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What have we learned?The 1st Congress of the Solvay Schools and their Alumni - BruSSelS, 25 OCTOBer 2010

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The 1st Congress of the Solvay Busi-ness Schools (ULB and VUB) and their Alumni was placed high on our

agenda five years ago. Its foundations were laid through the organization of two big events: “Multiculturality” in 2006 and “Leadership to win” in 2008. This Congress has been the showcase of what we can organize as Brussels’ busi-ness, economics and management centre of education excellence. SolvayAlumni, strong of its nearly 20.000 members, is proud to have taken this initiative and wishes to thank you all, Platinium-Gold and Special Sponsors, Alumni, guests and participants, for having supported it, financially and by your presence. On behalf of Solvay Alumni, I also would like to express our heartfelt thanks to the leading international figures -Messrs Her-man Van Rompuy, Pascal Lamy, Michel Barnier, Troy A. Paredes, Baudouin Prot and Edmund Phelp- as well as to the four Professors of the Solvay Brussels School of Economics and Management’s Faculty, Messrs Marco Becht, Mathias Dewatripont, André Sapir and Paul Verdin who strongly contributed to the success of this Congress. Furthermore, in your name as well as in the name of our association, I address my sincere and deepest gratitude to HRH Princess Mathilde of Belgium who, by her presence, not only honoured our dinner but demonstrated the interest of the Royal family for education and our Schools. Finally, it was also a real pleasure to have the students of the Schools’ Execu-tive Programs and Masters to attend the academic session for free.

● The idea five years ago was also to pay tribute to Ernest Solvay who, besides being the Great Captain of Industry praised worldwide, founded five “Institutes” of Physics, Chemistry, Physiology, Sociology and the Solvay Business School. Shortly after having brought the Inter-national Solvay Institutes for Physics and Chemistry alive, he started to organize

regular “Conseils” (we will use the word “Congress”) gather-ing experts in those fields amongst whom Nobel Prizes win-ners such as Albert Einstein, Marie Curie, Max Planck. Now that Eco-nomic Sciences have their so-called Nobel Prize, we felt natural to organize a Con-gress too, underlin-ing the importance of our schools’ fields of research, action and excellence as well as their influence on society.

●

It is my duty to transparently disclose that the Congress generated a surplus which will be shared equally between the Schools and SolvayAlumni. Part of the Schools’ grant will be dedicated to the Solvay Brussels School of Economics and Management new building, the balance being wired to an Endowment which will be created soon and managed jointly by the Schools and their Alumni. Our association will con-sider its part as equity, the revenue of which being used in the future to cover its running costs or very special events.

●

The following pages will remind you of the presentations and views shared at this thought-provoking event, which brought together about 1.200 participants at the Square Meeting Centre in Brussels on 25 October 2010 and which was widely applauded in the media as a particularly outstanding meeting. Having put the standard at a very high level, we have committed ourselves to take up the challenge to respect it for the next Congress, on October 8th, 2012. See you all then! All our gratitude and heartfelt thanks again! Very friendly yours,

Gilles Samyn, President SolvayAlumni

Demonstrating excellence

congress

content I sommaIre I Inhoud

gilles samynDemonstrating excellence 3

mathias dewatripontUne faculté ouverte sur le monde 5

Joël BransonEen fantastische troef 7

herman Van rompuyWe are not out of the danger zone! 8

Pascal LamyKeeping the trade channels open 11

the congress in pictures 15

michel BarnierThe moment of truth 20

a royal Visit 21

troy ParadesRegulation or burden? 22

Baudouin ProtProficient managementis a priority 24

edmund PhelpsWhich way back to worldhealth? 27

Workshop marco Becht> On Corporate Governance 29 mathias dewatripont> On Regulation 29 andré sapir> On globalization 30 Paul Verdin> On management and strategy 30

F.D. Roosevelt Ave 50(CP 145/01)1050 BrusselsT. +32 (0)2 650 35 51F. +32 (0)2 650 41 52fbecker@sbsalumni.be

ICS/EditoMarie-Louise Sq 691000 BrusselsT. +32 (0)2 230 02 33F. +32 (0)2 230 06 68ics@edito.be

Chief EditorMarc ChamutCoordinationLuc De SmetLyn Heigl

DesigningCarole GérardChristine Eekhout

PhotographyPierre WachholderAdvertisingAlain Mathieumedial@swing.be

All rights reserved.

4 12/2010 5 12/2010

Devenue tout récemment, deux ans après sa fusion avec le département d’économie de

l’Université Libre de Bruxelles, une faculté à part entière de l’ULB, la Sol-vay Brussels School of Economics and Management lançait il y a quelques semaines à peine son navire amiral, un bâtiment symboliquement ouvert sur le monde. Le premier grand Congrès organisé dans la foulée grâce à une fructueuse collaboration entre les Solvay Schools -ULB et VUB- et SolvayAlumni marque une nouvelle étape importante dans ce déploiement. La participation d’orateurs de haut rang à un panel de dimension vérita-blement européenne et internationale, sur un thème d’une chaude actualité au plan mondial, l’assistance nom-breuse et enthousiaste, le succès même de l’organisation d’un tel événement, montrent que ni l’image d’excellence ni l’ambition de croissance de la SBS-EM ne sont surfaites. C’est peu dire que cette succession d’événements comble Mathias Dewa-tripont, à la barre de la nouvelle faculté, entouré de Bruno van Pottelsberghe pour les affaires académiques et les relations internationales et de Hugues Pirotte pour l’Executive Education ainsi que les relations avec les entreprises.

“C’est un privilège d’avoir pu vivre ces développements en tant que Pré-sident de l’Ecole puis Doyen de la Faculté! Cette suite de grands pas en avant ouvre de vastes horizons nou-veaux à la SBS-EM. Je partage la fierté et la joie que suscitent ces réussites avec les équipes qui en sont les arti-sans.”

Bricks… and brains

Le Doyen tient en particulier à saluer la collaboration dynamique et efficace de l’association des alumni, au lea-dership visionnaire et volontaire. “La SBS-EM a la chance de pouvoir comp-ter sur l’appui décidé et la générosité de ses anciens, qui ont rendu ces avan-cées possibles et contribué largement au financement du nouveau bâtiment de la faculté aux côtés de nombreux mécènes.” “Outillés en termes logistiques, nous restons également attentifs à renfor-cer les ressources et promouvoir les qualités qui font la renommée de son enseignement et de sa recherche.” Comme plusieurs bienfaiteurs auxquels la SBS-EM doit l’existence de nouvelles chaires avec la participation de profes-seurs venus des plus prestigieuses ins-titutions internationales, SolvayAlumni s’est déjà engagée dans le mouvement en mettant en œuvre la Chaire en Expérience d’Entreprise, note le Doyen. Dans un contexte de concurrence internationale avivée, avec l’atout que représente la localisation dans la capi-tale de l’Europe, l’heure est à présent, après les “bricks”, aux “brains”. Et ce n’est sans doute pas l’austérité annon-cée qui facilitera la tâche des pouvoirs publics appelés à soutenir plus large-ment l’université. Le mécénat aura encore bien des attentes à combler et des opportunités à saisir, tandis que les partenariats internationaux se multi-plieront avec d’autres universités de renom en Europe et au-delà.

Les synergies de la fusion

La nouvelle faculté, forte des syner-gies nées de la fusion, étoffe dès à pré-

sent son offre, et en particulier, au-delà d’un renforcement de l’attrait à l’étran-ger, dans les premier et deuxième cycles, de ses traditionnels masters en Ingénieur de gestion et en Sciences économiques -qui regroupent quelque 2.700 étudiants-, celle de ses pro-grammes du troisième cycle dits pro-fessionalisants. Tournés davantage vers l’étranger dans les orientations “Business Economics” et “Management Science”, ils privilégient dorénavant l’anglais comme langue de travail. A cette offre revue en profondeur s’ajou-tent des masters en recherche ainsi que, en commun avec Solvay VUB, en Business and Technology, poursuit Mathias Dewatripont. “De son côté, Solvay Executive Edu-cation propose aux cadres et aux entre-prises à la recherche de formations de pointe un portefeuille de programmes alliant l’excellence académique et l’ex-périence pratique dans plusieurs grands domaines d’expertise.” Outre le fameux Cepac ou le MBA Solvay internationalement certifié, l’éventail des troisièmes cycles com-porte des programmes longs et courts adaptés aux besoins des managers, désirant accroître leurs compétences en management général ou dans des domaines spécifiques. Cela va du nou-veau First Time Manager Programme destiné à tout jeune à haut potentiel dont la société souhaite étendre les responsabilités aux formations sur mesure pour les entreprises confron-tées à des besoins organisationnels particuliers, voire aux sessions de coa-ching ou de self management plus per-sonnelles. Plus de 120 professeurs, dont une bonne cinquantaine à temps plein, participent à ces développements. Dans la longue tradition de la recher-che en économie et gestion dont la qualité a été couronnée par de nom-breux prix et honneurs, trois grandes entités de recherche et de formation doctorale -le Centre Emile Bernheim, le Dulbea et Ecares- s’inscrivent, avec divers centres thématiques, dans le sillage de la SBS-EM, qui met résolu-ment le cap sur son nouveau dévelop-pement international. ■

Une faculté ouverte sur le mondeUne succession d’événements comble Mathias Dewatripont, à la barre de la faculté à part entière qu’est dorénavant la SBS-EM au sein de l’université.

Mathias Dewatripont. Forte des synergies nées de la fusion, la nouvelle faculté étoffe son offre de formations.

Le mécénat

aura encore

bien des

attentes

à combler

et des

opportunités

à saisir.

uLB

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Veertig jaar geleden, voor de splitsing van de unitaire ULB, zaten studenten politicologie,

economie en sociologie samen met de Solvay-ers. Dat bleef ook zo tot jaren na de splitsing in Vrije Universiteit Brussel (VUB) en Université Libre de Bruxelles (ULB). Maar twee jaar geleden scheid-den aan de ULB de wegen van Pol & Soc-ers en economisten. De economisten gingen samen met de Solvay-ers. Met ingang van dit academiejaar heeft de ULB een aparte Faculteit Solvay Brus-sels School of Economics and Manage-ment (SBS-EM). Die ontwikkeling heeft de VUB vooralsnog niet gevolgd. Het is dan ook niet zo dat er aan de VUB een afzonderlijke voorzitter is van de Busi-ness School, die deel uitmaakt van de Faculteit van de Economische, Sociale en Politieke wetenschappen. Als decaan van die faculteit vervult Professor Joël Branson dus tegelijk die rol.

dichter bij elkaar

Met ongeveer 2.700 studenten is ze de grootste van de VUB. Een kleine 2.000 studenten daarvan volgt een economische richting of de Solvay-opleiding. De faculteit heeft in totaal een kader van 32 fulltime professoren. Met researchers en assistenten erbij zijn er een 200-tal mensen actief. “Naast de bachelor- en master- programma’s handelsingenieur Solvay en toegepaste economische wetenschap-

pen biedt onze faculteit bijkomende opleidingen ‘master in management’ en ‘master bedrijfskunde’, in het Engels en in het Nederlands, en zowel overdag als ‘s avonds. Met meer dan 400 stu-denten zijn ook dat twee sterke richtingen”, aldus Joël Branson.

a base for the next 10 or 20 years

Veertig jaar gele-den, toen ‘Solvay in het Nederlands’ pas was opgericht, doceer-den nog een aantal

professoren zowel aan de ULB als aan de VUB. Maar de trend van een steeds verder uit elkaar vloeien van de VUB en de ULB was ingezet. Ondanks het feit dat beide campussen nauwelijks twee kilometer uit elkaar liggen. “In de jaren negentig kenden we elkaar al niet meer. Dat gold zowel voor de professoren, als de studenten én de alumni. Alleen de naam ‘Solvay’ was nog gemeenschap-pelijk.” Toen werd een eerste poging onder-nomen om beide ‘Solvay’ schools weer dichter bij elkaar te brengen. Die resul-teerde in de mogelijkheid voor studen-ten van de VUB om een aantal vakken naar keuze in het Frans te volgen aan de ULB. Ook studenten van de ULB konden aan de VUB vakken volgen in het Nederlands. Het ging steeds over vakken die ze anders aan de eigen uni-versiteit zouden krijgen, maar dan in de andere taal. “Dat had een bepaald succes maar er was vooral heel veel terughoudendheid”, aldus Joël Bran-son. De enige studenten die geïnteres-seerd waren, bleken van huis uit reeds tweetalig. Eigenlijk mikten de initia-tiefnemers op iets meer ‘meerwaarde’. “Op alle Nederlandstalige en Fransta-lige studenten, dus, die op die manier hun taalkennis konden ‘verruimen’.” Daarom overwogen de initiatiefnemers op een bepaald ogenblik zelfs om die uitwisseling ‘verplicht’ te maken “maar dat stootte onmiddellijk op enorme weerstanden.”

drietalig projectleidt tot meer

Men gooide het dan liever over een andere boeg. De idee van een ‘drie-talige’ opleiding -Nederlands, Frans en Engels- begon te groeien. Die zou beperkt worden tot de laatste univer-siteitsjaren. Uitsluitend op master-niveau, dus. “Maar met een drietalig programma konden ULB en VUB geen internationale studenten aantrekken. Met een Engelstalig programma kon dat wel.” Na een tijdje is er dus uitsluitend voor het Engels gekozen en ontstond er een aantal jaren geleden een joint Master in Business and Technology. Het parcours kende vele hindernissen. “De decreten inzake universitair onder-

wijs in de Vlaamse en in de Franstalige Gemeenschap zijn zo verschillend dat het soms moeilijker is onderling samen te werken dan tussen Vlaanderen en Nederland of tussen Brussel en Parijs.” “Het grote voordeel van dit gemeen-schappelijke ‘Master’-traject is dat een aantal andere initiatieven er zich aan inspireerden.” Er was een nieuw communicatiekanaal ontstaan tussen professoren aan de VUB en ULB. En er werd weer op verschillende terreinen samengewerkt. Bijvoorbeeld op het vlak van de research. Zo is er een paar maanden geleden een leerstoel BNP Paribas Fortis verworven. “Deze Chair is een gemeenschappelijke leerstoel van Solvay ULB en VUB.” Het blijkt dus soms wel interessanter sponsors aan te spreken in een Belgische context.

het allergrootste succes

Maar misschien is de gezamenlijke Solvay-alumnivereniging wel het aller-grootste succes van die nieuwe samen-werking, meent Joël Branson, zelf alumnus van de Solvay VUB in 1988. Want ook binnen de alumnivereni-ging groeide er een nieuwe dynamiek. Nederlandstaligen en Franstaligen gingen weer samen zitten. “Tegelijk had men het geluk dat enkele actieve alumni, aan beide kanten, de zaken van de vereniging ‘professioneel’ gingen aanpakken.” “Er moet niet samen gewerkt wor-den omwille van nostalgische redenen, maar omdat er een win-win te halen valt.” Daarbij is de naam ‘Solvay’ een bindelement. “Hoe groter het netwerk, des te beter kan men een aantal zaken organiseren”, stelt Joël Branson. “Van-daag gaan we dus veel realistischer om met die samenwerking. Binnen de Schools proberen we nu research teams uit te bouwen met een grotere schaal.” “Op internationaal vlak hebben we één groot voordeel: location, location en location!”, zegt de decaan. “Maar je kan alleen overtuigen met een uit-stekende opleiding en baanbrekend onderzoek. En daarin is de samen- werking tussen ULB en VUB fantas-tisch!” ■

Een fantastische troefVoor Joël Branson slaan de ‘Solvay’ schools een brug tussen de VUB en de ULB.

Joël Branson. Op internationaal vlak hebben we één groot voordeel.

VuB

Misschien

is de

gezamenlijke

Solvay-

alumni-

vereniging

wel het

allergrootste

succes van

de nieuwe

samen-

werking

tussen

ULB en VUB.

9 12/2010 8 12/2010

We are not out of the danger zone!

I think we are in the post-crisis now. Or at least “post-recession”. As Europe is concerned, the latest IMF forecast for

economic growth in the European Union is 1,8 percent for 2010; almost the same figure for the Eurozone. This is double of what was expected just a few months ago. Obviously, we still need to do better structurally, but we are in a better shape than a few months ago. However this does not mean we are out of the danger zone, neither the EU nor the world economy. Churchill once said: “The problems of victory are more agreeable than those of defeat, but they are no less difficult.” Likewise, we can say today: “The prob-lems of the after-crisis are more agree-able than those of the crisis, but no less difficult.” The sense of urgency, which everybody felt at the height of the finan-cial crisis in 2008 and 2009, should not ebb away. Founded at the height of the crisis, in November 2008, the G20 of major economies embodied this will to coop-erate internationally. I thought that the G20 was losing momentum the last six months. The agreement of the G20 Ministers of Finance on IMF reform, on 23 October, was unexpected and most welcome. The Basel-III agreement at the level of central banks is also a positive

sign of continued momentum for interna-tional cooperation. Now we have to work further on rebalancing trade accounts, with amongst others the debate on exchange rates. The G20 was successful. The big sub-ject of the first two years was financial regulations. Both the American side and the European side have now put in place what we committed to do. In our case, the European Parliament and the Council of ministers adopted the final package on Financial Regulation last month.

a roller-coaster

I should like to go a bit more into a crisis where the ink of the responses we have found is not yet dry, and where I have been involved because of my own function: the public debt crisis in the Eurozone. The crisis starting in “07” and ending in year “XX”, has been a roller-coaster. People held their breath while events unfolded. First a sub-prime crisis. Then a banking and financial crisis. Then an eco-nomic crisis and recession (which lasted luckily less than one year). And finally the debt crisis of Greece and the Eurozone of this spring. I think most observers agree now that the European Union dealt solidly with it. Of course, the events showed some of the tensions inherent in the Economic and Monetary Union. We needed time to find an agreement, but we found it in the end, in a mix of solidarity and responsibil-ity. The member States showed their soli-darity by setting up safety nets and the countries with budgetary and economic problems showed their sense of responsi-bility by their reform programs. Bold political decisions were taken, in the span of a weekend, involving hundreds of billions of euros. A lot of these deci-sions were unpopular: for some countries, because of the austerity measures and reforms they implied, for others because of the last resort solidarity it implied. The end result was positive. That’s what counts. In my opinion, the euro crisis showed above all the very strong political determination to defend the euro and the Union! One should not underestimate

this resolve. Or to use a word which is en vogue: it showed the EU’s formidable resilience. L’Europe est coriace. Our first political duty was to avoid a repetition. As you may know, the Euro-pean Council asked me to chair a Task Force on reforming economic govern-ance. One week ago, we adopted the final report. The European Council of later this week will deal with a few out-standing questions, in particular with the follow-up of the Task Force. But the main agreement is there. I think all those who participated in the effort -the Commis-sion, the ECB, the Ministers of Finance- can be proud of it. Indeed because the European Union made a great leap forward in the Euro-pean Union’s economic governance. The package agreed by the Task force, when validated by the European Council, will be the biggest reform of the Economic and Monetary Union since the euro was created. Looking at a comparative table, com-paring the current Stability and Growth Pact and the one which would follow from our recommendations, the change is striking. Even a quick look shows the strengthening of the economic govern-ance, with new sanctions, applied earlier on, and easier decision-making. Therefore I reject any criticism suggesting the Task Force softened its stance. On the con-trary!

no imaginary new castle

Of course one can go to the draw-ing table and propose a completely new system. However in the Task Force, we decided not to move into an imaginary new castle, instead we consolidated the foundations of our own house. The rec-ommendations and concrete proposals contained in the report of the Task force go in four directions.First direction: real economic surveil-lance.We recommend to create a mechanism for macro-economic surveillance. This is in my view the biggest innovation. An early warning system will detect the risk of real estate bubbles or of unsustainable patterns on the balance of payments, or

Fiscal

sustainability

creates

confidence

and lays the

basis for

economic

growth and

jobs.

Taken

separately,

some of

the reforms

may seem

small steps.

Together,

they are a

major step

forward.

Herman Van Rompuy - The recent crisis has sharpened our minds. The financial markets keep us under pressure.

crIsIs 2007 - 20XX crIsIs 2007 - 20XX

strong divergences in competitiveness. These types of risks were neglected in the first decade of the euro. The crisis has shown that sound budgets are not enough to guarantee sustainable economic growth. That’s why we recom-mend this surveillance mechanism, as a macro-economic pendant of the budget-focused Pact. Ultimately this may result in sanctions for countries in the Eurozone only. It will strengthen the economic pillar of the Economic and Monetary Union. Second direction: greater fiscal discipline, a stronger Stability and Growth Pact.The main principles are: • awider rangeof sanctionsandmeas-

ures, both financial and political;• morefocusonthepublicdebtcriterion,

which used to be disregarded;• anadaptedtiming,withsanctionskick-

ing in at an earlier stage.

a consensus

We found a consensus on how to implement these general principles. One element is the agreement on easier deci-sion making. For the decision on all new sanctions, the so-called reversed majority rule will apply: a Commission recommen-dation on sanctions will be adopted unless a qualified majority of member States in the Council votes against.Two further remarks on the Pact. Firstly, balanced budgets are not a goal in themselves. We take these measures because fiscal sustainability creates con-fidence and lays the basis for economic growth and jobs. It creates also sufficient budgetary space for financing the cost of ageing populations.

Secondly, the Task Force’s commitment to a stronger Pact was high from the beginning to the end. I was impressed by the determination of the member States to impose these self-constraints. The Treaty gives them -and nobody else- a decisive responsibility. They are ready to take it. The full package now at the table will make our Economic and Monetary Union more solid. Third direction the Task Force recom-mends: deeper and broader coordina-tion, notably through the “European Semester”. This is a new form of ex-ante budget coordination amongst member States. It was already decided and will apply as of 2011. Each spring, it will allow a simul-taneous assessment of both budget-ary measures and structural economic reforms. It allows the European conse-quences of policy decisions to play a role in the subsequent regular national par-liamentary and public debates. Thus the Semester will increase the awareness that the decisions of one, affect all. Fourth direction: a more robust framework for crisis management. The Task Force considers there is a need for a credible crisis resolution framework for the euro area in the medium term. It should be capable of addressing financial distress and preventing contagion from one country to another. It must avoid the moral hazard implicit in any ex-ante rescue scheme. The precise features and operational means of such a crisis mecha-nism will require further work. The Euro-pean Council of this week will decide what form this work will take. Taken separately, some of these reforms may seem small steps. Together, they are a major step forward.

the battle of the euro

This spring the European Union won the battle of the euro. We took far-reach-ing decisions under the pressure of events. Now, without such pressure, we show the responsibility to draw the right lessons from the crisis. These recommendations provide a resolute response to a great challenge. Before concluding, it may be useful to open a wider perspective on what these proposals aim for. The euro has been unique from the start: a monetary union with a decen-tralised fiscal framework. Thanks to the single currency and the internal market our member States are deeply integrated

(both the 16 and the 27). The crisis has shown how deeply! Everybody discovered that the decision of one Member State potentially affects all. However, member States are responsible for their own fis-cal and economic policies and they will remain so. All recommendations will allow us to much better deal with this unique situa-tion. Basically they all aim for one of two things. On the one hand: making sure that each Member State fully takes into account the impact of its economic and fiscal deci-sions on its partners, and on the stability of European Union as a whole. We achieve this with a mix of more intense coopera-tion and stronger constraints. On the other hand: strengthening the EU’s capacity to react when policies in one Member State present a risk to the rest of the Union. In short: helping each to behave responsibly, and stepping in when irresponsible behaviour of one member affects the ensemble.

Like a pressure cooker

The recent crisis has sharpened our minds. The financial markets keep us under pressure, not always in an eco-nomically justified manner, but there is pressure. We have been able to make proposals which were unthinkable only a few months ago, and to finish earlier than originally planned. In this respect, the Task Force has worked like a pres-sure cooker. Everybody has contributed actively, the Commission, the Central Bank and the Ministers of Finance. This has allowed us to accelerate the proc-ess, thanks also to the close link with the European Council. Later this week, I will ask the political backing of the Heads of State and government. I am confident that the regular legislative process will then be able to translate our political agreement into legislative form. These measures should be in place as quickly as possible. It is our common duty. The lessons drawn form the crisis on economic governance in the EU, on the political side, are one important piece of the puzzle. Other important pieces con-cern financial regulation and corporate governance. The views of the eminent speakers after myself will surely shed light on those issues. ■

Herman Van Rompuy, at the 1st Congress of the Solvay Schools

and their Alumni, in Brussels, 25 October 2010.

Wee need more europe!

With the measures put now at the table by the Task Force, we have not solved all future problems. History will remain full of surprises, underlines Herman Van Rompuy. “However, we did draw the lessons to avoid the risks we now know.” In his view, the events of the year 2007 until the year 20-XX have shown a European Union rising to the occasion. “We stumbled a little, but we did not fall. In the end, we acted in time.“ “We will lay the foundations for renewed economic growth. A lot of countries are engaged in reform programs which are not popular in a populist political climate. But they stick to reforms. There is more political courage than most people think.” There is never an “acquis” in economics, certainly not in such a hypercompetitive environment as ours, in the world. “We also need to strengthen our economic infrastructure to play a role on the world stage, to defend European inter-ests and values. We need a strong economy for internal and external reasons. That’s why we need more Europe; it is as simple as that.”

Herman Van Rompuy was Prime Minister of Belgium in 2009, before taking office on 1 December 2009 as the first President of the European Council.

There is a question mark hanging over the congress’ title. “The indication of a scientific approach”, says Herman Van Rompuy. The question mark is the double ‘X’, the unknown end-date of the crisis. Are we out of the crisis yet, or not? When can we fill in those final numbers? Here are the President of the European Council’s remarks.

Herman Van Rompuy. The crisis has sharpened our minds.

10 12/2010 11 12/2010

Pascal Lamy is the fifth Director-General of the WTO, and was re-appointed by members for a second four-year term in 2009.

Keeping the trade channels open

At a time when multilateralism is coming into question -being sometimes seen as an ineffective or outdated concept- Pascal Lamy turns the spotlight on the World Trade Organization’s approach to multilateral governance.

The World Trade Organization has a real success story to tell in multilateralism, according to its

Director-General, Pascal Lamy. While he sees strong challenges ahead, he believes the WTO embodies the human learning curve. “What happened in the 1930s led post-war people to put together a system in which world trade would be regulated and disciplined, and GATT and the WTO were the result.” One important WTO success is that during this current crisis its most important purpose -which is to keep trade open- was delivered effectively. In November 2008, many people, some-times including Pascal Lamy himself, he admits, were certain that such a huge economic shock would bring a wave of protectionism. This did not hap-pen, although world trade dropped by 12% last year in volume. It didn’t result from protectionist measures but hap-pened because trade is the transmis-sion belt between demand and supply, and the latter collapsed last year. This year, world trade is expected to pick-up by a substantial 13%. “This is sim-ply because overall trade has remained

open, and indeed is as open today as it was two years ago.”

decisions based on consensus

The WTO also claims its successes in terms of open governance, due to the fact that both its agenda and its struc-tures -the way decisions are taken- truly reflect geopolitical transformations. For example, instead of majority voting, the WTO has a consensus-based system. Because of this, the new actors on the world trade stage such as China, Brazil, India, South Africa and Indonesia- have already become major players in the institution. Since two thirds of WTO Members are developing countries, development issues have a large place on the agenda, and the multilateral round of negotia-tions that was started in Doha in 2001 was called ‘the Doha Development Round’. Issues like agricultural subsidies, export subsidies, and duty-free, quota-free access to the world poorest are now on the table because the system is able to reflect this transformation. In comparison with other organisa-tions, WTO has shown its capacity to ensure compliance with the disciplines it administers. Its dispute settlement system is almost unique on the interna-tional scene -not only efficient, with a compliance rate of nearly 90 %, but also adjusted to geopolitical changes. Most disputes in WTO 15 years ago were ini-tiated by advanced countries. This year, two-thirds of them will be initiated by developing countries -so here again, multilateralism has proved its value.

a base for the next 10 or 20 years

Like all international governance systems, the WTO faces the challenge of effectiveness which in the trade field is the need to finalise the current round of multilateral negotiations. This is edition number 9 -number 1 was in 1947. Concluding a negotiation of this kind is a difficult, painful, and frustrat-

ing process simply because there are 153 members who need to reach con-sensus on numerous topics which were bundled together in the agenda. Any large overhaul of world trade rules is complex, but tackling it is essen-tial. WTO must prepare for the next 10 or 20 years, factoring in the likely obstacles to keeping trade open and opening it wider. “This calls for strong political will and leadership”, says Pas-cal Lamy. “Which is why the G20 may be the right place to look for leader-ship now that we are entering the end-game with a window of opportunity that opens in 2011.“ For the WTO, it is vital now to think seriously about possible obstacles to trade tomorrow. The classical ones as seen in the 20th century -tariff and quantative restrictions- are on the wane. But what is appearing now is a complex world of non-tariff barri-ers, regulatory barriers and behind-the-border barriers that are difficult to cope with. Many non-tariff barri-ers are related to values such as risk, safety, and other concerns, and such value-related regulations are inevitably imprinted with a cultural element.

Political energy is key

WTO is also keen to better address the ‘missing middle’ between regula-tion on one side and dispute settle-ment on the other. Just as Europe is trying to cope with new challenges and build up systems where peer review and proper reporting to help uncover deviant behaviour, so WTO is pushing for improved surveillance. Pascal Lamy’s view is that multilater-alism can work, provided that enough political energy and political account-ability is put behind it. “Although there is more in common between European countries than at the world trade level, what Europe is trying to do, others are trying to do world-wide -so we could say that the story of Europe has a lot in common with the story of world trade.” ■

WorLd trade

It is vital

now to think

seriously

about

possible

obstacles

to trade

tomorrow.

Pascal Lamy. The story of Europe has a lot in common with the story of world trade.

12 12/2010 13 12/2010

You all made it possible for SolvayAlumni to organize the “1st Congress of the Solvay Schools and their Alumni”, in Brussels, this 25th of October 2010. Its success is also yours!

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21 12/2010 20 12/2010

The moment of truth

Despite signs of recovery, the crisis is not over, says Michel Barnier. It’s time for Europe to shoulder its responsibilities by making and enforcing the rules for a stronger financial system.

Europe faces some challenging years ahead. There are signs of recovery, but better monthly indi-

cators of business or consumer confi-dence or slightly stronger growth rates are only part of the story. For Michel Barnier, European Commissioner for Internal Market and Services, this crisis has deeper roots, and until these are tackled Europe will not have the right foundations for a sustainable recovery. One very deep root is a lack of what the French call ‘responsabilité’ -a con-cept that covers both responsibility and accountability. The obsession of certain financial operators with immediate and maximum profits led to irresponsible behaviour. Coupled with this lack of responsibility was a lack of account-ability, and of effective regulation and supervision. “Europe’s citizens are now suffering from these weaknesses -the worst eco-nomic crisis in decades, with dramatic

and long-term social consequences and an enormous bill for both today and tomorrow’s tax payers.”

making businesses more responsible

In the Commissioner’s view, it is vital to learn all the lessons from these fail-ures. “Responsibility and accountability need be reinstituted at the heart of our system”, he emphasises. “Behaviour, practices and attitudes must all change to create a new era of good governance. Enforcement is of fundamental impor-tance in this respect.” Better management and corporate governance are key concepts. Too many businesses did not properly assess the nature or scale of the risks they were facing. Some, however, managed well, and there are some good examples of best practice in corporate governance from which others can learn. But in future, rules will need to be clearer and more specific. Here, the Commissioner outlines the European Commission’s focus on six main lines of action essential for improving corporate governance in Europe.

Better control from the board Directors, and especially non-exec-utive directors, must have the will and the ability to exercise more effective control over senior management. Too often, boards failed to act as prin-cipal decision-makers, or did not dare to challenge decisions and practices. Among the actions suggested are limit-ing the number of board memberships so that directors can dedicate more time to their functions, and evaluating their expertise more widely -for instance by extending the ‘fit and proper’ test.

a more diverse boardroom

Companies should make more effort to achieve a more diverse boardroom.Diversity creates the right conditions for integrating different angles and experiences into decision making.

new approach to risk management This is a necessary step because risk managers hold critical positions in a company, in particular in finan-cial institutions. They must be given more authority. The chief risk officer should have equal standing with the chief financial officer, and be properly trained. The role of risk committees also needs to be reassessed.

resolving conflicts of interest The scale of the problem is evident in some financial institutions. In the area of credit-rating agencies and audit firms, for example, the ‘issuer-pays’ principle raises serious questions.

responsible pay Responsible remuneration policies are imperative, and despite some improve-ments there are worrying signs of a return to ‘business as usual’. Pay should always be oriented towards mid and long-term achievements, in contrast to the short-term, hit-and-run culture that has caused so much damage. In this area, Europe is leading the way with the Capital Requirements Direc-tive 3, which will apply to 2010 bonuses and beyond.

active shareholders Too often, shareholders are only inter-ested in the highest possible dividends, and while this is understandable, it fuels short-termism. ‘Shareholders rights’ have been spoken about for years, now it’s time to talk about shareholders’ obligations, and for them to play their role fully. Taken together, in the Commissioner’s view, these measures will lead to better corporate governance, along with greater responsibility and accountability. There is still debate about how to put such measures in place, but it is clear that voluntary codes are no longer enough.

effective enforcement

Even if Europe had transparent mar-kets, the right rules, and a good supervi-sory structure in place, these measures

euroPeeuroPe

could only work if their full respect were ensured. It is an open question whether the levels of fines imposed in some seri-ous cases of malpractice will have any effect on future behaviour of these companies. Companies must take responsibility for their own activities, but regulators and supervisors also have a job to do -and in recent weeks a critical agree-ment has been reached on the new European supervisory structure. There is also a pressing need to upgrade the EU sanctions regime for market abuse and other infringements of European rules. To ensure that the internal market works properly, supervi-sory authorities need to have appropri-ate sanctioning powers that are applied consistently across Europe. Today sanctions differ widely -from tough in some countries to virtually non-existent in others- and the same is true for investigative tools. This leaves too much scope for regulatory arbitrage, putting financial stability and consum-ers at risk. “Our aim is to have a more effec-tive, more coherent and more dissua-sive sanctions regime”, Michel Barnier explains. “It may not be popular with everyone, but we cannot afford not to have this debate.”

Foundations for a stronger financial system

“A stronger financial system rests on many building blocks”, he continues. “Corporate governance on the preven-tive side, and sanctions on the correc-tive side. But they must complement other aspects, such as greater supervi-sion, stronger banks, and the framework for crisis prevention and management that is vital for financial reform.” “I want to build effective, robust, fully tested and operational set of firewalls able to contain an impending financial crisis at all stages -from prevention to early intervention, to resolution and insolvency.”

the global dimension

However, he recognises that action cannot be wholly effective if taken in Europe alone. Policies that have a global impact must be designed and applied globally. “This is why action at the G20 is so important.”

“As Europeans, we are living through a moment of truth. We can give in to the temptations of protectionism and self-ishness, and this will signal the end of the single market and a political Europe. Or we can take on our responsibilities fully.” “For me, there is no option. It is time to consolidate the single market, for

every citizen and business. Europe will in any case be held jointly responsible for the failures and the crises of this world, so it would be better to be held jointly responsible for its successes. We need a strong single market coupled with a strong political voice. This is the time of truth.” ■

Michel Barnier is European Commissioner for Internal Market and Services. He is Vice-President of the European People’s Party and Political Advisor of the UMP (Union pour un Mouvement Populaire).

Michel Barnier.Better management and corporate governance are key concepts.

The Princess entering the dining room, accompanied by Gilles Samyn, President of SolvayAlumni, and Mathias Dewatripont, Dean of Solvay Brussels School of Economics and Management.

Meeting guests of the Congress.

In conversation with Pascal Lamy, Director-General of the World Trade Organization.

a royal visit

It was a great honour to welcome HRH Princess Mathilde at the 1st Congress of the Solvay Schools and their Alumni.

23 12/2010 22 12/2010

Troy Paredes was appointed by President George W. Bush to the U.S. Securitiesand Exchange Commission. He has been professor at Washington University School of Law inSt. Louis, Missouri.

Regulation or burden?Member of the Security and Exchange Commission, Troy Paredes outlines his views on the impact of extensive legislation and the role of corporate directors in decision-making.

The Dodd-Frank Reform and Con-sumer Protection Act has realigned the relationship between govern-

ment and the private sector in the US. Among the scores of this rule-making are regulatory initiatives in areas such as securitisation, credit rating agencies, pri-vate funds, and corporate governance. Speaking generally about the regu-latory reform agenda, Commissioner Troy A. Paredes, member of the Secu-rity and Exchange Commission, voices his concern about the extent to which the recent wave of federal government regulation in the US already has dis-placed and distorted private-sector decision-making in the US economy. He is troubled by the potential for future regulatory initiatives, notably that regu-lations implementing Dodd-Frank will go too far, burdening the financial system at the expense of economic growth. Dodd-Frank charges the SEC with extensive rulemaking that allows the Commission a great deal of choice and discretion to shape the legislation’s prac-tical contours and thus to determine Dodd-Frank’s ultimate impact. Without question, there is a fundamental role for government, including the SEC, in over-seeing our financial markets and our economy more generally; and regulatory reform affords us the chance to fashion a regulatory framework that is resilient and that fits our increasingly intercon-nected and complex financial system. Yet even as we share the common goal of mitigating the prospect of a future financial crisis and look to fend off the

hardship that such a crisis would spawn, we have to recognize the real-life costs to society if the regulations implement-ing Dodd-Frank excessively constrain and hamper the U.S. financial system. As we strive to further secure the financial system and protect investors and others from misfortune, we need to be mindful that, as the regulatory regime becomes increasingly restrictive, financing may be more costly for companies and indi-viduals to come by; the ability of busi-nesses and investors to manage their risks appropriately may be compromised; fewer valuable investment opportunities that would create wealth and income for investors may become available; and the commercialization of new ideas may be frustrated. We need to use the regulatory author-ity Dodd-Frank has conferred upon us cautiously, carefully evaluating the intended benefits of our actions while giving due regard to the potential unde-sirable consequences of our regulatory steps. It also should include ensuring that the U.S. regulatory regime is appro-priately predictable. Private sector trans-acting and enterprise – including business investment and capital formation – are frustrated when regulatory frameworks become unpredictable. Parties need to know what the rules of the road are and have well-founded confidence that the rules are not shifting beneath their feet.

approaching reform with humility

Throughout the financial crisis, there has been uncertainty as to how the law would be applied. To the Commissioner, this implies that regulatory responsibili-ties should be approached with humility and decision-making supported by data and rigorous analysis to enable better and more informed choices. A more incre-mental approach to regulatory reform, taking some steps now and deferring others until it can be seen how the mar-ket and the private sector has adjusted, allows for the shaping of a more efficient and better calibrated regime. “Regulating, in essence, is about deter-mining what conduct we are going to

permit; what conduct we are going to prohibit; and what conduct we are going to mandate. Accordingly, like my col-leagues around the globe, as a regulator, I am in the business of drawing lines. As you can imagine, it can be difficult to identify the appropriate demarcations. In fact, people often disagree on where the lines should be drawn. At each turn, the practical question, then, is this: Do the benefits of some regulatory course outweigh the costs or not?

With the help of disagreement

Across jurisdictions, the Commissioner notes, boards of directors are central to good corporate governance. But what makes for an effective board of direc-tors? In his view, what matters most is not how a board is structured or how many meetings are held, but how direc-tors act. The expectation is that the group will work through a range of ideas and arguments, and make a decision that is better as a result of their collective efforts. As decision-making improves, so should companies’ competitiveness and performance. Decision-making should improve when directors engage in open and frank discussion, even if it means being criti-cal. When assessing a course of action, directors should ask probing questions, challenge key assumptions, and develop competing options to ensure that alter-natives are not cast aside too readily. Directors should be willing to dissent, and disagreement from others should not be discouraged or suppressed. When it leads people to engage rigorously, disa-greement helps ensure that the unknown is identified, that potential conflicts are spotted, that information is uncovered, that biases are managed, and that chal-lenges and opportunities are assessed in a more balanced way. Didn’t Peter Drucker, the influential management consultant and profes-sor, express a similar sentiment when he said that “the first rule in decision-making is that one does not make a decision unless there is disagree-ment”? ■

We have to

recognise

the real-

life cost to

society if

regulations

excessively

constrain

and hamper

the financial

system.

goVernement

Troy Paredes. What matters is how directors act.

25 12/2010 24 12/2010

Proficient management is a priority

Baudouin Prot discusses the role of management and regulation in emerging from crisis and preventing similar situations in the future.

As the skipper of a ship that weathered the storm and sig-nificantly expanded its horizons,

Baudouin Prot, CEO of BNP Paribas, has a clear view of what his group learnt from the crisis. Examining the multiple origins of the crisis, he observes that although there were a number of contributive country-specific failings, the crisis largely origi-nated in the United States. “Macro-economic imbalances, particular in the US, were one of the main causes. These include the American deficit, loose monetary policy, and the over-promo-tion of wide homeownership.” In addition, he points to the many deficiencies in regulation or supervi-

sion. In the US, for example, this took the form of unregulated ‘mortgage originators’ or ‘broker dealers’, along with inefficient insurance regulation. “Also, globally we experienced a boom in unregulated, yet important, market participants such as hedge funds or rating agencies.” “Then, there were individual fail-ures at institutions that were targeting excess returns without sufficient analy-sis of their risks, solvency, and liquidity.”

how a local crisis became global

In this CEO’s view, it was because of globalization and in particular the

interconnected nature of the mar-kets and accounting standards -that encouraged the extension of the ‘fair value’ concept- that a local crisis mushroomed into a global affair. In the face of a severe downturn and a widespread loss of confidence, the G20 leaders had to act strongly and globally. Their main objective was to restore confidence, growth and jobs, and it was thanks to this co-ordinated public intervention, he emphasises, that systemic crisis was, thankfully, avoided. “It is striking that this crisis has both been created and resolved by globali-zation. This was a locally originated crisis that rapidly turned global before being tackled at an international level -not only by the G20 but also by the European Commission, the European Central Bank and co-ordinated efforts from member States.” He states that it is crucial that the global answer to the crisis, supplied by the Basel Com-mittee, is now implemented by the G20 in a timely and consistent way across all geographies. “The crisis taught me, or should I say, confirmed to me, that good man-agement is a priority,” Baudouin Prot continues. He explains that compa-nies, including banks, achieved very different results despite operating in similar markets and geographies. “We witnessed failures in various countries and across the whole spectrum of the banking sector -both investment banks and retail (mortgage) banks dis-appeared.” He infers therefore that manage-ment, naturally backed by adequate corporate governance, plays a central role in the success or failure of any institution. Furthermore, “in the case of banks or other specific institutions, this good management needs to be adequately supervised. In other words, no amount of capital, regulation or legislation can compensate for poor management unchecked by adequate supervision.”

It is striking

that this

crisis has

both been

created and

resolved by

globalization.

The strongest

safeguard

against

systemic risk is

harmonized and

internationally

applied

regulation and

supervision.Baudouin Prot. Nothing can compensate for poor management unchecked by adequate supervision.

strategy strategy

What makes the difference

“What differentiates companies, he explains, are factors such as cul-ture, risk management, adherence to and implementation of a detailed strategy, how well different teams work together and how quickly they respond to events explaining that it was these things that contributed to the out-performance of BNP Paribas. Discussing BNP Paribas’ manage-ment culture, he highlights that his strong management team paid close attention to the risk/reward balance throughout the cycle. “The opera-tional divisions combine best-in-class technical expertise with highly expe-rienced management that promote a long-term approach based on cus-tomer relations.” These management teams need to be supported by best in class functions such as finance and human resources, and overseen by powerful and independent divisions like group risk management, compli-ance and internal audit. For example, BNP Paribas has, since 1994, had a committee within the board of directors dedicated to inter-nal control and risks. This differs from, but complements, the audit commit-tee. In addition, the bank’s general management chairs committees that establish risk policies and limits and is involved in risk management at all levels.

a manager’s role is to manage

“As managers, it is our business to manage -and this means manag-ing risks in various fields, like credit, liquidity, market and operational- and managing people, relationships, and projects such as the BNP Paribas Fortis integration. We also have to manage our financial discipline, our ethics and our corporate and social responsibil-ity.” He believes that group’s manage-ment responsibility, in all of its aspects, is crucial in maintaining its reputation, its attractiveness and the trust placed in it by shareholders and stakeholders over the long term. Baudouin Prot asserts that exter-nal oversight of management has to be more consistent and better co-

ordinated across markets. There are lessons to be learned from the crisis about solvency and liquidity, he notes, but regulatory reform is also required to ensure financial stability. The Basel Committee’s decisions in July and September are seen as important steps towards enhancing this financial stability.

rules are not enough

New regulation, he acknowledges, is essential but “as in sport, rules must be overseen by a referee. Market stability will be greatly enhanced, particularly in a time of stress, if we have clear evi-dence that the ‘referee’ is present and ready to step in.” In line with the main goal of the G20 -which is to strike the delicate balance between strengthening financial sta-bility and ensuring banks are able to continue to support economic recov-ery- he firmly believes that the appro-priate answer is a cocktail of stronger, more consistent and well-conceived regulation and improved supervision of international firms. “The strongest safeguard against systemic risk is har-monized and internationally applied regulation and supervision” . There have been significant improvements in European supervi-sory oversight that will be operational next year, at all levels: at a macro level the creation of the European Systemic Risk Board and at a sector level the creation of three new European super-vision authorities for banks, insurance companies and markets. Leaders, he believes, have a duty to ensure that all these issues must beaddressed in a highly co-ordinated, multilateral, manner, especially at a time when economic recovery contin-ues to be fragile across many mature economies.

outlook for regulatory reforms

He warns, however, against exces-sive and unco-ordinated actions. “Uni-lateral actions would undermine much of the benefits of the multilateral reg-ulatory reforms that have been agreed so far.” He insists: “Such action would create major uncertainties in the markets and jeopardize the ability of banks to contribute fully to economic

growth. This is especially the case in Europe, where two-thirds of corpo-rates’ balance sheets are financed through banks.” “I believe we should pay tribute to the G20 for their co-ordinated and global answer to this global crisis”. Banking reform, he hopes, should now be more or less achieved once the Basel agreement is adopted at the G20 level and implemented globally in a co-ordinated and multilateral man-ner. That said, he highlights that a lot of work remains to be done to address the roots of the crisis, from tackling the shadow banking system to solving global imbalances. “For all these global issues, it should be clear that the first defence is effi-cient, consistent, and hands-on man-agement, overseen by effective regu-lation and supervision.” He concludes by likening the situation to an air-plane navigating a major atmospheric depression: it is the quality and the judgment of the captain, the crew, and the control tower that count.” ■

Baudouin Prot is the Chief Executive Officer of BNP PARIBAS Group, and the former Chairman of the French Banking Federation.

26 12/2010 27 12/2010

Professor Edmund Phelps took his B.A. at Amherst and his Ph.D at Yale, joining Columbia in1971 and founding the Center for Capitalism and Society in 2001. In 2006 he won the 2006 Nobel Prize in Economics. His recent work studies the dynamism and inclusion of the “modern economy,” now in peril, and connects these to the humanists’ Good Life.

Which way back to world health?

The origin of the catastrophe, according to Edmund Phelps, Pro-fessor at Columbia University and

winner of the 2006 Nobel Prize in Eco-nomics, was a speculative bubble that burst, but unfortunately only when the housing industry had produced a mas-sive over-supply, and after the banking industry had made a massive amount of bad loans -most of them on the books of US banks. Behind this bubble, he believes, was a little-noticed decline

in US innovation over two decades, and a decline in investment. He asks why there was a slump after the boom, and not a controlled slide back down to normal levels of activ-ity. In economic jargon, the question is: “What was the expectational equi-librium response to the housing boom? Would it be just a moderation in sup-ply leading to its disappearance, or a slump?” In the markets he studied, the expectational equilibrium is in fact a slump, followed by working back up to normal levels of recovery. Other developments also contrib-uted, he says. “One is the large amount of uncertainty created. CEOs put shadow prices on business assets and invest accordingly, but shadow prices declined in line with uncertainty. The second was that the Fed was slow in creating liquidity. However, I don’t believe in the Keynesian view that the whole problem is one of deficient demand. The problem was the over-supply of housing and the over-supply of bad loans and the accompanying uncertainty.”

Looking at lessons learned and the possibilities for government action, Professor Phelps believes that citizens will be more cautious next time, as will lenders. “We are divided about what to do in many respects. A revival in inno-vation, especially in the US economy, could boost business investment and employment. But in the short run that’s not the answer. In my view, the US economy is badly wounded,” he says. “We want to get back to a healthy global economy and a full recovery of US employment. We won’t be able to return to the 4.9% unemployment reached in 2006/7. My guess is that the ‘new normal’ will exhibit an unemploy-ment rate around 7%. But we should aim to improve the new normal to get it down to the old normal of 5.5%, last seen in the mid 90s. The only way to get back to these levels is through more exports. “In its own interests, the world has to make a place for more exports from the US if we are to have a revival of the world economy.” ■

Edmund Phelps. We need low-wage employment subsidies.

economy

should public authorities trust markets?

At the start of the crisis, there was criticism of capitalism, and distrust of over-reliance on the markets. There were calls for intervention and con-sumer protection, and for an ‘indus-trial policy’ -an activist government in areas like energy and the environ-ment. To what extent do you believe that public authorities should trust markets, or be paternalistic in terms of consumer protection, innovation, and industrial policy?Europe tends to see every new crisis or development as an argument for con-taining or shutting down capitalism. Now there is this alternative scenario of environment, energy and invest-ment policies. I believe there would be grave dangers in rejecting capitalism, in which entrepreneurs develop new commercial ideas and capitalists select which to support, in favour of what we might call ‘environmentalism’, where the government consults with scien-tists and others involved in new invest-ment projects. In such a system, inno-

vation would have far less chance. The system would be driven by the career ambitions of scientists rather than the relatively neutral CEOs in business, and the system would largely benefit the elite in society. Capitalism offers far more benefits for the masses and for personal development on a wide scale.

Capitalism has brought rising ine-quality in developed countries, and there is still massive inequality in emerging countries. Given the lim-its facing redistributive taxation, can tampering with free markets be an alternative way to redistrib-ute? Should redistribution in market economies take place purely through taxation, or could we also use limits to competition and regulation of key sectors?At one time there was a move to make the US post office the ‘employer of last resort’ for those unable to find other work. The Post Office swelled, but then the ‘law of unanticipated conse-quences’ took effect: Fedex and UPS saw the opportunity to go into the letter carrying business, with the result

that there are now fewer jobs in the Post Office than before that govern-ment push. However, by the standards of the economics profession I’m some-thing of an activist here -I passionately advocate low-wage employment sub-sidies paid to companies for the ongo-ing employment of low-wage labour. In my analysis, it would not only pull up wages, but also pull up employment in the long term.

Expectations for the future seem to be muted, but at the same time positive business results are being reported. Is this an unprecedented gap between the macro and micro pictures? Are we on the verge of a big recovery or are we on the verge of a new crisis?There is gathering disconnect between what is happening in employment and output and profits. In the US economy, profits are relatively high. There was a similar situation around the time of the great depression. In 1933, out-put leapt ahead, the economy turned around sharply until the recession in 1937-8. During that period, employ-

ment increased, but far more slowly than output. In other words there was a fantastic growth in productivity. We could be seeing the same thing in the present decade. It’s likely that in the 1930s companies were still liv-ing off earlier innovations -such as electrification- which enabled busi-ness to take advantage of many new possibilities. The effects of the first innovation lasted about 50 years, the next one 40 years, and so on until the internet revolution. It is estimated to have 20 years to run, so perhaps has another good 10 years of business tak-ing advantage of productivity oppor-tunities. So yes, we could have a very tough time in employment despite the prosperity of companies. This brings me back to my thought that we need low-wage employment subsidies to pick up employment. We also need an investment tax credit and we need a subsidy for the financing of innova-tion. Leo Tilman and I have developed a proposal for a First National Bank of Innovation. This would be a new entity, lending to and investing in companies that embark on innovative projects.

Edmund Phelps’ views provoked a lively debate about the dangers now facing this economy, and possible remedies.

28 12/2010 29 12/2010

WorkshopsProfessors of the Solvay Schools conducted workshops allowing participants to study and put into perspective the crisis from four different angles. Here is how they summarize those discussions.

on corPorate goVernance

What have we learnt from the current crisis about the governance of banks? What can we do to prevent future fail-ures, and what action should we take when a bank gets into difficulties -how can we resolve it? In terms of prevention, we have to recognize that the corporate governance of banks is different from other organi-zations because of leverage. Bank execu-tives, boards and shareholders take large risks with money entrusted to them by creditors. “Organizations like the SEC and the European Commission have put forward proposals to strengthen the rights of shareholders, but this might be counterproductive for banks”, says Pro-fessor Marco Becht. In well-capitalised corporations shareholders have put up a large per-centage of total capital. When things go well they gain, when things go badly they lose. In highly leveraged banks,

shareholders put up very little capi-tal. They take risks using the money of bondholders and depositors. If things go well they have a lot to gain, when things go badly they have little to lose -creditors and taxpayers must absorb the losses. The corporate governance of many banks before the crisis failed to align the incentives of bank executives, boards and shareholders with those of creditors and taxpayers. The influence of bank creditors, not of bank shareholders, needs to be strengthened. On the question of resolution, we should note that in the United States the FDIC has proven its ability to take control of local banks, protect deposi-tors, impose the necessary losses on other claimholders and ensure the smooth continuation of business. These powers have just been extended to deal with larger banks and other financial institutions. “The Benelux countries were unable to smoothly resolve a cross-border group like Fortis and the

Irish approach to resolution has brought the whole country to the brink of failure. The current European proposals look insufficient, but we will have to see how they evolve, also in light of the ongoing European sovereign debt crisis.” ■

WorKshoPs

on reguLatIon

In terms of the macroeconomic picture, it is widely acknowledged that the public authorities have managed so far to avoid the economic crisis of 2008-9 turning into another Great Depression, but wor-rying tensions remain, comments Profes-sor Mathias Dewatripont. “It was hoped that Europe could play its part in finding a solution, but to be a credible partner, Europe must get its act together. “Steps have been taken at EU level, but we need to go further. For exam-ple, the insistence on fiscal sovereignty by member States is a problem, particularly as Europe has pooled monetary policy but has not unified fiscal policy to the same level. There is a need for greater unity in this area.” On the issue of regulation more gen-erally -of markets versus governments- while we do not always want to trust mar-

kets, it is important to have a disciplined approach and to explicitly motivate why and when we would want to tamper with them. For example, where markets are fail-ing, is it a question of ‘externalities’, of short-termism, or of lack of competition? “Sometimes there are societal values that should take priority over the market sys-tem, for example in the environmental field. There is a valid view that there are circumstances where we should not hesi-tate to tamper with markets, but enforce-ment must then follow regulation. Oth-erwise, we risk being over-regulated on paper but under-regulated in reality.” This happens because politicians are often eager to sign new regulations, but then because of lack of proper resources there is no enforcement. “So while we think we have solved the problem, in fact nothing has actually been done.” ■

Winner of the “Francqui Prize”, the highest Belgian scientific reward, Mathias Dewatripont is Dean of the SBS-EM, Visiting Professor of Economics at MIT and Research Director of the Centre for Economic Policy Research (CEPR).

Marco Becht is Goldschmidt Professor of Corporate Governance at the SBS-EM, Executive Director of the European Corporate Governance Institute (ECGI) and Member of the Belgian Corporate Governance Commission.

Marco Becht. Rewards in banking were out of line with risk taking.

Mathias Dewatripont. We risk being over-regulated on paper but under-regulated in reality.

A detailed summary of the workshop is available from www.tcgd.org/2010

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on gLoBaLIzatIon

There is general consensus that glo-balization is largely inevitable and that both private and public decision-mak-ers need to act accordingly, says Pro-fessor André Sapir. Globalization cre-ates huge economic opportunities and wealth, but also huge economic and

political tensions between and within countries. The current phase of globalization marks the end of a century which is likely to remain exceptional. Never before had the importance of China and India fallen so low in world income and production. The re-emergence of these two giants (and the emergence of other developing countries) to global prominence already produced, before the financial crisis, major changes that tested the resilience of the domestic and international economic institutions put in place at the end of the Second World War. “By hitting so severely the mature economies and leaving emerg-ing countries relatively unaffected, the crisis will accelerate the process of glo-bal transformation in favour of the lat-ter, which will test even further these institutions, and thereby the future of globalization itself.” This view of globalization naturally gives rise to questions about the place of advanced countries in general -and of Europe in particular- in the glo-bal economy. Is globalization “good” for emerging countries but “bad” for

Europe? Is Europe sufficiently well equipped to benefit, rather than lose out, from the huge economic transfor-mation associated with globalization? Those questions need to be addressed at three separate levels: a global level, a European level, and a national (or even regional and local) level. At global level, globalization needs to be “harnessed” with the help of global institutions such as the World Trade Organization (WTO), the International Monetary Fund (IMF) and all the G20. Here the question for Europe is whether it has the will and the capacity to speak with one voice as it already does at the WTO in order to ensure that its voice is heard. Secondly, European policies need to improve the attractiveness of Europe as a location for enterprise, innovation and investment. Finally, “European member States need to better equip their citizens with the kind of educa-tion and life-long learning environment that can deliver sustainable growth in this new age of globalization”. ■

on management and strategy

What are the biggest risks people see in the current crisis? Among the concerns are questions of political instability, risk, and the functioning or non-functioning of bureaucracy. Few doubt the need in some areas for more regulation, but there is a feeling that it is more important to eliminate bad regulation, and what is needed more than ever are policy-makers who understand the specific needs of busi-ness. In addition to competent leader-ship, “we need to focus on values as a way of rebuilding trust and confidence in the markets, in the economy and in society at at large”, explains Professor Paul Verdin. “Companies are successful because of what they do – and don’t do”, and not in the first place because of the external environment, so in moving away from macros and the political scene we are facing key questions. What can we expect from policy- makers and macroeconomists to point

us towards growth? The general reac-tion from business here is ‘leave it to us, please!’ We need to move away from the macro approach where we think we can legislate for growth. Growth and good macro-performance are the result of what successful companies do, and of good management – not the other way around. “A paradox in today’s environment is the need to be flexible while also stick-ing to a strategy that sets a course for the long-term. There is also tension

between the sophisticated specializa-tion that is taking place within compa-nies and in education, while more than ever we need to have people with a broader view.” From the employees’ perspective, many feel that companies do not com-municate enough, not only from the board of directors but across the whole company. Finally, one interesting sug-gestion coming from participants was the launch of a new website to be called ‘humility.com’! ■

André Sapir is Professor of International Trade and European Integration at the SBS-EM and Senior Fellow of Bruegel, the Brussels-based European think tank. He was Economic Adviser to the President of the European Commission.

Paul Verdin is Professor at the SBS-EM (Chair in Strategy and Organization), Professor of Strategy and International Management at Tilburg University and KULeuven, formely Professor of Strategy at Insead, IESE and other international business schools.

WorKshoPs

André SapirEurope must get its act together to face up to globalization.

Paul Verdin. We need to have people with a broader view.

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