence on Russia´s export of raw materials is obviously enormous. The general credit crisis has complicated the situation of Russian business. Previously, when speaking of Russian enterprises, attention was focused on corporate profitability while the companies´ enormous debts in foreign currency were totally ignored. Most major investments in Russia enjoyed short-term financing by international banks while Russian politicians held the public´s trust. Despite their apparent confidence, Russians secretly admit that, to a large extent, the country is dependent on the world economy.

 

In an instant, Russia´s economy lost its good name. The consequences are that some banks are working only thanks to state financial help and investment activity is declining while unemployment rates are rising. However, a repetition of the severe shock of 1998 seems improbable: this time, there are sufficient financial reserves to soften many short term losses.

 

The political consequences are difficult to foresee. The public supported Medvedev and Putin in return for economic stability and prosperity, which could be achieved only through vast investments and social expenditures. But now that oil prices are going down and without another profitable part of the economy except for the raw materials sector, current levels of investment and spending are unsustainable in the long term. Crises are the best time to learn lessons: Russians are on the way to lose trust in their President´s sagacity and in the never-ending progress of their economy - something that is been going on in the West for a long time. The question is: what actions will Russian politicians undertake to attract long-term domestic and foreign investments in fields other than the raw materials sector? Will they lower themselves to blaming international markets, employing nationalistic rhetoric and blustering threats or will they be responsible and offer serious legislative reforms? Let´s hope that the latter will be their choice.

Sascha Tamm, Potsdam

Manfred Wichmann

How to Foster Freedom in a Hesitant Democracy

 A "hesitant democracy" - this might be an adequate, albeit friendly name for Ukraine since the success of the Orange Revolution in early 2005. There has been little movement ahead, except in the economic field. No sound institutional development, no emergence of a stabilising political culture can be reported. To the contrary: Ukraine is still among the most corrupt countries in Europe, if not the world. The political class is mainly concerned with its own power struggles. Disenchantment and apathy towards public affairs is growing, especially among those who once thought the Orange Revolution would open the gates to a dynamic, democratic evolution and closely link Ukraine with the values of the Western World, especially those of the European Union. Two important achievements from those glorious days have survived so far: freedom of expression and more or less fair elections, an asset that, despite all shortcomings, still makes Ukraine a positive exception in the CIS.

 

Three years in Ukraine

 

How does a liberal NGO like the Friedrich-Naumann-Foundation for Liberty operate in such a difficult environment and still hope that its modest contribution to democratic stability can have fruitful results? After three years of trial and error, of looking for partner organisations with political and social potential, for personalities with influence and integrity and for subject matters that cover the real needs of the Ukrainian society, the answers are as unclear as the country´s political future.

 

We have helped the youth organisations of important political parties to increase the knowledge and skills of their leading members, thus strengthening their influence within their respective parties. We have contributed to the education of members of local councils and administrations, mainly the younger ones, so that they can take decisions and act up to their new responsibilities. In cooperation with a central academic institution, we have laid the grounds for the dissemination of modern teaching methods and knowledge about New Public Management, a way of delivering efficient services to local citizens. We have supported the efforts by renowned political experts from the capital, Kiev, to extend their networks to the other parts of Ukraine, and given incentives to local elites for enhancing their own set of activities. We have fostered various information programs on the structure, decision-making process and the activities of NATO, thus combating the wide-ranging prejudices and appalling misconceptions about the Alliance among Ukrainian citizens. We have invited Ukrainian decision-makers to Germany and to Brussels, both the capital of the EU and NATO Headquarters, to give them an insight into the life of a stable democracy and key Western institutions. And, not to forget our Raison d´être, we have tried to spread liberal ideas via institutions, parties and personalities, although, facing the general lack of interest in programmatic thinking, to a lesser extent than we would wish.

On familiar terms with difficulties

 

Are we satisfied? Not really. Apart from the obvious stagnation in Ukrainian political culture we have to recognise, as is true in some other countries, the elite´s excessive self-satisfaction and its astonishing confusion about what has to change, how change could come about and how far it should go. This confusion afflicts the common people as much as their decision-makers. There is a huge contrast between Ukraine and the Baltic States, who also separated from the Soviet Union but right after their independence chose the shortest, most direct way to Western democracy and the market economy. Ukraine has lost a lot of time, and its people the notion of urgency. One can become obsessed by how often members of the Ukrainian elites use the excuse: "We are just starting our development, be patient." The fact is that after the Orange Revolution, development in terms of institution building and the state of the political culture may even have declined despite the thorough analysis, the ambitious projects and the high expectations that reigned in those early days. It seems an illusion to believe that the difficult times before the Revolution, a period marked by a strange mixture of authoritarian rule, dishonest privatisation yet an increasingly active civil society, have not left their mark on people´s minds. The most tangible consequence of that period is the domination of personal economic interest in public decision-making.

 

There is also a much too great a tendency to neglect the contradictions within modern Ukrainian society. Analytical thinking is scarce, even among intellectuals. Emotional, overly moralistic argumentation is accompanied by an astonishing incapacity to realize that Ukraine is in many ways a split country and therefore compromise the only reasonable foundation for steady, productive development. Ukrainian politicians are much better in stating their differences - too often accompanied by overly harsh words and even physical violence - than in defining common interests.

 

Work with political parties is hampered because, in addition to their abstaining from programs and scheduling, they are either short-lived or directed in an extremely authoritarian way.

 

A pointless job? Not at all!

 

So, is civic education in Ukraine pointless? By no means. Ukraine remains a huge challenge to all those who believe in individual liberty, democracy and the market economy. If the country succeeds in solving its internal problems in a tolerant way and becomes both a trustworthy partner of the West and a respected neighbor of Russia, its contribution to freedom, peace and economic prosperity in Europe can be immense. If not, Ukraine risks becoming a permanent generator of domestic and international trouble. It is our duty to support all those Ukrainians who, in NGOs, in political parties, in key public institutions and in private interest groups, strive for democratic development and public honesty. There are enough of them to make our job worthwhile. 

Manfred Wichmann, Kiev

Dr. Wolfgang John

Georgia: An Armistice without Peace

Following the truce concluded with the help of the European Union, Russia withdrew all its peacekeeping troops from Georgia´s heartland and life in the capital city of Tbilisi returned to its normal, peaceful rhythm. Disturbances occur only near the frontiers of  the separatist regions of Abkhazia and South Ossetia, which, after the war in August, seceded and were recognized by Russia as independent states. The consensus of international public opinion is that while Georgia´s attempts to restore constitutional order by force in South Ossetia were inappropriate, the Russian reaction went beyond all bounds. The two parties have started discussions in Geneva over the format of future peace negotiations.

It also goes without saying that all the participants in this five-day war paid a penalty for their actions. South Ossetia suffered heavy losses, its capital city Tskhinvali was devastated and the banishment of Georgians from the territory of South Ossetia have discredited the country in the eyes of the world. Russia´s recognition of South Ossetia and Abkhazia as independent states as well as their offensive which reached the gates of Tbilisi have cut off Russia from the rest of the world and ruined its reputation as an investment paradise. Georgians, however, also joined the club of the defeated, because due to their rash actions against the people of South Ossetia, they now have no chance in the near future of peacefully restoring the territorial integrity of their country.

 

New Chances for Georgia´s Future

 

Georgia was saved thanks to the solidarity of the West. The current ceasefire would not have been possible without the massive intervention of the USA and the EU. A  prerequisite for the relatively successful ceasefire was that Russia realised the advantages of international negotiations and therefore curbed its imperial instincts. For the time being, the withdrawal of Russian troops from Georgia´s heartland has set up preconditions only for peace talks, but not for long-lasting peace. Georgians have already made it unambiguously clear that they would never accept the Russian recognition of the independence of Abkhazia and South Ossetia, which contravenes international law. On September 1^st , President Saakashvili delivered a speech before thousands of his fellow countrymen saying that Georgians had stopped "the Barbarians of the 21^st century" just outside the gates of Tbilisi, thus making the country "a graveyard of Russian imperialism". He also said that Georgia would come out of the crisis "ten times" stronger.

Putting such bellicose emotions aside and rebuilding their ruined country should be Georgia´s only goals in the next few months. The fight for the independence and territorial integrity of Georgia should be conducted solely through the re-establishment of state institutions and the strengthening of civil society. It should include the reinforcement of property rights, of impartial legal proceedings and the inclusion of minorities in the development of the country. The international community should help Georgia guarantee the security of its people, giving them the opportunity to concentrate their attention on a peaceful settlement of the conflict. Therefore, the conference, which took place in Brussels on October 22, was an important step forward. The country will be granted approximately 3.4 billion Euros, to be used only for non-military purposes.

Overcoming the Past - Objective 1

 

Western support, however, is insufficient to bring peace to the country. Overcoming the reactionary spirits of the past is a priority at the moment. The age-old fight of all the peoples of the South Caucasus against Russian (later, Soviet) tyranny should be recognized. A solution to these ethnic conflicts can only be found when the underlying iniquity is fully eradicated. A selective interpretation of history leads to new conflicts. Exiles, ethnic purges and the banishment of whole peoples to regions over the Urals cannot be tacitly excused. The troubles of Abkhazians, Ossetians, Meshets and Armenians caused by Stalin´s nationality policy deserve as much attention as the oppression of Georgians. Having all this in mind, Georgians should lay particular stress on the analysis of the causes for the outbreak of the wars in the beginning of the 1990´s and come to conclusions for the resolution of these conflicts. The political doctrine "Georgia for Georgians" of the founding father and first president of Georgia, Zviad Gamsakhurdia, has to be entirely rejected. For this ultra nationalist, a grave on the Holy Mountain in Tbilisi is as unacceptable as is the museum in Gori is for Stalin. A dialogue amongst the representatives of all the South Caucasus peoples, now divided from one another by the tragic events of the past, is the only thing that can show all of them the right way in the future. It also creates preconditions for their mutual interpretation of their history.

 

No Progress without Democracy

 

Authoritarism, too, is a legacy of Soviet dictatorship. Therefore, Western champions of Georgia should be ready to help but demand more democracy in return. During his brief visit to Tbilisi, Daniel Fried, Assistant Secretary of the European and Eurasian Affairs Bureau in US State Department, expressed the opinion that independent media, unprejudiced courts and a strong Opposition are exactly what the country needs to develop successfully. The international criticism of the tragic events of November 7, 2007 and the recently held presidential and parliamentary elections should make Georgians draw the right conclusions. The predominance of the ruling party in the Parliament and in nearly all local governments does not move the country forward. Creativity and motivation, on the contrary, depend to a certain extent on enthusiastic discussions in representative institutions. The enormous power of the President, derived from the constitutional changes of 2004, have no counterpart in the Post-Soviet world and are inimical to productive development.

 

The Role of the Friedrich-Naumann-Foundation for Liberty

 

The promotion of a free market economy, a South Caucasus dialogue and Georgia´s joint activities with European and Euro-Atlantic organisations continue to be the major objectives of Friedrich-Naumann-Foundation for Liberty´s work in Georgia. The immediate establishment of peace and overcoming the antagonism with Abkhazians and Ossetians deserve greater attention. The development of a Russian - Georgian dialogue will be a crucial moment for the suppression of their mutual prejudices. Liberal ideas, therefore, can contribute greatly to this cause. A minority policy should undoubtedly be part of the Foundation´s program. Through its activities, the Friedrich-Naumann-Foundation for Liberty has to commit itself to the idea of enlisting the liberal family in Europe for the peace engagement cause in South Caucasus.

Dr. Wolfgang John, Tbilissi

 

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