EYE ON EUROPE

INTHIS ISSUE:

If it ain’t broke, don’t fix it P2

Book review:The Ascent of Money P3

Spotlight on Energy andEnvironment Programme P4

Is Lisbon Makinga Comeback? P6

Think Tank profiles P8

1ISSUE SIXTEEN

WINTER 2009ISSUE SIXTEEN

CONNECTINGTHINKTANKS, CREATING IDEASSTOCKHOLM NETWORK

Just as there is no such thing asa free lunch, one may argue thatthere is no such thing as an entirelyfree market. For the market tofunction successfully, especially intoday’s complex and interconnectedglobal economy, all the playersneed to know the rules of the game.So to what extent – if any –should governments intervene infinancial markets, both in terms ofregulating them but also in termsof policing them?

Global arrangements concerning capital

adequacy requirements, for example, the so-

called Basel I and Basel II frameworks, touch

upon this delicate relationship between states

and markets.

When the global economy is in good shape

and markets are on the rise, the need for

such frameworks seems less relevant. During

these phases it seems self-evident to argue in

favour of the efficiency gains of international

financial liberalisation, and in particular that it

improves the industrial allocation of capital.

In boom times, the supervisory role of

regulators is perceived as a stumbling block

to global prosperity.

However, when things turn sour and when

markets show their chaotic side – something

which could not be more prominent than in

the current period of credit crunch, financial

meltdown and global bailouts - the existence

STATES AND MARKETSgeneral provisions, hybrid instruments and

subordinated term debt). Additional areas of

difficulty concerned which institutions should be

subjected to the Basel I framework. It was argued

that the Basel Accord potentially disadvantaged

universal banks of the European kind, which are

subject to capital requirements, relative to specialist

firms in the securities, insurance and consumer

finance area, which are not.

Basel II emerged in the late 1990s with the

anticipation of providing a more robust framework

for regulating and managing the risk profile of

the banking sector. It is based on three pillars.

The first focuses on the minimum capital

requirements, taking into account the components

of credit risk, operational risk and market risk.

The second pillar focuses on the issue of

governance - essentially the degree of regulatory

and supervisory powers that should be used to

oversee the successful implementation of the first

pillar.The third pillar of Basel II (Market Discipline)

focuses on the disclosure requirements from

banks that operate in countries that adhere to

the framework.

Nevertheless, based on the current state of the

global financial markets the easy answer would be

to say that Basel II is failing. Critiques of the

framework can persuasively argue that

compromises reached in order to allow for this

framework to exist resulted in a very weak

framework that lacked any real ability to do much

at all in terms of reducing risk and preventing crisis.

CONTINUED ON PAGE 2

of such regulatory frameworks then starts to

seem more important. And it is in this context

that Basel I and Basel II should be considered.

The 1988 Basel Accord, negotiated and

concluded by the Basel committee of the G-10

countries (operating under the Bank of

International Settlement), emerged as a response

to the financial fallouts of several European

banks in 1974, most notably Germany’s Herstatt

Bank.These failures emphasised the need for an

agreement on bank supervision, especially in the

European markets. In other words, the general

perception at the time was that financial markets

could not just be left to their own devices.These

problems, combined with growing concern

about the divergence of capital adequacy

requirements between different monetary

authorities, finally resulted in an international

agreement - the Basel Capital Adequacy Accord

of July 1988, otherwise known as Basel I.

Broadly, the framework aimed to establish

minimum capital adequacy standards across the

major countries. Basel I set a minimum capital

standard of 8% of risk weighted assets (of which

at least 4% must consist of ‘Tier 1’ or core

capital) to be achieved by the end of 1992. Since

1988, this framework has been progressively

introduced by a number of countries.

Arguably, Basel I had several weaknesses. For

example, it allowed for a significant degree of

national discretion in terms of how countries

might achieve the minimum requirements by the

1992 deadline.The most noted example was the

discretion allowed with respect to ‘Tier 2’ capital

(undisclosed reserves, revaluation reserves,

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which the nature of innovation will evolve and

the way in which demand for such innovation

will manifest itself.The case of the personal

computer is just one example. Until the late

1970s, it was the general consensus at all levels

within IBM that the future of computing would

be dominated by the demand for computer

mainframes. It is reported that in 1977 Ken

Olsen, President, Chairman and founder of

Digital Equipment Corp. argued:“there is no

reason for any individual to have a computer in

their home”. However, the market experienced

a dramatic surge in household demand for

personal computers. In just five years, the annual

sales volume of personal computers matched

sales of the mainframe market, which had been

around for more than 30 years. Despite its

failure to predict demand, and contrary to other

companies, IBM did produce its own personal

computer and, by 1983, dominated the market.

Certainly, the professional pursuit of innovation

underpins the ability to introduce new products

to the market. But, of equal importance is the

fact that innovation can be unpredictable,

influenced by external events and ultimately

nurtured by the ability of entrepreneurs to

identify and seize opportunities once they

present themselves.

Technological innovation is deeply rooted in

market forces. It is the incentives and rewards

that the market provides which drives innovators

to make the risky, time consuming and costly

investments needed to bring new products to

the market.The innovation process is driven by

the voluntary will of the innovator to create and

use knowledge rather than any form of

compulsion.The voluntary market-driven efforts

of innovators form a bottom-up process.

If we accept that technological innovation is

based on these voluntary, market-driven efforts,

certain mechanisms do need to be in place.

One such mechanism is the existence of

intellectual property rights (IPRs) which provide

the incentives both for the creation and the

exchange of knowledge for the sake of

promoting technological innovation. IPRs

function as a safety-net that allows the process

of knowledge creation to take place, not least

in the phases that precede the introduction of

these technologies to the market. IPRs also allow

ISSUE SIXTEEN2

EYE ON EUROPE

Yet despite such valid criticism, the achievements

of the Basel I and Basel II frameworks should

not be underestimated. One should first ask

what could have happened to the banking

system in the recent period if this framework

had been absent. Of course, the situation could

have been better, but it is equally plausible that

we would have experienced much worse crises

than we have seen to date.

At times where banks and other well-known

household financial institutions turn to the state

for help and rescue, it reminds even the most

fervent supporters of the free market that a

framework such as Basel II is needed.

The question is not whether we should have it

or not, but rather how can we make it better

and more effective. Indeed, in order to meet

these challenges, in July 2008, the Basel

Committee on Banking Supervision (which

operates under the auspices of the Bank

of International Settlement) put forward a

proposal for revisions to the Basel II market

risk framework. Emphasis was given to more

enhanced supervision of assessment of risk, both

internally as well as by the regulator. Also, as part

of its efforts to make Basel II more effective,

The Basel Committee on Banking Supervision

announced in January 2009 that it is broadening

the mandate of its Accord Implementation

Group to concentrate on implementation of

Basel Committee guidance and standards.

The current condition of the market offers an

opportunity to treat the Basel II framework

more seriously and to understand that checks

and balances are needed for the international

banking system.

However, it is equally important to remember

that today’s economic downturn should not

be used - or abused - to present very rigid

regulatory requirements that may stifle the

financial markets and their ability to innovate.

The next few months will be about trying

to strike the right balance between states

and markets.

Helen Disney is Founder and Chief Executive

of the Stockholm Network

A version of this article first appeared in the

15 September 2008 issue of Quantum Magazine

STATES AND MARKETS …

CONTINUEDIF IT AIN’T BROKE,DON’T FIX ITIt would be hard to find anyonewho actively opposes the conceptof innovation. Both developed anddeveloping economies now recognisethe importance and impact ofinnovation on their national economicperformance, global competitivenessand overall wellbeing.And, in the ageof the ‘knowledge economy’ therehas undoubtedly been intensifyinginterest in identifying the desiredset of policy tools needed toencourage innovation.

Innovation is, however, a complex concept, and

takes place in various shapes and forms. It is a

social and economic phenomenon as much as

it is a technological one. The study of innovation

is constantly evolving, adding to our knowledge

and understanding of how innovation takes

place and how it may be improved or enhanced.

Equally challenging is the attempt to understand

further the relationship between knowledge and

innovation. For example how does the creation

and use of knowledge lead to more innovation?

And to what extent do new innovations

increase our knowledge? In other words,

innovation is such a complex and deep concept

that it would be impossible and even

presumptuous to try to argue that one is able

to predict and control the process.

Despite its complexity, however, we can still

identify some governing patterns that underlie

the innovation process.

First, technological innovation cannot be

characterised in terms of ‘good’ or ‘bad’

innovation. In some current public discussions

there is a tendency to argue that incremental

innovation contributes less to society than

radical innovation and, as such, is less desirable.

In other circles, innovation that focuses on the

components of a product is afforded a higher

status than innovation that concerns the manner

in which such products are introduced to the

market and to the public. In real life, though, the

contribution of innovation to society cannot be

categorised in such a simplistic way. Incremental

improvements can have effects which are just as

significant as radical innovation, while innovations

that concern processes and architectures

surrounding a product may be as essential to

the market and to the public as the original

product innovation itself.

Second, technological innovation cannot be

dictated or anticipated via top-down processes.

History suggests that even the brightest minds

cannot be expected to anticipate the manner in

entities to exchange and share their knowledge

assets in a manner that guarantees their

expected share of market reward from a

given innovation.

Nevertheless, it seems that a perception is

emerging in some segments of the policy-making

community that the use of compulsory, non-

market-driven tools in the private sector will

lead to greater innovative output, compared to

the existing models of innovation that are based

on voluntary market-driven efforts.With regard

to the compulsory aspect of the above model,

we can broadly define the term compulsory as

the act by a national or supra-national authority

of forcing the innovator to give up (in total or in

part) proprietary knowledge assets, be they

technology, knowledge, know-how, or trade

secrets. Compulsory practices can be based

either on the specific revocation of the legal

rights of the innovator to prevent others from

free-riding his proprietary knowledge asset

without his permission, or by forcing the

innovator to actively disclose all the particulars

relevant to the use of knowledge assets.

But leaving aside specific industrial sectors, and

looking at the theory as a whole, supporting a

compulsory, non-market driven model to

promote innovation could prove highly

problematic. First, it is not backed up by

theoretical or empirical underpinnings. On the

contrary, much of the theory and empirical

evidence suggests that innovation does not

seem to occur in this way. Second, it is more

likely that the exercise of this model is based on

political considerations rather than a rational

discussion of its merits.Third, it would seem that

advocates of this model are suggesting turning

the process on its head i.e. they advocate

implementing the concept first in the hope and

anticipation that it will work.

Certainly experimentation with different models

of innovation is not something that should be

prohibited, as long as these experiments are

undertaken at the expense and efforts of those

who wish to pursue them. In this case alternative

models are being touted not as complementary

innovation models but as replacements to the

long-established innovation process. In other

words, the experimentation is taking place at the

possible expense of innovation itself and, as a

consequence, at the expense of the consumer.

Helen Disney is Chief Executive and Meir Pugatch

is Director of Research of the Stockholm Network

A longer version of this article first appeared in

the 17 December 2008 issue of Foreign Direct

Investment magazine.

appreciation of how far our experiences with

finance have come and how our global financial

institutions and practices have developed. One

gets a profound impression from this chronicle

of finance that there is so much that we can

learn from history in order to prevent past

mistakes, but also to attempt a reproduction

of previous successes.What is clear is that the

value of finance in society is overwhelming and

its ability to enhance the lives of people, as well

as protect them from uncertainties, means that

no momentary crisis will be able to do away

with its principles. Consequently, anyone looking

for a sequel to this book entitled The Descent

of Money will have an unrewarding search.

Overall, The Ascent of Money offers an

intelligent and witty portrayal of our global

financial experience, which is both useful and

much needed in the often naïve discourse on

the current financial crisis. Readers will also

take away an important awareness of their

own association and connection to the financial

world, which begs the question ‘can you afford

not to buy this book?’

Paul Healy is Policy Analyst at the

Stockholm Network

Book Review:The Ascent of MoneyNiall Ferguson

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engu

inPress

The year 2008 will surely berecognised by history as a financialnadir. Global stock markets haveplummeted, large financial institutionshave collapsed (or been bought out),and governments around the worldhave resorted to using public fundsto rescue various ailing industries.What better time then to considerhow we came to find ourselves insuch a volatile arrangement?

The Ascent of Money is more than just a

biography of cash, it is an uncovering of the

entire system that has been created because

of money and a tool for understanding the

practices and institutions that affect, and enrich,

so much of our lives.The book’s author

highlights in advance the lack of financial

awareness in current society and there will be

many who have felt ignorant about the changes

that have occurred in recent times.

The Ascent of Money can act for many as an

educational device, a tool for comprehending

contemporary crises and putting them into a

historical perspective.

Like its companionTV series, this book separates

itself into six different sections that depict the

ascent of money, covering credit, the bond

market, the stock market, insurance, real estate

and international finance. Each chapter identifies

key figures and events that have contributed to

our understanding and practice of finance

including the Medici family, John Law, Nathan

Rothschild, and George Soros.

Readers will be fascinated by the book’s

interpretation of how the real turning point in

the American CivilWar occurred before the

South’s surrender at Vicksburg.The book details

how in 1862 the South’s loss of New Orleans

and its cotton-exporting port destroyed the

value of the South’s cotton-backed bonds

forcing its economy into ruin.

There is also an insightful account of the

pension reforms in Chile that took place

between 1979 and 1981 under the supervision

of Dr José Piñera, which resulted in sizeable

reductions in government expenditure and

has furnished almost 7.7 million Chileans with

private pensions.

What readers should get from this book is an

The resulting environmental changes, from

melting sea ice and permafrost to increasingly

variable precipitation and wind patterns, are

having serious effects on economies around the

region. In this ongoing process there are no clear

economic ‘winners’. The long shadow of

economic uncertainty casts its pall over the

whole range of northern non-state economic

actors, including indigenous communities, the

fossil fuel industry, and international shippers.

Though separated by vast distances and

differences, indigenous peoples are connected by

their shared environmental adaptations.

Their economic institutions reflect both their

similarities and differences. Hunting, herding,

fishing, and gathering form the backbone of

their societies. Agriculture, the central institution

in many southern economic systems, is almost

totally absent, limited by long winters, short

summers and low soil productivity. By

transforming these ecosystems, climate change

promises to forever alter the way indigenous

peoples make their living.

Increasingly, communities around the Arctic are

finding that traditional knowledge is at odds with

their shifting environment. Progressively later

freeze-ups on the coasts of eastern Siberia, Alaska

and the Canadian Arctic have limited hunters’

ability to travel safely across sea ice, the primary

winter transportation corridor for the region’s

coastal populations. Among other impacts, this

constrains their access to the marine mammals

that constitute an important segment of local

diets. Later winters have also forced the Saami of

Scandinavia and the Kola peninsula to find new

routes for their reindeer herds, changing

migration patterns and undoing millennia of

evolved social behaviour. Traditional economic

activities are being made more dangerous by

unfamiliar weather patterns, which have led to

more violent storm systems across the region

and an increasing number of deaths. By raising

the costs of hunting and herding, these

unpredictable climatic swings are forcing many

indigenous peoples to rely increasingly on

supplementary income provided by wage labour

and government subsidies.

The changing population and distribution of prey

species is also having dramatic effects.

The gradual thinning and retreat of arctic sea

ice is directly affecting the region’s seven primary

marine mammals, including beluga and bowhead

whales, the narwhal, ringed and bearded seals,

the walrus, and the polar bear. These animals

rely on sea ice for a variety of needs.

The possible disappearance of summer sea ice

over the next fifty to one hundred years would

be disastrous for animals and indigenous

peoples alike.

On September 16 2007, sea ice covered 4.13

million km2 of the Arctic Ocean, an area slightly

smaller than that covered by the European

Union and a 39% decrease from the twenty-

year average measured between 1979 and

2000. Four days earlier, global oil prices had hit

an all-time high of $80 per barrel. In a deeply

ironic juxtaposition, circumpolar climate change

therefore became equated with untapped fossil

fuels, the very substances whose exploitation

was primarily responsible for triggering climate

change to begin with. With an estimated 90 to

200 billion barrels of oil and a third of the

world’s undiscovered natural gas, the fossil fuel

potential of the Arctic is undeniable.

Nevertheless, the likelihood of its immediate

exploitation remains doubtful. Public

commentators, casting their eyes on Russia’s

west Siberian and Barents Sea fields, assume that

success in one sector of the Arctic foreshadows

similar success elsewhere. However, western

Siberia and the Barents Sea are special cases in

the polar world. Both are mild, warmed by the

northern arm of the Gulf Stream that keeps

sections of the Norwegian and Barents Sea

relatively ice-free. Compared to conditions

farther east, these corporate and state ventures

face relatively few environmental constraints.

Operators in other maritime and terrestrial

areas of the Arctic face more uncertain

environmental futures.

Offshore drillers are the most likely to benefit

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Spotlight on the Energyand Environment Programme:

CLIMATE CHANGEANDARCTIC ECONOMIESThe Arctic is a land of immense diversity. Populated by only four million people, it is on the front line of anthropogenicclimate change. Over the past fifty years, it has witnessed some of the largest temperature rises on the planet, as muchas 3° to 4°C in Alaska and Canada’s Yukon and Northwest territories.

EYE ON EUROPE

ISSUE SIXTEEN4

alongside demand for their services. Finally, given

the inherent risks of arctic travel, companies will

face significantly higher insurance premiums.

A few general conclusions are immediately

apparent. First, indigenous economies are under

threat from unpredictable weather patterns,

polar melting, and changing animal populations.

Sustainable indigenous economies will only

emerge once the economic benefits accruing to

companies and states from industry and

resource exploitation in the Arctic are shared

with the populations that first spearheaded

humans’ occupation of the polar landscape.

Second, climate change will adversely affect the

costs of doing business on the Arctic mainland,

where expanding active layers of permafrost will

undermine infrastructure and shorten winter

transport seasons. Finally, the retreat of sea ice,

while opening up new sources of fossil fuels and

previously ice-bound maritime trade routes, will

not translate into immediate economic benefits

for businesses or communities. Both companies

and governments will need to make significant

infrastructure investments before realizing their

potential economic windfalls. Only then might

the Arctic economy live up to some of the

expectations that have been heaped upon it.

Richard D. Campanaro is a Research Student

at the International Relations Department of

the London School of Economics

“Commentators assume thatsuccess in one sector of theArctic foreshadows similarsuccess elsewhere”

“States and companies will need to overcome several

obstacles in order to realise this potential boon”

from the long-term ecological effects of climate

change. By opening more sea-lanes to maritime

traffic for longer seasons, warming trends may

reduce the currently high costs of exploration,

construction, maintenance, and transportation.

Nevertheless, uncertainty remains. Increasingly

common storm systems and severe coastal

erosion may undo some of the cost savings that

might accrue to businesses from a warmer sea.

The future of terrestrial oil and gas exploration

is more unclear. These businesses are literally

rooted in arctic permafrost. Their infrastructures

are built on frozen ground. Over the past thirty

years, a 2°C warming trend in the permafrost

has led to a halving of the number of days

during which the Alaskan Department of

Natural Resources permits heavy vehicles on the

tundra. This equates to a 50% shorter season

during which heavy exploration and drilling

equipment can be used. The effects of

permafrost melting are particularly marked along

the coast of the Arctic Ocean, where it has

contributed to severe erosion around the ports,

with the threat of even higher communication

and transportation costs.The costs associated

with this warming trend will be very high. Old

buildings and port facilities will have to be

retrofitted to cope with changing conditions.

Thus, while a warmer Arctic may reduce some

environmental constraints, its knock-on effects

for infrastructure and travel will make the

coming decades an increasingly challenging time

for its terrestrial oil and gas industries.

Though the summer sea ice in 2008 did not

reach the minimum extent seen a year earlier,

the season was marked by two important

events. It saw the first recorded instance in

which both the Asiatic and American transpolar

sea-lanes, the Northern Sea Route (NSR) and

Northwest Passage (NWP) respectively, were

simultaneously ice-free. It also saw the lowest-

ever recorded overall volume of arctic sea ice,

with thin first-year floes making up 73% of the

March ice pack.These events foreshadowed the

beginning of a new era of activity for transpolar

shipping, which could cut as much as 40% off

shipping distances between East Asia and either

Europe or the east coast of North America via

Suez and Panama.

States and companies will need to overcome

several obstacles in order to realise this potential

boon. First, governments will need to provide

adequate support to ships passing through their

waters. This will require considerable spending

on port, search and rescue, and pollution control

facilities, as well as the construction of

icebreakers capable of operation in the

increasingly variable ice conditions.To date,

neither Canada nor Russia, the states most

immediately concerned with the NSR and NWP,

have made the necessary commitments. Port

and support infrastructure on the NSR has

become increasingly dilapidated since its heyday

in the late 1980s, when the Soviet Union poured

resources into its maintenance. The Canadian

Arctic lacks all but the most rudimentary

facilities. Icebreaker capacity is in even worse

shape, having decreased in both countries since

1990. Russia has made a move to ameliorate its

capacity shortfalls, commissioning its first polar

class vessel since the fall of the Soviet Union. A

recent order by the Canadian government for

six ice-capable costal patrol ships will provide

some support, though they will need to leave

the Arctic before the winter freeze-up and will

be based in southern ports rather than

constituting a truly arctic force.

Companies will also need to make considerable

investments in order to take advantage of

transpolar routes. In order to operate safely in

arctic waters, vessels need to be reinforced to

withstand contact with first-year ice. Such

vessels, which cost significantly more than normal

container ships, will only be able to take

advantage of transpolar routes for a few months

every year.

Current estimates from the Arctic Monitoring

and Assessment Programme (AMAP) of the

Arctic Council foresee the NSR’s summer

shipping season extending from the current 30

days to an estimated 90 to 100 days by 2080.

Companies will also need to hire or train

ice-ready crews with the special skills necessary

in arctic waters, whose wages will increase

“Indigenous economies are under

threat from unpredictable weather

patterns, polar melting, and

changing animal populations”

EYE ON EUROPE

IS LISBON MAKING A COMEBACK?

on growth in the developing world and the

BRIC economies of Brazil, Russia, India and

China) and deeper. Global finance and banking

remain in dire straits, international credit markets

are largely frozen, and packages of government

aid and loans, while averting a disaster, have

contributed to the ever increasing bubble of

Western debt. Clearly, the economic prospects

of the EU are vastly different now (the beginning

of 2009) than they were 12-18 months ago, or

in 2000 when the Agenda was first launched.

Where does this leave the recommendations of

these two reports, let alone the future of the

Lisbon Agenda? Does the original Lisbon Agenda

– and its clunkier named successor the Lisbon

Growth and Jobs Strategy – have a real future?

Most economists would agree that the primary

responsibility of national and local governments

during difficult economic times like these is to

do everything possible to contain an economic

recession from turning into something much

nastier and more drawn out. Under current

circumstances one would be forgiven

for assuming that long-term costly policies on

innovation, research and education would

receive scant consideration alongside more

urgent fiscal and monetary stimuli. But with

regard to the EU and the Lisbon Agenda, such

an assumption could be mistaken.

Indeed, the current Czech Presidency of the EU

Council provides a few clues as to the EU’s

coming priorities. In their officialWork

Programme, released only a few months ago,

the Czechs commented on the relationship

between the current financial crisis and the

Lisbon Agenda, stating that “a significant

economic slowdown underlines the importance

of the Lisbon Strategy as a set of instruments to

strengthen economic growth and resistance of

economies to internal and external shocks.”

From this it would seem clear that the goals of

the Lisbon Agenda are still highly relevant to the

long-term economic health and prosperity of

the EU. Could it be that the current crisis

provides the necessary impetus for finally making

the goals of Lisbon a reality? Many from within

the EU Commission certainly seem to think so.

Recently the Polish Commissioner for Regional

Policy, Danuta Hübner, commented that

innovation and research should play a key role

in helping Europe’s economies recover from

the economic slump. On an official visit to

the southeast of France, celebrating the

achievements EU investment in local research

and business policies had made, she said:

“The current economic context underlines

even more clearly the importance of innovation

in relaunching competitiveness and creating

jobs.” Similarly, the January launch of the

EuropeanYear of Creativity and Innovation

2009 by Commission President José Manuel

Barroso and Czech Prime Minister Mirek

Topolánek, highlights the emphasis the

Commission and Czech Presidency is placing on

some of the most important characteristics of

the original Lisbon Agenda.

There is little doubt that innovation, research

and the development and use of new

technologies will play a leading role in any

eventual global economic recovery. But “bottling”

innovation, creating successful research clusters,

and implementing pan-European research

strategies are all easier said than done. In this

sense, the contraction of Europe’s economies

does not change the fundamental criticism of

the Lisbon Agenda of being overly centralised.

In fact, the recommendations made in the Lisbon

Barometer of a greater focus on each individual

Member State’s needs still ring true. Lisbon is

still needed, but unless its goals and methods

are fundamentally changed, success will prove

to be as elusive as it has been in the past.

DavidTorstensson is Senior Researcher at the

Stockholm Network

In the midst of a financial andeconomic crisis, which punditsdeclare the world has not seensince the Great Depression, the EUmay be re-discovering its decade-oldcommitment to making Europe‘the most competitive and dynamicknowledge-based economyin the world’.

When it was first launched, the Lisbon Agenda

was intended to be a defining moment for the

European Union (EU).At the annual spring

meeting in Lisbon, Portugal, the European

Council set out a new economic and social

vision for a 21st century Europe.

Last year the Stockholm Network produced the

Lisbon Barometer, a statistical evaluation of

whether the EU and its Member States were

living up to their Lisbon Agenda commitments.

By using nineteen statistical categories – some

used by the European Commission itself and

some picked to supplement the Commission’s

measures – covering both standard and less

traditional areas of innovation and competition,

this barometer monitored and ranked the

progress of nine EU countries towards meeting

the goals of the original Lisbon Agenda of 2000

and the Lisbon Strategy for Growth and Jobs.

Together with its sister publication, Explaining the

Lisbon Barometer, the Lisbon Barometer provided

a number of important insights into what has

gone both right and wrong with the Lisbon

Agenda.While the Barometer’s overall results

were perhaps no surprise – with Sweden and

the Netherlands coming out on top – its most

interesting finding was the degree of variation

between different countries, both in terms of

their overall performance as well as within

individual categories. In light of this finding, the

paper’s central recommendation was that the

European Commission should move away from

viewing Lisbon I and II as a pan-European

project requiring EU-wide targets and goals.

Instead, the diversity, different aspirations, and

varying requirements of each individual Member

State should be embraced.

But the research and recommendations of both

the Lisbon Barometer and Explaining the Lisbon

Barometer were written in an economic climate

very different from the one of today.Then the

Eurozone, the UK and the US were only

entering a credit-crunch induced time of financial

and economic difficulties. Since then, we have

learned that the global recession will likely be

both more widespread (also putting the clamps

ISSUE SIXTEEN6

“There is little doubt that innovation,

research and the development and

use of new technologies will play a

leading role in any eventual global

economic recovery”

DIRECTOR’S REPORT

7WINTER 2009

WWW.STOCKHOLM-NETWORK.ORG

The past few months have hardlybeen the most propitious of timesfor markets, nor indeed for states.As governments around the worldseem to be revisiting the ideas ofKeynes, digging deeper into theirempty pockets to implement vastprogrammes of public spending tokickstart their economies, the outlookfor growth and prosperity in 2009 israther bleak.

In thisWinter issue of Eye on Europe, we look at

a range of topics which pertain to getting

Europe’s economy back on track. Our leading

articles, along with our update on the

Stockholm Network’s new Lisbon Barometer,

touch on two important and highly topical

issues - financial regulation and innovation.

It is evident that the quality of both are central

to making sure that Europe remains a

worthwhile place to invest in today’s much

frostier economic climate. And it is no

coincidence that both these themes are the

heart of the agenda for the current Czech

Presidency of the European Union, whose

slogan is ‘Europe without Barriers’.Twenty years

after the fall of the Iron Curtain, it is worth

reminding ourselves of the importance of our

political and economic freedoms, even in the

face of today’s financial gloom.

We also review historian Niall Ferguson’s new

book The Ascent of Money, which provides a

timely reminder of the history of money and

some of the pitfalls of handling it. Essential

reading for all politicians and business people.

Although times are tough across all industries –

including for think tanks – we are pleased to

announce that we have recently added several

new member think tanks to our network,

including the Murray Rothbard Institute in

Belgium and the Institute for Innovation &

Valuation in Health Care in Germany, both of

whom are profiled here.We welcome our

newest member think tanks into this policy

community and look forward to the pleasure

of introducing them to you in print, as well as

in person.

Helen Disney is Founder and Chief Executive of

the Stockholm Network

ISSUE SIXTEEN8 9WINTER 2009

WWW.STOCKHOLM-NETWORK.ORGEYE ON EUROPE

A free-market think tank based inStockholm, Sweden,Timbro has formore than 30 years originated theideas and shaped the opinions thatguide Swedish enterprise.

Timbro faced an uphill battle in its nascence.The

Swedish political topography was dominated by

groups espousing socialisation, collectivist

economic planning and heavy taxation.

Enterprise, private ownership and market

economies were deemed, at best, lacklustre

phenomena.At worst, these concepts were to

be stricken from the vocabulary of political

discourse. In 1978, in the face of a political

proposition from the Social democrats to force

all companies above a certain size to issue new

stock shares to workers - so that within 20

years the workers would control 52% of the

companies in which they worked -Timbro was

formed.Though the proposition fell, it left an

indelible mark on Swedish politics and society.

Change, however, loomed on the horizon.

Following intense debate in the 1980s over

political ideologies and systems, the country’s

socialist ambitions began to take a back seat.

Sweden instead embraced deregulation and

lowered taxes. Furthermore, the country earned

international recognition for initiating a string of

reforms ushering in greater freedom of choice.

Today, most observers would aver that Sweden

has evolved into a relatively mainstreamWestern

European country. In fact, pundits and thinkers

from around the world have hailed the Swedish

model—peaceful coexistence between a vibrant

system of enterprise and an ambitious state—as

a smashing success.

Timbro takes particular issue with this particular

point. For one thing, the vast state apparatus

places far too many constraints on its citizens,

which in turn prevents Sweden from capitalizing

fully on opportunities put before it.Too many

businesses never get off the ground; too many

people languish on the labour market’s sidelines;

too many potentially beneficial initiatives never

leave the drawing board.

Sweden has a serious but difficult problem to

diagnose.The country’s economy is undynamic

and unresponsive, and complacency is setting in.

The “culture of opportunity” is giving way to a

debilitating “culture of entitlement.”

At the same time, we are witnessing dramatic,

tectonic change in the form of globalisation.

Indeed, across the globe countless political

decisions are made to foster business and

stimulate trade. 12 years of social democratic

rule separate the current centre-right

government from the previous one – a period

marked by indifference to reform.

The current government, led by Prime Minister

Fredrik Reinfeldt, provides large tax breaks for

lower-income earners, promotes choice in health

care and pursues privatisation of state-owned

monopolies and enterprises.Yet, it has shied

away from the pressing issues of labour market

reform, the unions’ stranglehold on the economy,

and exorbitant taxes on high earners.

Taken together, this means that Timbro is

needed more than ever.The mission of

promoting a classically liberal, free-market

agenda never ends.Timbro will continue to

pursue rigorous issue advocacy and opinion-

shaping—that is, publishing books, reports and

policy papers, as well as appearing in both the

broadcast, print and social media. AtopTimbro’s

agenda in 2009 are issues relating to wealth

accumulation, reform strategies and the for-profit

provision of public services.

BecauseTimbro’s activities are geared toward

predominantly domestic audiences, the content

of its website is delivered primarily in Swedish.

However,Timbro does publish certain material

in English and strives to keep its international

audience abreast of upcoming events and

publications.Timbro communicates with its

stakeholders across a broad range of media,

includingTwitter, Facebook and various blogs. In

addition to an ever-expanding presence online,

Timbro is also growing its Sture Academy

education program for college age men and

women.Timbro recently celebrated its 30th

anniversary and is already looking ahead to 30

more years of success as one of Europe’s

leading think tanks.

Billy McCormac is the Director of

Communications & Publishing at Timbro

The Jože Pucnik Institute (IJP) wasfounded in 2006 as a think-tank ofscientists, policymakers, experts andacademics from various fields with thegoal of enhancing political culture inSlovenia.With its activities the IJPwishes to encourage and supportfree exchange of opinions on topicalquestions in society which areimportant for development ofdemocratic thought.

In accordance with the political thinking and

work of Dr Jože Pucnik, the IJP strives for:

• Implementation of high standards of political

culture in Slovenia

• Democratic and open society

• A society of Slovenian and European values

•Tolerance and understanding in public life

• Enhancement of plural cultural and scientific

creativity

• Cooperation with the like-minded political,

cultural and scientific groups and individuals in

Europe and around the world joined together

by the principles of the society of democracy,

openness and solidarity

In order to reach these goals the IJP carries out

the following activities:

• Organization of public debates and other

forms of exchange of opinion

• Providing expertise on topical political and

social issues

• Education and training of policymakers and

public servants

• Supporting scientific and cultural creativity

• Encouraging political dialogue of various

opinions on relevant themes at public events,

in various publications and in media,

International connections and exchanges

The Jože Pucnik Institute is mainly interested in

democracy promotion, civil society building, EU

Affairs and economic issues as well as more

general topics in the fields of culture and society.

In two and a half years of existence the Jože

Pucnik Institute has organised a number of

conferences, roundtables, discussions and

published several books.The most important

events have been:

•The international conference “The Role of

National Parliaments in EU Decision-Making

Processes”, held in January 2007.This

conference was attended by more than

120 participants including the Presidents of

the Slovenian, German and Portuguese

Parliaments and the Vice-President of the

French National Assembly; and

•The “Days of Jože Pucnik”, considered the

main event of the Institute.This two-day

conference is held annually and focuses

on a carefully selected topic that concerns

Slovenian society. All major events are

usually accompanied by the publication

of related conference papers’

The Jože Pucnik Institute is also a member

of different international networks, among

others the Stockholm Network with whom it

co-organised the conference “The Future of

Healthcare Reform in Slovenia” in November

2008, as part of the Stockholm Network

project “CEE Ahead”.

In 2009 the Jože Pucnik Institute plans to

organise two big events: a two-day conference

dedicated to the present economic crisis and

its impact on Slovenian society in March, and

a two-day international conference marking the

twentieth anniversary of democratic changes

in Eastern Europe and Slovenia.

The objective for the near future is to spread

our activities into the neighbouring regions of

theWestern Balkans and to play a more active

role on the internet.

Mateja Jancar is Programme Manager

of the Jože Pucnik Institute

Photo:S

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Photo:S

hutterstock

PROFILE:TimbroStockholm, Sweden

www.timbro.se/

“With its activities the IJP wishes to encourage

and support free exchange of opinions on

topical questions in society which are important

for development of democratic thought”

www.ijpucnik.si/

“Timbro is neededmore than ever.Themission of promotinga classically liberal,free-market agendanever ends”

PROFILE:Jože Pucnik InstituteLjubljana, Slovenia

ISSUE SIXTEEN10 11WINTER 2009

WWW.STOCKHOLM-NETWORK.ORGEYE ON EUROPE

InnoVal-HC was founded in 2005 byGerman professors Oliver Schwarz,a specialist in econometrics,and Michael Schlander, a physicianand economist.

The Institute is an independent not-for-profit

scientific organisation dedicated to research into

the foundations of economic evaluation of

health care technologies and their application,

with particular emphasis on process (e.g. health

care delivery, access, utilisation, cost, and

financing) and product (e.g. diagnostics,

pharmaceuticals, medical devices, and their

appropriate use) innovations.

The raison-d’être of InnoVal-HC is to contribute

to the understanding of the trade-offs inevitably

associated with diagnostic and therapeutic

decisions, including their opportunity cost.

This implies analyses and research into the:

• Methods and ethical foundations of

health economic evaluations

• Mechanisms of delivery of and financing

health care and their impact on outcomes,

quality, and efficiency

• Valuation of innovative technologies,

procedures, and products

• Acceptability analysis of new technologies

based on cost-benefit evaluation, incremental

cost-effectiveness ratios, and budgetary

impact models

• Utilisation of specific health care programmes,

including their real-world effectiveness and

resource impact

• Decision analytic modelling to support

efficient health care provision and research

& development

A fundamental principle of all InnoVal-HC

projects is adherence to rigorous

methodological standards and the strict

separation of evidence (factual knowledge)

and interpretation (opinion).

InnoVal-HC and its founders take pride in the

strict neutrality of their analyses.As a matter

of principle, in order to maintain that

independence, they accept financial support

of projects exclusively under a policy of

unrestricted educational grants.A self-regulatory

Code of Conduct demonstrates the

commitment of Innoval-HC to the highest

attainable academic standards.

The InnoVal-HC Code of Conduct covers in

detail the following subjects:

1 Area of Application

2 Mission and modus operandi of the Institute

3 Professional Standards

4 Good Scientific Practice

5 Conflicts of Interest

6 Implementation

7 Allegations of Misconduct

8 Effectiveness / Severability Clause

9 References

In terms of activities, in the past couple of years

InnoVal-HC has inaugurated and organised the

Heidelberg Health Economics Summer School,

a high–level programme offered in cooperation

with the University of Heidelberg (Department

for Public Health, Social and Preventive

Medicine of the Mannheim Medical Faculty).

The Summer School is directed to professionals

of the health system.

In terms of publications, InnoVal-HC’s chairman,

Professor Michael Schlander, has published a

range of papers in peer-reviewed periodicals

like Current Medical Research and Opinion, the

Journal of Medical Economics and Journal of

Medical Ethics – as well as specialty journals

such as the American Journal of Psychiatry, Health

Services Research, European Child & Adolescent

Psychiatry, Journal of Clinical Anaesthesia, the Drug

Information Journal, The Pharmaceutical Executive,

and Child and Adolescent Psychiatry and Mental

Health, among others.

A recent study examined Britain’s highly

acclaimed approach to cost-effectiveness

analysis (CEA), and its international potential.

The analysis, published as ‘Health Technology

Assessment by the National Institute for Health

and Clinical Excellence (NICE)’ with Springer in

NewYork, NY, revealed an astonishing number

of technical problems associated with a recent

NICE technology assessment, which had been

conducted by a group of researchers from the

renowned University of York, England. Beyond

casting serious doubt on the real-life robustness

of the technocratic approach adopted by NICE,

the study proposed important lessons for

international policy makers looking at NICE as

a potential role model.

Forthcoming papers by InnoVal-HC include an

entry in the Encyclopaedia of Medical Decision-

Making and papers in Current Medical Research

and Opinion and the German Journal for Evidence

and Quality in Health Care, all currently in press.

Current projects span pharmaceutical market

regulation, approaches for “comparative

effectiveness” evaluation, and the economic

evaluation of particular medical technologies.

Further health care utilisation studies are

underway, drawing on the ‘Nordbaden database’

project established by InnoVal-HC, comprising

the complete outpatient care data of more than

2 million patients covered by German statutory

Health Insurance (SHI).

Professor Michael Schlander is Chairman

of InnoVal-HC

The Murray Rothbard Institute is anindependent centre of research andeducation in philosophy of law andeconomic theory. Clear fundamentalinsights in those areas are crucialbecause the decisions based on themhave a profound influence onprosperity and peace for mankind.Working mainly within the traditionsof the Austrian school of economicsand natural law theory, we want tocontribute to both the academic andpublic debate.

Our two main programmes are publications

and seminars.We translate and publish both

new and existing works - advanced academic

books as well as short accessible books for the

intelligent layman. Our seminars are chiefly

aimed at university students, to provide them

with a firm theoretical understanding in

economics or philosophy of law.

The success by which a doctor can cure his

patients does not rest solely on his good

intentions. Just as critical are his medical

knowledge and the available medicines - we only

have to think about the popular but fallacious

historical practice of blood-letting. In the same

way, the means used by politicians, reformers

and activists seeking to better society are often

detrimental to their cause.That is why we

believe in a dispassionate presentation of

discussion about what we consider to be the

key theoretical insights to successfully ‘diagnose’

and ‘cure’ the crucial challenges facing society.

We focus on economic theory, and philosophy

of law and institutions, with special attention

to the interdisciplinary possibilities of those

two sciences.Within these broad areas, we

place special emphasis on the theory of

business cycles, monetary institutions, and the

normative foundations of legal and political

rights, among others.

The Rothbard Institute was founded at the end

of 2007 and started operations in 2008. So far it

has published two books:

• het Fundamenteel Rechtsbeginsel (the

Fundamental Principle of Law), by Prof Frank

van Dun, an academic book on philosophy of

law; and,

• What Has Government Done To Our Money?,

a translation of a popular book by Murray

Rothbard on monetary theory and history.

By translating this book into Dutch, the

Murray Rothbard Institute has made this

terrific little work available to the 22 million

Dutch-speaking people of Belgium and The

Netherlands, in the heart ofWestern Europe.

We have also organised two series of series

of seminars, one on philosophy of law and

one on economic theory and the current

economic crisis.The Institute received a Project

Grant from the Atlas Economic Research

Foundation in November 2008.

In 2009 we will continue our series of seminars

on philosophy of law and economic theory in

Belgium’s two main university centres, Ghent

and Leuven; organise an intensive four-day long

summer seminar for students, and publish

several books.We will pay special attention to

explaining the root causes of the economic crisis

that we are currently facing.

Michaël Bauwens is co-founder of the Murray

Rothbard Institute

PROFILE:Murray RothbardInstituteAntwerp, Belgium

PROFILE:Institute for InnovationandValuation in HealthCare (InnoVal-HC)Eschborn, Germany

www.innoval-hc.com/ www.rothbard.be/

“The raison-d’être of InnoVal-HC is

to contribute to the understanding

of the trade-offs inevitably

associated with diagnostic and

therapeutic decisions, including

their opportunity cost”

“We believe in a dispassionate presentation ofdiscussion about what we consider to be the keytheoretical insights to successfully ‘diagnose’ and ‘cure’the crucial challenges facing society”

Photo:B

igStock

Photo

Photo:S

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Stockholm NetworkWeekly BulletinThis weekly e-update keeps subscribers

up to date on all Stockholm Network

member think tank activities including

events, announcements and publications.

NewslettersReceive information about current issues

as well as expert analysis and insight into

debates in our three programme areas:

Climate of OpinionEach issue focuses on a different aspect

of energy and environment policies.

Recent issues have explored China, OPEC,

carbon mitigation policy and future fuels.

Gesundheit!Highlights developments in contemporary

European health and welfare policy. Previous

issues have considered health care reform in

Central and Eastern Europe, and the US

debate on health care.

Know IPDiscusses notable developments in the field

of intellectual property taking place both in

Europe and beyond. Previous issues have

included patent reform, parallel imports and

creative content online.

If you would like to subscribe to any of these

newsletters, including the Eye on Europe,

please email: info@stockholm-network.org

To download these and any of our

publications, please visit:

www.stockholm-network.org/Publications-List

UPCOMINGADDITIONS

Poly BriefsThe policy briefing service will offer regular,

concise summaries and analyses of critical

developments in our three programme areas.

Stockholm Network EventsIP – PARIS EVENT

Workshop on “Evidence-Based Policy in the

Field of Intellectual Property Rights”, held in

Paris on 22 September 2008.The speakers

were Mario Cervantes, OECD; Denis Dambois,

European Commission; DrYoav Shechter, MSD

Israel; and Dr Meir Pugatch and Helen Disney

of the Stockholm Network.

SN – THE ECONOMIST EVENT.

The Economist´s cartoonist Kevin `KAL`

Kallaugher and Henry Naylor (creator of TV`s

`Headcases` and `Spitting Image` head writer)

discussed cartooning, campaigning and

chicanery and explore how art can be used

to interest, excite and intrigue any audience.

The discussion was chaired by Krishnan

Guru-Murthy, Channel 4 News.

POLICY ISSUESThe Network is a forum for sharing, exchanging

and developing pan-European research and best

practice. Interested in ideas which stimulate

economic growth and help people to help

themselves, we promote and raise awareness of

policies which create the social and economic

conditions for a free society.These include:

Reforming European welfare states and

creating a more flexible labour market

Updating European pension systems to

empower individuals

Ensuring more consumer-driven healthcare,

through reform of European health systems

and markets

Encouraging an informed debate on intellectual

property rights as an incentive to innovate

and develop new knowledge in the future,

whilst ensuring wide public access to such

products in the present

Reforming European energy markets to ensure

the most beneficial balance between economic

growth and environmental quality

Emphasising the benefits of globalisation, trade

and competition and creating an understanding

of free market ideas and institutions

The Stockholm Network is a leadingpan-European think tank andmarket-oriented network. It is aone-stop shop for organisationsseeking to work with Europe’sbrightest policymakers and thinkers.Today, the Stockholm Networkbrings together over 130 market-oriented think tanks from acrossEurope, giving us the capacity todeliver local reform messages andlocally-tailored global messagesacross the EU and beyond.

Combined, the think tanks in our network

publish thousands of op-eds in the high quality

European press, produce many hundreds of

publications, and hold a wide range of

conferences, seminars and meetings. As such,

the Stockholm Network and its member

organisations influence many millions of

Europeans every year.

WHAT DOWE DOWe conduct pan-European research on,

and create a wider audience for, market-

oriented policy ideas in Europe. Our website

contains a comprehensive directory of

European free market think tanks and

thinkers.We advertise forthcoming events

(our own and those of partner organisations)

and facilitate publication exchange and

translation between think tanks. We also

post regular news flashes and updates on

European think tanks and their activities.

Would you like to join theStockholm Network?Please contact us on +44 20 7354 8888

or email info@stockholm-network.org

MEET THE TEAMChief Executive and Founder Helen Disney.

Director of Research Dr Meir Pugatch

Chief Operating Officer Dr Cristina Palomares

Fellows Paul Domjan and Jacob Arfwedson

Research Team

David Torstensson, Senior Researcher

Paul Healy, Policy Analyst

Rachel Chu, Research Officer

Accounts Nasrin Hassam

ABOUTTHENETWORK

CEE AHEAD – SLOVENIA EVENT

The Stockholm Network and the Jože Pucnik

Institute joined forces to organise a workshop

on “The Future of Healthcare Reform in

Slovenia”. Helen Disney and Dr Meir Pugatch of

the Stockholm Network were joined by the

President of the Institute, Mihael Brejc MEP, and

Natasa Sustar, Director of the Institute.

EYE ON EUROPE

Design

:withrelish.co.uk

From the first issue of The Stateof Union - launched in 2005 - tothis follow-up edition, we havewitnessed quite a number ofpolitical and economic changes inthe EU.This publication highlightsthe market oriented economicreforms put forward by the 27EU members up to early 2008.Yet, in the past few months, theglobal financial crisis hasthreatened the achievements ofmany EU countries, which havesuccessfully managed to embracethese reforms during the pastfew years.This publication willbe available online.For further information onpublication date please checkwww.fundacionfaes.es

RECENTPUBLICATIONS

EL ESTADO DE LA UNIÓNEl progreso de las reformas de mercado en la UE

FORTHCOMING PUBLICATIONThe State of the Union – Spanish versionThe Stockholm Network has joined forces with FAESFoundation, one of its member think tanks, to translate apublication that was first launched in April 2008, The Stateof the Union or El Estado de la Union, in its Spanish version.

If it Ain’t Broke, Don’t Fix It

Courting Confusion

The Health Quality Agenda

Health Care Reform in CEE

WEB UPDATE: CEE AHEADCEE Ahead seeks to advance health reform andmodernisation in Central and Eastern Europe throughenabling a broad and informed debate about better waysto deliver and finance sustainable healthcare in Europe.

The CEE Ahead website

provides country snapshots

which detail the progress of

health reforms in individual

countries since transition,

along with regular news

updates on reform

developments. In addition,

the website contains

information on CEE Ahead

publications and events,

as well as links to other

related websites, publications

and initiatives.

To access the website, please visit:

www.stockholm-

network.org/Conferences-and-

Programmemes/Health-and-

Welfare/CEE-Ahead

WWW.STOCKHOLM-NETWORK.ORG

ISSUE SIXTEEN12

STOCKHOLM NETWORK35 Britannia Row, London N1 8QHUnited Kingdom

Tel: (44) 207-354-8888 Fax: (44) 207-359-8888

E-mail: info@stockholm-network.org Website: www.stockholm-network.org

13WINTER 2009

If it Ain't Broke, Don't Fix ItA discussion paper on the benefits of a

voluntary market-driven approach to innovation

Courting Confusion?Where is Canada`s Intellectual

Property Policy Heading?

A HEALTHY MARKET?

The Health Quality Agenda

Health Care Reform in Centraland Eastern Europe: Setting theStage for Discussion