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Sovereign debt solutions – Europe’s &nancial fringe

Longitude #41e Italian Monthly on World Affairs

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august/september 2014

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cover story

27 The messy businessof bordersby lanfranco vaccari

32 The end of the Sykes-Picot lineby lorenzo vidino,andrea plebani,and stefano torelli

38 A snapshot of ISISin the Middle Eastmap by marie joveneau

42 Nightmare sans frontièresby stash luczkiw

48 A visual history of bordersin Europemap by marie joveneau

50 Creeping encroachment,China’s western surgeby raffaello pantucciand sarah lain

56 China’s alluring neighborsmap by marie joveneau

58 Bordering on Utopiaby frank jacobs

65 A new world disorderby stefano stefanini

europe

73 Sovereign debtin turbulent timesby domenico lombardiand skylar brooks

78 Europe’s financial fringeby moreno zani

84 Spurring venture capitalby fernando napolitano

featured briefing

93 The Grand Disruptorby stefano cingolani

98 Amazing Amazon - graphby marie joveneau

100 Playing with Fireby christopher caldwell

102 The Empire of Flying Pizzasby francesco galietti

finance

110 Banking minus the interest,or so it seemsby maurizio stefanini

115 Sharia-compliant Europeby enrico verga

Longitude #41

leaders4 The stagnant dilemmaby pialuisa bianco

widescreen8 Sialkot, where the balls come frombymarco mona

charted territories16 Her Majesty’s frozen slice of pie

by frank jacobs

talking heads18 Politics on and off the pitch

by carmine finelli

world money20 Money’s architectural shifts

by paolo savona

smart thinking22 Lessons from failure

by danilo broggi

the orientalist40 Lines in the sand

by maurizio molinari

berlaymont86 Don’t do todaywhat you can put off till tomorrowby adriana cerretelli

potomac watch106 The wealth of nations

by renzo cianfanelli

warming bloopers122 China’s clean technology

by carlo clini

chosen words124 Here’s my story, vote for me

by maurizio stefanini

numbers126 Something fishy going on

by federico bini

published by

LongitudeVia Bruxelles 6700198 Rome, Italy

editor-in-chiefPialuisa [email protected]

senior [email protected]

managing editorStash [email protected]

associate editorGiancarlo [email protected]

art directorEttore Festa

photo [email protected]

layoutValentina [email protected]

maps & chartsMarie Joveneau

advertising [email protected]

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printed byAmilcare Pizzi SpACinisello Balsamo (MI)

distributed byPress-Di DistribuzioneStampa e Multimedia SrlSegrate (MI)

Registrazionepresso il Tribunale di Roman. 3/2011 del 20/01/2011

photo credits

cover: Marco Mona /GMP – Cover illustrationcommissioned by Longitude.

header strip: Joe Klamar/AFP/GettyImages – JeffBezos CEO of Amazon introducing the new KindlePaperwhite in Santa Monica, California.

Go to press date: July 21, 2014

august/september 2014

Leaders

4 - longitude #41

Leaders

There is a recur-ring sense of déjàvu in Europe this

summer. Echoes of apre-crisis world aremounting and Europeis in deep trouble. Theeconomy is stumbling.As theMay elections showed, the continent’s voters areincreasingly averse to the original European project.And the Ukrainian conflict, as well as the renewedfighting all over theMiddle East, have drawn attentionto the glaring lack of foreign policy. The consequencesof all of this are hard to predict. But the ripple effect ofa geopolitical crisis will have huge implications on analready wavering economy.

The European Union complains about not beingtaken seriously in the world, while its leaders arepainfully entangled in their embarrassing failure tosettle upon how to distribute the top jobs. Called to-gether inmid-July to choose two of themost senior po-sitions in the Brussels hierarchy, EU leaders decided topostpone their decision until the end of August. Thesummit wasmeant to identify whowould preside overEU summits after Hermann Van Rompuy steps downas president of EU Council, and who would succeedCatherine Ashton as the bloc’s next foreign policy rep-resentative. But negotiating who would do what job,backroommaneuvers prevailed over political and eco-nomic urgencies. The resulting delay inflated thechronic a lack of effective leadership.

As disorder in the world increases and the stabili-ty of a large part of Europe is at stake, the EU can’t evenpick the bloc’s new foreign policy chief. This at a mo-mentwhenwhat is needed is a leaderwho is not afraidto take initiatives and can build political consensus foreffective conflict prevention and rapid conflict man-agement.Yet such an option seems unlikely.While thejob has considerable powers, it is considered the leastweighty of the triumvirate of EU leadership posts,which include the presidents of the European Com-mission and the European Council, the body whichrepresents member states. Representation in Europeseems purely a formal, not a political affair. Memberstates are determined to preserve sway in foreign pol-icy. London, Paris, Berlin, and other capitals won’t liketo be muscled out by a powerful foreign policy chief.The High Representative for Common Foreign Policyand Security must ensure he or she doesn’t get too farahead of national capitals.Whoever gets the nodwill be

rate, economic growth comes to a standstill – it stag-nates.

And yet, if familiar secular stagnation concerns arerelevant to our current situation, there are obviouslyprofound policy implications. A few points seem tostand out clearly. First, that the recovery – while un-derway – is following a lower and feebler trajectorythan customary, even in the United States. Second,this likely reflects restraining factors of a longer-termnature – even though they are not necessarily “secular.”Third, that in such a setting, the risks are asymmetric:they are much more pronounced on the downside,with a high probability of mishaps. Fourth, that eco-nomics is often prone to determinism. But policymustset aside any fatalism, precisely because the forces tobe countered are deeply rooted, there is a need forgreater decisiveness and activism.

The current debate has offered various remedialproposals, among which two stand out. First, directmore resources toward public infrastructure and tech-nology investment, to build for the future. Second, ac-cept a higher level of inflation in order to generatenegative real interest rates, so as to spur demand –starting with a more resolute reaction to halt the slip-pery slide into deflation. In Europe, both of these in-dications require changes in common policies thatnow seem out of reach. But there is also a third, in-escapable, and unanimously obvious ingredient forcountries with an anemic growth potential: the im-perative of structural reforms.

The eurozone’s leaders have repeatedly underesti-mated the risks of crisis. They promoted austeritymeasureswithout recognizing the degree towhich thiswould compoundunemployment.They ignoredwarn-ings of likely contagion in 2010, at a time when theyshould have moved quickly to negotiate a debt re-structuring, which wasn’t achieved until 2012.

Reviving growth requires investments. But crucial-ly important for investor sentiment is a sense that na-tional leaders in the eurozone are findingways to revivepublic confidence in their ability to restore stability andpursue a path to growth.They have to improve a robustbanking union; they should strengthen the mecha-nism they have put in place to provide essential cred-it to countries in trouble; and they should revive seri-ous thinking about a fiscal pact that commits all gov-ernments to budget stability.

The longer they wait, the tougher the problemswill become, increasing the risk of serious if not lethalshocks to the system.

The stagnant dilemma

longitude #41 - 5

chosen only to ensure gender, geographic andparty po-litical balance within the EU leadership.

Evenmore dangerous is the impasse on economicroles. The leaders also have to decide on the next pres-ident of the Eurogroup, who presides over regularmeetings of eurozone finance ministers. The Interna-tionalMonetary Fund’s latest report on eurozone con-ditions should be a wake-up call. It describes the rootcauses of pervasive weakness in growth as “persistentfinancial market fragmentation, weak bank balancesheets, low demand, and creeping uncertainty as wellas structural weakness.”

The President of the EuropeanCentral Bank,MarioDraghi, recently suggested that there were some signsof economic improvement in the eurozone, but he,like the IMF, admitted that the downside risks weresubstantial, as indeed they are.

The yo-yo forecasts for the eurozone as a wholemask a grave situation in some of the most troubledeconomies andbeg the question: Is the European econ-omy expanding, or is it in recession? Are we really in arecovery phase, albeit a slow one? Or are we boggeddown in a new normal of prolonged anemic growth?

Wehave to understandwhy the economic situationseems so perilous in Europe, even though its economyisn’t shrinking. To say the acute phase of crisis haspassed, is not to conclude that the euro has been fixed.A long public argument around rules versus flexibilitywould be as futile as the earlier debate between aus-terity and growth. In both cases, the euro zone re-quires both. Finding an equilibrium requires above allelse the establishment of truth.

Technically, overall growth in the eurozonehasbeenfaintly positive since early last year, with growth of justunder 1% from early 2013 to early 2014. The eurozonegrewat anannual rate of 0.7% in the first quarter of 2014.The ECB forecasts that the bloc will grow 1% this year,1.7% in 2015, and 1.8% in 2016. The IMF reports euro-zone GDP declining for a second year in 2013 by 0.6%and then recoveringmodestly with a growth of 0.9%.

Despite the overall movement forward, economicoutput shrank in eight eurozone countries in the firstquarter, including the Netherlands and Finland.Growth was zero in France, which has the secondlargest economy in the eurozone after Germany.Joblessness is 11.7%, just below the record.

Annual inflation is 0.5%, well belowthe ECB’s target of 2%, and manyeconomists have expressed alarmabout the risk of deflation.

And while investors have flocked back to the re-gion’s government debt and European stocks have re-bounded from crisis lows, output in the 18 countriesof the eurozone has still not recovered to the level of2008, when the financial crisis began.

The real issue is not about slight oscillations in theeconomic indicators. It resides rather in the questionof the phase that we are going through and of the long-term perspective. Many analysts consider that whatmay be underway is not a recovery, but rather a stretchof breathing space in the recession.

In other words, if the European economy keepsgrowing and eventually accelerates, then it will turn outthat the first quarter of 2013 was the trough of a reces-sion that began in the third quarter of 2011. However,if there’s a renewed dip, it is just a single prolonged re-cession.

It means that economic times in the eurozone arebad. They are bad if we are still in recession, but theymight beworse thanwe feared if this is what expansionlooks like in the eurozone. Recessions are miserable,but at least they end. If this glacial growth is the newcontinuing reality for Europe, it is terrible news in itsown right.

Larry Summers called it the “secular stagnation.”The term originated with Alvin Hansen, a Harvardeconomist, in the late 1930s. Hansenwasworried thatslower population growth and slower rate of techno-logical progresswould result in less investment and re-duced economic growth. Hansen’s prediction did notcome true – the baby boom eliminated worries aboutpopulation growth, and technological progress re-mained strong. However his definition explains a con-dition of negligible or no economic growth in amarket-based economy.

The new normal of secular stagnation, togetherwith the disquieting example of Japan –whereGDP to-day is less than two-thirds of whatmost observers pre-dicted a generation ago – point to a basic inability of theeconomy to self-recalibrate.

Whenper capita income stays at relatively high lev-els, the percentage of savings is likely to start exceedingthepercentageof longer-term investments that arenec-essary to sustain future economic growth.The absence

of such investments and consequently of eco-nomic growth, leads to declining levels of

per capita income and consequently ofper capita savings.With the reducedpercentage savings rate convergingwith the reduced investment

by pialuisa bianco

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WidescreenWidescreen

Sialkot, wherethe balls come from

by marco mona Cricket-mad Pakistan might not have much of afootball team, they’re 159th in FIFA’s world rankings,but it has a proud history of manufacturing top-classballs. Located at the foot of the Kashmir hills nearthe Chenab River in the northeast of Pakistan’sPunjab province, Sialkot, which once housed BritishIndia’s first bagpipe works (there are now 20 pipebands in the city), is today a major source of sportsgoods for international sports events. It alsoproduces dental and hospital instruments, leathergarments, musical instruments, sportswear, gloves,badges, walking sticks, cutlery, hunting knives, airguns and let’s not forget shotguns. In fact, it seems asthough they make practically everything here, but ifyou had to pick the one main industry in Pakistan’s

third richest city, well then, balls it is. In fact, it’sprobably no coincidence that there is a veritablewho’s who list of prominent national cricket andhockey champions that hail from here. Nowadays,with the notable exception of grabbing the contractfor production of the Brazuca ball for the FIFA WorldCup in Brazil, because Adidas factories in Chinacouldn’t keep up, things have slowed down a little.But at one time Sialkot was the unassailable soccerball production capital of the world, exporting about30 million balls a year, an estimated 40% of globalproduction. Not bad for a city that still has to dealwith load shedding and water shortages and the oddrocket or two fired from across the border.

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longitude #41 - 98 - longitude #41

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TT SS PP May 28, 2014,Pakistani workers gluea design onto a soccerball at a factory inSialkot ahead of theFIFA World Cup 2014 inBrazil. Forward Sportsproduces match ballsfor Adidas for some ofthe world’s top footballcompetitions includingthe Champions League,the German Bundesligaand now the WorldCup.

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10 - longitude #41

QQWorkers packsoccer balls into sacksbefore they aredispatched for sale.

TTSialkot gainedinternational celebritystatus when itproduced the “Tango”ball for the 1982 WorldCup in Spain, kickingoff a lucrative industryand Pakistan’s foreignexchequer. The townmanufactures sportsequipment sold all overthe world. Over the lastdecade, Pakistanexported on average 40million balls worth $210million producedannually by some60,000 highly skilledlaborers.

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PP Ramzan Ahmed, 70,stitches a soccer ballat a factory in Sialkot.

SS Pakistani villagerZainab Bibi issurrounded by herchildren as she stitchesa soccer ball at herhome in Sialkot.



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PP Rizwan Ahmed, 18,stitches leather arounda spherical core toform a cricket ball at afactory in Sialkot.

SSA worker looks overcricket balls ready forpacking.

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SSMohammad Shabir,31, =les the edges ofcane sticks to formhandles for cricketbats.

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14 - longitude #41

QQPakistani rangerstake positions at theTahir Joian bordervillage near Sialkot onOctober 24, 2013 afterIndian troops hadincreased =ring onPakistani areas andtargeted civilianpopulations.

TTSS Pakistanivillagers point todamage caused bymortar shells allegedly=red by India acrossthe border at TahirJoian.

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production process atTalon Sports, thefactory where KarmaChakhs are made inSialkot.

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longitude #41 - 17

Charted territoriesCharted territories

overlap, as is the case with Chile and Ar-gentina’s. Both also overlap with the BAT.

Needless to say that Chile, Argentinaand the UK do not recognize each other’sclaims. Hence the FCO’s rush to point outthat naming part of the BAT after QueenElizabeth did not affect the validity of theBritish claim, nor alter the status quo.

Queen Elizabeth Land, at 437,000square kilometers, is twice the size of theUK, and comprises the southern, narrowestthird of the pizza slice. Its northern bound-ary is the frozen coastline, where themain-land touches the massive Filcher-RonneIce Shelf; and to thewest thereof a latitudi-nal line separating it fromCoats Land to thenorth. Its main geographic feature, apartfrom lots of snow and ice, are the Pensaco-laMountains, running fromnorth to southacross its middle.

Henceforth, the nameQueen ElizabethLandwill appear on all official Britishmaps.It’s highly unlikely that Chile or Argentinawillmark the territory asTierra Reina Isabel.Argentina especially has a bone to pickwithBritain – and names are an important ele-ment in the dispute.

For 2012 alsowas the 30th anniversary ofthe short, sharp war between both coun-tries over a group of islands north of theBAT, and east of Patagonia. To the British,these are the Falklands, while the Argen-tines know them as the Malvinas.

The naming of Queen Elizabeth Landprompted Argentina’s Foreign Ministry tolodge a formal complaint with the British,expressing Argentina’s “firmest rejection”of theUK“naming an area of the ArgentineAntarctic sector,” whichwas a reflection of“anachronistic imperialist ambitions” – aswell as an infringement of the spirit of theAntarctic treaty.

Sowhat is all this aggravation for? Com-pared to coastal Antarctica, home to pen-guins, seals, and most of the continent’sresearch stations, the BAT’s hinterland is asterile waste, landlocked and covered in amile of ice. Even in summer, the ther-mometer struggles to reach -20˚C. Nothinglives here, and nobody survives there forvery long. Robert Falcon Scott, who lost therace to the South Pole to Roald Amundsen102 years ago, died en route back to the

by Frank Jacobs

Yet another chunk of territoryhas been named after a Britishmonarch. Now QueenElizabeth II has a gelidwasteland named after her.But even the nether reaches ofAntarctica breed territorialdisputes.

Her Majesty’s frozenslice of pie

Frank Jacobs is the author of Strange Maps – AnAtlas of Cartographic Curiosities.

Blog: StrangeMaps(bigthink.com/blogs/strange-maps)

Blog: Bordelines(opinionator.blogs.nytimes.com)

Whatdoyouget someonewho is asclose as anyone to having every-thing? You spread the risk, and

get her twopresents.That’s what the Britishcabinet did on December 18, 2012, whentheQueencame round to visit: they gaveher60 tablemats. And a chunk of Antarctica.

Elizabeth II’s visit marked the end ofher Silver Jubilee year. As she left, she waspresented with 60 lacquered table mats,one for every year of her reign. She then vis-ited Foreign SecretaryWilliamHague’s For-eign and Commonwealth Office (FCO)across the road. Hague presented her witha gift the size of a few billion tablemats: “Asa mark of this country’s gratitude to theQueen for her service, we are naming a partof the British Antarctic Territory (BAT) inher honor as Queen Elizabeth Land.”

TheQueen received a stone prised fromthe frozenwastes that constitute her newestterritory, roughly equal to the southernthird of the BAT. The BAT is situated southof 60˚S latitude and between 20˚W and80˚W longitude, with those two meridiansconverging on the South Pole to give theterritory its pizza-slice shape. It includes ahandful of islands and the Antarctic Penin-sula as well as the deep-frozen interior.Measuring 1.7 million square kilometers,the BAT is the largest of Britain’s overseasterritories, but arguably also its least sub-stantial: itsmain sources of income are a taxon the research scientists in the territory,and the sale of postage stamps.

With half a dozen other countries claim-ing their own slice of the South Pole, the po-tential for exploration to escalate into con-frontation was huge. Hence the AntarcticTreaty of 1959, Article IV of which commit-ted all seven claimants to freeze theirclaims. The by now 50 signatories have theright to establish bases anywhere on thecontinent, but for scientific research only.

The framework of the Treaty has keptAntarctica free from military bases, min-eral exploitation andnuclearweapons, andmanaged fishing and tourism. It has also al-lowed some signatories to recognize eachother’s claimswithout upsetting the broad-er agree-to-disagree framework. NotablyFrance, Norway, New Zealand, Australiaand the UK. It helps that their claims don’t

Australian sector of the frozen continent.And then there’s another Queen ElizabethRange, also in Antarctica, named in 1957.

She’s probably old andwise enough notto take any of it personally. As KlausDodds,professor of geopolitics at Royal Holloway,remarks: “Place-naming is one of themostpowerful ways of reinforcing sense of yourownership of a territory.” According toDodds, the naming is part and parcel ofBritain’s assertion of its ‘strategic presence’in themost contested part of the Antarctic:“With the absence of an indigenous hu-man population,maps and charts have al-ways been instruments of power in the po-lar context.”

The US has deployed most names inAntarctica – 13,000, according to the Com-posite Gazetteer of Antarctica –with Britainresponsible for nearly 5,000. But evensmaller players like New Zealand or Bul-garia take great care tomark their presencewith hundreds of place names. Like the

claims, those names sometimes overlap.Famously, the Antarctic PeninsulawasGra-hamLand to the Brits, Palmer Peninsula tothe Americans,Tierra SanMartin to the Ar-gentines and Tierra de O’Higgins to theChileans.

In 1964, the US and the UK agreed toapply the British name to the peninsula’snorth, and theAmerican one to its south. Sothere is room for compromise. But only ifHer Majesty’s government is prepared tolet Elizabeth II beQueen of a slightly small-er piece of the South Pole.

coast, but not before exclaiming: “God,what an awful place!” It is so inhospitablethat most of it was only charted from the1950s onwards, from the air.

Maybe the Queen was mildly insultedfor having such a desolate place named af-ter her. Especiallywith somanynicer placesbearing her name. Also in recognition ofthe Diamond Jubilee, the British parlia-ment renamed the Clock Tower housingthe Big Ben the Elizabeth Tower. Andaround the Commonwealth and beyond,countless schools, hospitals, streets,squares, bridges, buildings and monu-ments are named after her.

As for prominent geographic features,there are the Queen Elizabeth Range andtheQueen Elizabeth Islands, both in Cana-da. Curiously, two segments of Antarcticaalready bear her name. In 1931, when hergrandfather George V was still on thethrone, a piece of Antarctica was namedPrincess Elizabeth Land. It is now in the

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QUEEN ELIZABETH LAND WITHIN THE BRITISH ANTARCTIC TERRITORY

longitude #41 - 19

Talking heads

18 - longitude #41

Talking heads

by carmine finelli

Sports have often played a role ininternational relations. It is achance for countries to displaypower and prowess. But sportsevents all too often translate intocrises or tension in the politicalarena. During the ColdWar, boththe 1980 Olympics inMoscow andthe 1984 Olympics in Los Angelessuffered boycotts by the hosts’respective ColdWar adversaries.The FIFAWorld Cup, while lessprone to geopoliticalmachinations, nevertheless has itsown superpowers and is regularlyan outlet for displays of unbridlednationalism. In this light soccerhas proved to be one of thefavorite fields in which politics andathleticism reflect theperformance of a country. TheBrazilianWorld Cup of 2014 hasshown that there aremanysimilarities between the way onecountry acts on the internationalscene and the way it plays on thepitch. The contradictory Brazil,which was able to go undefeateduntil the semi-final, also revealedthe contradictions between wealthand poverty visible in the country.The defeated Argentina, which ison the brink of a new economiccrisis, and the powerful Germany,which has risen again from thetumult and burden of unificationto once again claim its traditionalplace as a soccer superpower.

Finally, there is the ever-presentNetherlands. Often among the firstfour national teams in the worldand a great country in the north ofEurope.What the pitch shows us isthat soccer, as von Clausewitzmight have put it, is thecontinuation of politics by othermeans.

Politics on and off the pitch

carmine finelli is an analyst at the Universitàdegli studi del Molise department of law.

Germany’s panzers are once again thechampions of the world. They de-

served the cup by playing with cruelty andcynicism overwhelming the hosts Brazil 7to 1 in the semi-finalmatch. German pow-er has spread not only in politics and theEuropean economy but also in football.Actually, Germany has been long been apowerhouse in football, but it has also re-emerged as a political power after re-uni-fication in 1990. AngelaMerkel is a productof such reunification and she is leadingher country towards an impressive series ofsuccesses.

Nowadays, Germany is the leading pow-er of the European Union and it has post-ed a very impressive economic perform-ance with high growth rates and a lowdeficit. The policy of austerity endorsed byAngelaMerkel has avoided the dismantlingof the European Union by imposing sacri-fices to undisciplined states of the south. Asa result, the European Union has almostovercome the economic crisis. Unemploy-ment is at the moment the most urgentproblem tobe tackled, but the economic in-dicators aremoving in a positive direction.

GETTY

“Germany is the world champion. The peo-ple of our country are proud of this team.Congratulations.”

Angela Merkel

Leo Messi’s team was not able to bringthe cup to Argentina. Defeated by Ger-

many in the finalmatch,many economistshave referred to the match as a match be-tween dissipation and austerity to reaffirmthe thesis that discipline is the right way tosuccess. Is that true? If we look at econom-ic indicators, that is undoubtedly true. Afterthe default of early 2000s, Argentina recov-ered its economyby using devaluation andpinning thepeseta to thedollar as its bench-mark on the currencymarket. But the risk ofa new default has never been overcome.When Cristina Kirchner took office in 2007anewdefault seemed tobe very far fromAr-gentine shore, but the emergence of theeconomic crisis and the structural weak-ness of a fragile economy are exposing Ar-gentina to new risks of deterioration.

In the first months of 2014 a new eco-nomic crisis began for Argentina. PresidentKirchner was forced to take unpopular de-cisions, cutting wages and reducing wel-fare in trying to solve problems. As thingsare, the outlook for Argentina is not verypositive. It needs strong leadership to pushthe country beyond the crisis, and it is notclear if Kirchner is up to the task.

GETTY

“I didn’t see any single match of the WorldCup.”

Cristina Kirchner

The Netherlands has never won theWorld Cup. Often in the history of the

tournament the Netherlands was amongthe semi-finalist, but it has nevermanagedto raise the cup. Since the“total-football” ofJohan Cruijff, the Netherlands has beenamong the best national teams in theworld. But the Netherlands’ national teamlacks the pitilessness of Germany and theinspiration of a South American nationalteam.This is not a detail: this featuresmakethe difference between winner and loserin soccer.However, on the pitch theNether-lands is always hard to beat, and puts in agood performance.

On the political and economic sideNetherlands reflects the features it showson the pitch. It is a developed country witha dynamic economic system due to a hugerange of freedom granted in the country. Itrealizes good economic performance andthe outlook is very positive for the future. Ithas a regular path towards growth and hasnot suffered a lot because of the economiccrisis that spread in world since 2007 andthe government, led by Prime MinisterMark Rutte was able to grant the Nether-lands a good way of life.

GETTY

“The Netherlands and Belgium are highlymotivated and capable of hosting a topWorld Cup tournament in 2022 or 2026.”

Mark Rutte

TheWorld Cup in Brazil has enlightenedthe weakness of the country. With its

star attacker injured and best defender dis-qualified, the perennial favorites showed asurprising lack of bench depth. The “B” ofthe so-calledBRICS countrieswas oneof thefavorites towin the cup, but on itswayBrazilmet Germany andwas absolutely thrashedin the semi-finalmatch: 7 to 1.On thepitch,Brazil was unable to generate any sort of at-tack and its defense fell apart. It also lost inthe third-place game against the Nether-lands: 3 to 0.

If we assume football as a metaphor ofa country’s political and economic per-formance we could findmany similarities.Under President Lula, Brazil experiencedhigh growth rates.WithDilma Rousseff thepath towards a complete developmentseems to have slowed down. Rousseff, whowas Lula’s chief of staff, has not been able tosolve the contradictions of her country.Many people still live in the shantytownsknown as favelas. The World Cup has in-deed shone a light over a country that triesto overcome difficulties with no apparentsuccess.

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“In their turn, the investments expected forthe World Cup and the Olympics will bemade in such away as to achieve permanentgains in quality of life for those in all the re-gions involved.”

Dilma Rousseff

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World money

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World money

As we all know, the result has been thatgold was stored in official reserves, silvervalues fluctuated on its market and paperbanknotes became by rule of law themostconvenient instrument tomake paymentsand pay off debts. Gresham’s law that “badmoney drives out good” was thereforeproved. It is not a coincidence that the pa-per dollar (the “greenback”) as well as de-posits and other dollar denominated fi-nancial instruments are the very backboneof the global financial system. This is whymarkets are all together good but nervous.If we look at the problem from an ab-

stract point of view, the euro could resem-ble the “bad” money which drives out the“good,” but the euro is not backed by a na-tion-state having the power to induce oth-er states to voluntarily accept its currencyas a medium in international payments asthe dollar to-day (what the economists call“fiat money”) and to impose it by law. Atpresent, the ECB is much similar in its in-stitutional architecture to the “Issuing In-stitution” of our past, mainly private as inItaly (the National Bank of the Kingdom ofItaly, theTuscanNational Bank,TheTuscanBank of Credit, The Bank of Naples and theBank of Sicily) which were centralizedeverywhere as “central banks” (in Italy theBank of Italy) whose power of issuing cur-rency is regulated by law.In the current set of geo-economic and

geopolitical relations, the dollar could becompared to gold, the Renminbi to silverand the euro to papermoney. If this repre-sentation gives us a fair view of the currentinternational monetary system, the euroshould be the money that drives out theothers as it was at the beginning of the cri-sis before the market became aware of itsmain institutional weaknesses: being a cur-rency without a state, a crown without aking.Without saying that the renminbi willsurpass the dollar, as it is unlikely it willdethrone the dollar from its dominant po-sition in the short term, we cannot excludesuch a possibility in the future if China, asannounced many times, will allow the fullconvertibility of its currency. Since the eurois recovering its credibility, the tri-polarmonetary system will experience new andgreater imbalances.

We have already experienced a severemonetary crisis as we believed that finan-cial markets were perfect, i.e. able to regu-late themselves and the breakneck growthof derivatives. Perhaps we are committingthe same mistake again with the interna-tional currency market when we purpose-ly overlook the ambitions of each of thethree currencies. If all factors impeding thedollar from maintaining its central posi-tionwithin the international currencymar-ket were to be removed and its stabilitywere to be questioned along with the eurocapacity to resist institutional pressures,China’s hesitation tomake its currency ful-ly convertible could force global marketsinto a period of currency imbalances with

their relative side effects on the real econ-omy. Some sort of political or economicimpediment, whether coming from the in-side or the outside, will always prevent thethree major players from reaching an in-ternational monetary agreement such asthe one reached at BrettonWoods in 1944and therefore impede the creation of newjobs in the entire world.We should turn back to the Interna-

tional Monetary Conferences repeatedlyheld during the past two centuries whichbroughtmonetary stability and growth andcreated independent national bankswherethey were still unknown. At present, thedebate takes place outside democratic in-stitutions and behind the closed doors of

by paolo savona

Although the internationaleconomy is still whollydominated by the dollar, thefuture will no doubt see thebalance altered by both theeuro and the Chineserenminbi.

Money’s architectural shifts

paolo savona is Emeritus Professor of PoliticalEconomy.

the Basel Bank for International Settle-ments where representatives from centralbanks all over the world gather monthly.Their decisions are taken without involve-ment of the democratic institutions andwith the passive acceptance of the auto-cratic ones. Since this central bankers’ fo-rumwas not able to stop the recent severeglobal financial crisis, it should be notedthat despite its role, it cannot offer a solu-tion to the lack of a worldmonetary agree-ment among nation-states that character-izes the monetary architecture in the cur-rent era of globalization.

Econometricians and scholars in eco-nomic historywill tell us in the futureif the Federal Reserve Chairman

Janet Yellen’s strategy of tapering has hadsome impact on the slowdown of UnitedStates GDP growth and if the opposite re-action of the European Central Bank ledbyMario Draghi is the reply to somemod-est tightening of USmonetary policy or theconsequence of fears that the weakness ofthe eurozone will hamper the euro and itsbanking systemwhile they are still sufferingfrom the world crisis.At present, observers of global mone-

tary policies agree that the ECB will takeover the Fed’s role in injecting liquidity intothe global markets. Wall Street respondedby registering a new record with the DowJones closing at 17,000 points while Frank-furt, albeit disturbed by a nonlinear debateon the future of EuropeanUnion fiscal pol-icy, followed at amoderate pace the positivetrends of stock exchange values across theAtlantic.All at oncewe have been informed that

the BRICS decided to implement their IMFbank and that China and South Koreareached an agreement to expand the yuan-renminbi on their foreign exchange trans-actions but no one has ever put this agree-ment in relation with current trends ofmonetary policy in the eurozone and inthe US. China will give $41 billion to theBRICS Bank taking another step towardsthe internationalization of the renminbi.The renminbi has taken another step to-wards its internationalization thus addingcomplexity to the functioning of the glob-almonetary systemwhich instead calls forsimplification and freedom from the hege-mony of a single national currency.In fact, we aremoving forward a tri-po-

lar global currency system which ends theduopoly between the dollar and the eurowithout having reached a proper agree-ment on how domanage the internationalmonetary system. In some ways, the cur-rent international monetary regime is be-coming similar to the one operating duringthe late 19th and early 20th centuries, whenit was difficult to find a balance betweengold, silver and national paper moneyspartly or fully convertible inmetallic coins.

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The former Saudi ArabiaPavilion from the 2010World Expo next to theproposed site of theheadquarters of theBRICS development bankin the Pudongdevelopment zone inShanghai, July 17, 2014.

Smart thinking

bankruptcy is the new religion of the NewEconomy, you could also say that it is its“goose that lays the golden eggs.” Just con-sider the growing success of the FailConconference which has become an annualevent in San Francisco. The basic principlebehind FailCon is a bit like that of Alco-holics Anonymousmeeting: if you want toovercome your failures, you must first ad-mit them and share them with your peers.

Because failures, along with unexpect-ed successes, often belong to the sphere ofunpredictability of events, and they spurthe desire to want to plan and controleverything, including errors or failures. Onebook that has been around for a while,Whoever Makes the Most Mistakes Wins: theParadox of Innovation by Richard Farsonand Ralph Keyes, illustrates the conceptwell: companies often fear and punish fail-ures though, especially in an era charac-terized by discontinuity and complexity,experimentation with new services, prod-ucts and business models has become apractical imperative for survival. That isobviously a serious mistake; just to giveone well-known example, a blockbusterlike 3M’s Post-it came from the experi-mentation of a glue that failed for the ap-plication it was designed for – but not for anew product that was totally non-existent.

In short, you can often learnmore fromtheworst practices than you can learn fromthe best practices. In order not to repeatsomething that has proved ineffective, butalso to learn about how to handle errorsthemaxim ofThomasWatson, the founderof IBM, might be instructive: he said thatthe best way to succeed is to double yourrate of failure. Even more so today, with arapidly changingworld, wheremoving for-ward is necessary and unavoidable, as isthe ability to deal with the two sides of thesame coin: success and failure. Becausewhile failure is a negative element, it alsorepresents an opportunity to develop newsolutions and strategies. Only when weabandon the practice of “second chance” isthe crisis is real.

And there is no doubt that he was right totry again.

by danilo broggi

e high-tech industry is aperfect example of the needto fail, even often, in order to�nally achieve the success thatall new entrepreneurs dreamof. In fact, we may be seeingthe rise of a culture of failure.

Lessons from failure

danilo broggi is the Chairman of Poste Assicura.

In 2003, three students of the HelsinkiUniversity of Technology took part inan online contest sponsored by Nokia

and Hewlett Packard. They won it by pre-senting a real-timemultiplayer video gameand founded a company, which they calledRelude. In January 2005, the company re-ceived its first round of funding from anangel investor and Relude changed hisname to Rovio Mobile.

In early 2009, Rovio Mobile was on theverge of bankruptcy. The 51 projects de-veloped by the company had proved un-profitable, if not outright failures.

In December 2009, Rovio released An-gry Birds, its 52nd game, and after sixmonths it reached the number one spot inthe Apple App Store. The game since thenhas been downloaded over one billiontimes,making it one of the bestselling of alltime, aswell as a goldmine for its inventors.

Angry Birds, of course, is not the onlyexample of a success after a series of fail-ures: even companies like Apple,Microsoft,Danone, Amazon, Facebook and Pinterest,commonly referred to as “innovation driv-en companies” have racked up errors be-fore finding the right path.

CB Insight recently carried out a surveybased on about 160 technology companiesfinanced at the seed stage by Americanventure capitalists. What were the mainfindings from this research? It reveal whathas come to be called a “venture capitalfunnel”: After the first round of funding,54% of the companies got to a secondround; 9% of startups got at least 5 roundsof funding; 75% of new initiatives failed orwere left to die; 21% got an“exit” through asale or merger (not always profitable).

And what about the remaining 4%?Only in this case arewe talking about a real“rising star,” those who become best casesto be studied in business schools.

In fact, most of the failures teach bestpractices. In some cases, the celebrationof failure has even become the “groundzero” of an increasingly common culturaltrend, particularly in Silicon Valley. And if

Smart thinking


Hence, it is crucial to have the rightmental attitude – in business, as in life. Alesson comes to us from the Swiss tennisplayer Stanislas Wawrinska, who has al-ways lived in the shadow of his superstarcompatriot Roger Federer. This year

Wawrinska was the surprise winner of theAustralian Open and jumped to numberthree in the world ranking. On his arm, thetennis player has tattooed a maximum ofSamuel Beckett: “Ever tried. Ever failed. Nomatter. Try again. Fail again. Fail better.”

Stanislas Wawrinka ofSwitzerland with histattoo on his forearmduring the 2014Australian Open atMelbourne Park onJanuary 21, 2014 inMelbourne, Australia.

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LET’S LOOK FORWARD

Industry, agriculture, art, design, engineering, fashion, food, science, filmmaking, sport.

There’s no field where Italy hasn’t been outstanding.Now it’s time to do even better. It’s time to truly shine.

Let’s build, write, invent, produce. Let’s do something new we can be proud of now. Not through nostalgia for our past glories. But through

all the energy we now have inside us. Together with the energy of a leading, integrated player in electricity and gas. A group that started in Italy and today provides power to 60 million customers in Europe and Latin America.

Together with

enel.com

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longitude #41 - 27

Borders

Outof the 195 independ-ent states and 71 de-pendencies, areas of

special sovereignty, and otherentities listed in the CIA Factbook, 175 are involved inbilateral ormultilateral territorial disputes.Theworld’s325 international land boundaries, stretching over250,000 kilometers, and the 430maritime boundaries,of which only 209 have been agreed upon, give plentyof opportunities for historical and cultural confronta-tion; legitimize, at least in the petitioner’s view, any sortof claims based on religion, language, ethnicity; fostercompetition over water, oil and gas, minerals, fish,arable land and other resources. Conflicts affect every-one – long-standing allies such as Canada and the USandwarring enemies such as Israelis and Palestinians– and reach everywhere – from deep into the Africanjungle, where several islands along the Congo are con-tested between the two states bearing the river’s name,to the barren glaciers of Antarctica, where seven coun-tries assert overlapping rights. Intensity varies frommanaged or dormant quarrels to violent ormilitarizedcrises. Even in Europe, a continent where in the last 14centurieswars have been fought over and over again toconquer or defend territory, 28 disputes are currentlygoing on and 22 recognized sovereign states and stateswith limited recognition are involved (secessionistmovements are not taken in account).

Borders are amessy business. The confusion startswith terminology. Technically, the term for “the line insand” is boundary: it comes from “bound” and, ac-cording to the late Ladis Kristof, a political geographerwho taught at Portland State University, means terri-

torial limits and separation, and suggests an inward ori-entation. The term border is often used as a synonym,but in reality it refers to the region contiguouswith theboundary: either side of which, in neighboring states,is a borderland. Finally, frontier refers to the process ofterritorial expansion in what are deemed, most of thetime incorrectlywhennot plainly falsely, as “empty” ar-eas. From a geopolitical perspective, the entire zone ofthe frontier constitutes the border, it’s a buffer zonesupposed to smooth out interstate conflicts –Afghanistan being a goodhistorical example: it was cre-ated to divide the British and Russian Empires’ zonesof influence – or to contain particularly restive indige-nous populations – the Afghanistan-Pakistan border-land was called North-West Frontier Province beforebeing labeled as Federally AdministratedTribal Areas.

“Perhaps the most palpable political geographyphenomena,” according to the classical definition for-mulated back in 1963 by Julian Minghi, professoremeritus at University of South Carolina, borders,their rise and fall, their construction and deconstruc-tion, intertwine with the entire history of human civ-ilization. The Romans had inTerminus, an attribute oftheir paramount god Jupiter Optimus Maximus, theprotector of boundaries that were not to be trans-gressed by any foreign foe. The original Terminus, aconsecrated stone to which every year sacrifices wereoffered, stood between the fifth and the sixthmilestonetowards Laurentum, near a place called Festi. As the

Themessy businessof borders

by lanfranco vaccari

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empire expanded, walls and fortificationswere built toprotect against the “barbarians” and to control trade.But there was no such thing as a definite line to markthe sovereignty of the state. Boundaries were porous:sovereigntywas conceived as jurisdiction over subjectsrather than an exclusive authority over a territory.

This concept came along only in 1648, when thePeace ofWestphalia ended 30 years of ongoing war allover Europe. The politically centralized state was seenas the solution for addressing the chronic lack of sta-bility that characterizedmuch of themedieval era, es-tablishing the principle of mutually exclusive sover-eignty over territories delineated by borders. But thecontemporary nation-state idea emerged only in thewake of the French Revolution, when state, territorialsovereignty, group identity, and borders coalesced.From then on, according to Anssi Paasi, professor ofGeography at theUniversity ofOulu, Finland, “a nation-state is understood as a country inhabited by a groupof people who see themselves as one distinct commu-nity.” Boundaries separate different distinctive com-munities bound together by the merger of two con-cepts: political territoriality, as expressed in the insti-tution of the state, and ethnic and cultural identity, asexpressed in the idea of nation.

The state formation processes in Europe after theCongress of Vienna in 1815, following the defeat ofNapoleon, follow a repetitive script. The state claimedto include everybody living inside its borders; peopleswitched from being the subjects of the ruler to beingcitizens in a territory administrated by a sovereignstate that claimed to represent them directly; the na-tion-state gave them a nationality based on their ter-ritorial residence; the state territory became the terri-

tory of the nation itself; the boundaries of the state be-came the borders of the nation; and interstate bor-ders became international borders. As Gabriel Popes-cu, associate professor of Geography at Indiana Uni-versity-South Bend, writes in Bordering and Orderingthe Twenty-first Century: “This territorialization ofidentity materialized in the nation. The institution ofthe state gave the nation its political expression. Bor-ders served to bind it all together.”

Not everything was solved, tough. A territory is abounded space and, according to Jean Gottmann, the20th century French geographer who invented the ne-ologismMegalopolis, “a state’s claims to themonopolyof power within its territorial borders have been codi-fied in themodern principle of territorial sovereignty.”Within the bordersmarking the formal extension of itsterritorial power, the state is sovereign – that is, has aright to a territorially exclusive practice with bordersimposed to control access and regulatemobility. How-ever, no nation-state has been built from scratch and,arguably with the exception of Japan, usually differentgroups share the same territory. There is no such thingas a sizeable chunk of territory hosting an ethnicallypure and culturally homogenous community of people.Moreover, according to Ben Anderson, reader in Ge-ography at DurhamUniversity, in the UK, “there is lit-tle agreement towhat exactly themix of language, his-tory, ethnic background, political institutions, and at-tachment to a particular territory should be; who de-cides when a group of people achieves the status of anation; and where to establish the borders.”

As a result, the number of nations in the worldvaries widely from several hundred to several thou-sand, but the number of states is just under 200. So thenation-state appears a theoretical impossibility. Twocenturies ago, the ideology of nationalism came to therescue. States used it in a process of nation building,seeking to create an identity based on bounded space.As professor Popescu writes, “Borders played a crucialrole in the creation of myths and symbols to produceand enforce a clear division between the ‘superiority’ ofthe nation’s domestic ‘us’ and the ‘inferiority’ of its for-eign ‘them’.” In the process, national borders becamesacrosanct to thenation-state, theywere considered theguarantor of the very existence of the nation: violatingthem represented an offense to the people themselvesand a cause for war. The more so after the Paris PeaceConference in 1919, at the end ofWorldWar I, when theprinciple of national self-determination became thecornerstone of European political order. At its best, na-tionalism has allowed the emancipation of certaingroups of people from the domination of tyrannicalrulers. At its worst, nationalism is responsible for out-rageous formsof violence, as demonstrated in the 1990swith ethnic cleansing in the formerYugoslavia.

At the end of day, borders are about power. And

power is not distributed once and for all. Throughoutthe ages,major shifts of power between countries havebeen frequent and rarely peaceful. “Whatmadewar in-evitable was the growth of Athenian power and thefear which this caused in Sparta”: from Thucydideson, it has always been the same old story. Rising pow-ers are nationalistic, seek redress of past grievances,andwant to claim their place in the sun. Usually, theirfirst step is advancing territorial claims against theirneighbors and asking for some border adjustment.And, as with the balance of power, boundaries are notfixed, they change in space and in time: who belongswhere, who is an insider and who is an outsider, whois part of “us” andwho is part of “them” – nothing is de-termined once and forever. The map of Europe hasbeen radically redrawn three times during the 20thcentury, more often than not in blood. Old peoplefrom Carpathian Ruthenia, a small region betweenUkraine and Slovakia carrying such a convoluted his-tory that has been knownover timewith a dozen of dif-ferent names, like to tell a joke: it’s about having livedin four states (Austro-Hungarian Empire, Czechoslo-vakia, USSR andUkraine)without ever having left one’snative village.The Polish state disappeared three timesin the course of its history – and Alfred Jarry, a Frenchwriter and dramatist, at the end of the 19th century sethis playUbu Roi “in Poland; in other words, nowhere.”

In their scramble for the world, even before capi-talism and the nation-state, Europeans exported bor-ders.The first notable colonial border dates from1494,when Spain and Portugal decided how to divide theirrights to colonize lands across the Atlantic they bare-ly knew. In the Treaty of Tordesillas, they agreed to anorth-south line along the 46°37’Wmeridian to sepa-

rate their future colonial domains. This never hap-pened.When better maps became available, the Por-tuguese realized that their share of South Americawasmuch smaller than the Spanish one, and they pushedbeyond theTordesillas line.The lasting consequence ofthis dividing line consists in the principle it inaugu-rated. From then on, everywhere (again, with the lone-ly exception of Japan) boundaries were either imposedby European colonialists or borrowed from them.Withdecolonization, the new states usually retained theterritorial borders they had as colonies. First, the bor-ders between different European colonial domains be-came interstate borders: for example, the border be-tween French Niger and British Nigeria became theborder between independent Niger and independentNigeria. Second, the administrative borders betweenthe subdivisions of a colonial domain became the newinterstate borders, as in the case of the Spanishprovinces in South America.

And state borders kept emerging. At the beginningof the 20th century therewere 55 independent states. Atthe beginning of the 21st century, there were 195. Thiscame around in three major rounds that shaped thecurrent world political map. The first took place at theend ofWorldWar I, when the disintegration of the Aus-tro-Hungarian, German, Russian and Ottoman Em-pires resulted in a dramatic increase of European statesas well as in territorial alterations to already existingones and in the occupation of the Middle East byFrance and Great Britain. The second, between theend ofWorldWar II and the 1960s, when 120 new statescoincidedwith the termination of the supremacy of Eu-ropean powers, the decolonization era and the emer-gence of two superpowers. The third, after the col-

Banquet of theAmsterdam CivicGuard in Celebrationof the Peace ofMunster, 1648.Rijskmuseum.Amsterdam.Netherlands.

The Tordesillas Treaty,signed on June 7, 1494between Spain andPortugal. Seville, Indianarchives. Spain.

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Borders

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lapse of Soviet Union that ended the bipolar ColdWarorder in the 1990s: in the last two decades, more than26,000 kilometers of new borders have been addedworldwide,mainly in Europe and Asia. This happenedin the same period when globalization brought aboutan unprecedented flow of people, goods, diseases, andideas. The end of both history and geography was en-visioned as near, borders were seen as doomed, andhumanitywas forecast to live in a global village, a post-modern and deterritorialized hyperspace. The likes ofFrancis Fukuyama, Kenichi Ohmae andThomas Fried-man propagated the “borderless world” theory, si-lencing and even befooling David Harvey, the British-born professor of Anthropology andGeography at CityUniversity of New York, who in 1989 observed, “farfrom fading away, it seems that the more territorialborders fall apart, themore various groups around theworld cling to place, nation, and religion asmarkers oftheir identity.” Of course, Harvey was right and the ul-

tra-globalists were deadwrong.Globalization did however

have its effects. Contemporaryborders are becomingmore dif-ferentiated and theirmeaning ischanging. In an increasingly in-tegrating Europe, for instance,there is now a distinction be-tween inside, or secondary, bor-ders and outside borders, theformer having been softenedand the latter hardened. As pro-fessor Popescu says in his book,“In the 20th century, borderingwas about securing state terri-tories. In the 21st century, it ap-pears to be about securingmo-bility.” Borders now have to al-low mobility while simultane-ously protecting against theirside effects: they help managemajor societal risks, such asmi-gration, economic flows, terror-ism and organized crime. Se-lective permeability, the newcatchphrase, tries to solve theintrinsic conflict between mo-bility and security, both en-hanced by globalization, and atthe same time to find a balancebetween the territorial state asthe exclusive form of politicalorganization in the world andthe unsatisfied (at themoment)need for global governance.

Meanwhile, the classic dis-tinction between “good” and

“bad,” natural and artificial borders, has been left be-hind. In the present debate, asHenk vanHoutum, pro-fessor of Political Geography at Radboud University,The Netherlands, writes in a paper, The Geopolitics ofBorders and Boundaries, “the argument ismade that allpolitical borders are human-made products.” Duringmost of the 20th century, the overall view was that“good” were generally those borders that were seen asnatural, that is, made by nature in terms of its physio-graphic variation (seas, mountains, deserts) and bor-ders were generally seen as “bad” when they were ar-tificial, that is, human-made. In the real world, all bor-ders are artificial – and arbitrary. They may be bad(most of them are), but it’s a seemingly impossibletask to find better ones.

TheMiddle East’s borders are a case in point. Theywere carved after the demise of the Ottoman Empire,followingWorldWar I, by two diplomats, SirMike SykesfromBritain and François Georges-Picot fromFrance.

They didn’t have the best of intensions, of course: to de-fine the respective sphere of influence once the TripleEntente hadwon thewar, was all theywanted. So theyfamously drew a line in the sand,mostly across deserts,and marked with an “A” what was going to be French,and with a “B” what was going to be British. Then theBritish joined the separate provinces of Mosul, Bagh-dad, and Basra to form Iraq because it was a territoryoften treated as a coherent economic andmilitary areaby the Ottoman government. To the West, MountLebanon had been carved out as a special administra-tive unit following religious violence there in 1860 as acompromise between the Sublime Porte and theGreatPowers: the French transformed it into a sovereignstate, even tough the Syrian regime has always con-sidered it, with some reason, its own territory.The onlycompletely “artificial” statewas Jordan, invented by theBritish to give something to be king of to one of theirstaunchest allies, Abdullah. It has also, ironically, beenfar and away themost peaceful country of the entire lot.

Could Sykes and Picot have done a better job? NickDanforth, a PhD candidate in Turkish history atGeorgetown University,Washington DC, explored thealternatives in two articles, for theWorld Policy Insti-tute and forThe Atlanticmagazine.His conclusions arenot encouraging. In Iraq, creating smaller independentstates along the Ottoman administrative lines wouldonly have prefigured the conflicts dividing Iraq today.A predominantly Kurdish state built around the oldOt-toman province of Mosul would almost inevitabilityhave become ensnared in the conflict betweenTurkeyand its ownKurdishminority. A small Shiite state basedon the province of Basrawould have proved a constanttemptation for Iran. A state base on the central provinceof Baghdadwould have be left without oil deposits, anobvious recipe for disaster. “At best, creating morecountries would have justmeantmore borders to fightover, while fewer large countries would have turnedregular wars into civil ones,” Danforth writes.

No better results would have come endorsing thelogic of pan-Arabism. A large Sunni state encompass-ing the whole area would have struggled with Shiite,Kurdish, Christian, and other minorities bringing re-gional politics back to square one (a smaller experi-ment, the United Arab Republic between Egypt andSyria, failed miserably after three years). Had the Eu-ropeans left to the locals to sort things out themselves,the most likely scenario would have been what theBalkans underwent in the 1990s. And finally considerthis: the bloodiest war inMiddle East history, betweenIran and Iraq 30 years ago,was fought over a border thathad remained largely unchanged since the 16th centu-ry conquests of Suleiman the Magnificent; SaddamHussein invaded Kuwait claiming that the British hadunjustly separated the territory from Iraq only to bru-tally repress, immediately after, the Kurds in defense of

lanfranco vaccari has covered globalization for Italian dailiesIl Corriere della Sera and Il Sole 24 Ore.

Map of the Sykes-PicotAgreement showingEastern Turkey in Asia,Syria and WesternPersia, and areas ofcontrol and in;uenceagreed between theBritish and the French.Royal GeographicalSociety, 1910-15.Signed by Mark Sykesand François Georges-Picot, May 8, 1916.

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an equally high-handed British decision to attachKirkuk to Iraq.

Colonial borders are not the main culprit of theturmoil affecting theMiddle East or other parts of theworld. According to Danforth, theWest deserves to beblamed for other reasons: “Our collective fixationwiththe Middle East’s borders has drawn attention awayfrom the truly pernicious policy of divide-and-rulethat the French and British used to sustain their pow-er.” They cultivated the Alawite minority against theSunni in Syria, theTurks against the Greeks in Cyprus,theMuslims against theHindu in India, and so on – fos-tering future disasters. Straight lines appear suspi-cious, but in the Middle East they mostly reflect thepresence of large swaths of flat, barely-inhabited land.When Soviet anthropologists in the 1920s tried to cre-ate scientifically accurate borders in a dizzyinglymul-ti-ethnic region of Central Asia, the result was absurdand equally contested by Uzbekistan, Tajikistan andKyrgyzstan (only once they won independence, ofcourse).

As discouraging as itmay seem, there are no“good”or natural borders waiting to be identified on theground and to be put over a map. Borders work like amarriage – they are good only and if both sides decidethat they are better off with them.

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BORDERS AMONG KAZAKHSTAN, UZBEKISTAN, KYRGYZSTAN AND TAJIKISTAN

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Last June the blitzkrieg launched by the IslamicState in Iraq and the Levant (ISIS) took theworldby surprise. Within three weeks, annihilating

the weak defenses posed by the Iraqi army, the groupseized a swath of land that goes from the city of Mo-sul to the outskirts of Baghdad. The media-savvy or-ganization accompanied its military feat with a prop-aganda barrage onTwitter and other socialmedia out-lets. It started with the launch of the hashtag #Smash-ingSykesPicot, which surprised occasional observersbut not those who had long monitored ISIS and oth-er Islamist groups. The names of François Georges-Pi-cot and Sir Mark Sykes, in fact, are all but forgotten intheWest but have long been a rallying cry for MiddleEastern Islamists. At the height ofWorldWar I the twodiplomats had negotiated a secret deal on behalf of, re-spectively, France and Britain in which the two pow-ers divided among themselves the spoils of the mori-bundOttoman Empire.These designs, which fit the in-terests of the colonial powers and largely overlookedhistorical, ethnic and religious dynamics on theground, formed the basis of the territorial order thatgrew out of the war and that has since characterizedthe region. Islamist narrative has long argued that theSykes-Picot borders are artificial machinations de-signed by colonial powers to serve their interests by di-viding the ummah, the global community of Muslimbelievers which, by its very nature, should knowno in-ternal boundaries.

On June 29, in an audacious move that surprisedthe jihadist group’s supporters and detractors alike,ISIS sought to reverse another early 20th century his-torical event that has long plagued the Islamist psycheby declaring the formation of the Caliphate in the ter-ritories it controls, a block that also includes sectionsof northern and eastern Syria.The 1924 abolition of theCaliphate had also been seen by Islamists as a diabol-ical plot by secularMuslim leaderswho, in order to gainpower for themselves, had caved in toWestern impe-

rialist interests and sold out the God-mandated unityof Muslims. Islamists long argued that all the region’sproblems are spawned by this unnatural and exter-nally-imposed status quo andonly its demisewould re-store the ummah’s pride, welfare and global primacy.

This narrative was clearly stated by ISIS’s chief AbuBakr al-Baghdadi in his first speech as self-declaredcaliph: “Indeed theMuslimswere defeated after the fallof their caliphate.Then their state ceased to exist, so thedisbelievers were able to weaken and humiliate the

Muslims, dominate them in every region, plunder theirwealth and resources, and rob them of their rights.They accomplished this by attacking and occupyingtheir lands, placing their treacherous agents in powerto rule theMuslimswith an iron fist, and spreading daz-zling and deceptive slogans such as: civilization, peace,co-existence, freedom, democracy.” And in thewake ofthe announcement ISIS (which for the occasion an-nounced its change of name into Islamic State, IS) is-sued an official video by the title The End of Sykes-Pi-

The end ofthe Sykes-Picot line

The borders drawn up at the end ofWorldWar I in whatwas left of the Ottoman Empire have often been accusedof being arbitrary. Islamists, however, see them as acolonial imposition that must be rectified.

ISIS militants show offa tank along the streetsof Syria’s northernRaqqa province,June 30, 2014.

by lorenzo vidino, Andrea Plebani,and Stefano Torelli

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cotwhose narrator, in keeping with the group’s globalprofile, was a Norwegian convert of Chilean descent,BastiánVásquez (Abu Safiyya).Walking amidst the ru-ins on an Iraqi border post, Vásquez stated of the bor-der: “We do not recognize it and we will never recog-nize it.”

IS’s post-Westphalian vision could appear, at firstglance, pathetically utopian. And there are reasons tohypothesize that its project could quickly crumble.Even though IS is the first jihadist group to declare thecaliphate, over the last few years others had estab-lishedde facto Islamic states in territories they had con-quered: theTaliban in large parts of Afghanistan beforethe American invasion, al-Shabaab in Somalia, and,more recently, various al-Qaeda-linked groups in Iraq,Yemen andMali. In all these cases the local population,which had initially welcomed the development as a so-lution to the anarchy and violence that had plaguedtheir life, came to reject the brutality and extremism thejihadist groups had brought.Without fail they turnedagainst them and, often in conjunction withWesternmilitary intervention, overturned them.

IS, which has all along displayed a remarkable tac-tical flexibility and ability to learn from themistakes ofother jihadist groups, seems to be adopting a slightlydifferent approach and cultivating the local populationthrough gifts of primary needs, goods and social ac-tivities.Yet its brutal imposition of laws andmorals thatare at odds with those of even the most conservativecross-sections of Syrian and Iraqi populations is al-ready alienating the masses.

IS’s swift advance in northwestern Iraq cannot beunderstood if not related to the deeppolitical crisis thathas affected the country since the end of 2010.While al-Baghdadi’s forces demonstrated their prowess onmul-tiple occasions, humiliating their opponents in Syria

and Iraq alike, they could havenever been able to extend theircontrol over roughly a third ofthe“landof the two rivers”with-out local backing or – at the veryleast – acquiescence. It is a re-sult as important as IS’s mili-tary victories, particularly ifconsidered that the IslamicState of Iraq (ISI), a forerunnerof the recent endeavour found-ed by the group in 2007, was de-featedmerely a year later thanksto the efforts of Sunni tribalmilitias coalesced under thebanners of US-supported sah-wa councils (known in theWestmainly as “Sons of Iraq”). Thisu-turn was the result of diverg-ing interests and agendas that

ultimately severed the ties holding together Iraqi Sun-ni insurgents and their (mainly foreign) ISI “brothers inarms,” who were accused of exploiting the Iraqi crisisfor their ownpurposes and imposing their control overthe populationwithout considering interests, religiouspractices and autonomy of local actors (in particulartribes). ISI remnants were forced to regroup to north-western Iraq (especially in and around Mosul) butpromised vengeance for what they considered a be-trayal. Since IS is widely known for its brutality and forkeeping its promises, how is it possible that the very ac-tors which expelled the group from Iraq in 2008 ac-cepted its return, deciding even – in some cases – toside with it?

The answer lies mainly in the sectarian policiesadopted by Iraq’s Shiite PrimeMinister Nouri al-Mali-ki against the Arab Sunni community since the begin-ning of his second term in 2010. Despite the agree-ment reached in Erbil at the endof that year, whichwasinstrumental in confirming al-Maliki as the head of thegovernment, the prime minister did not comply withthe pact reachedwith Iyyad Allawi, the leader of a Sun-ni-backed party sidelined after obtaining a plurality atthe 2010 elections. Al-Maliki’s offensive was not limit-ed to political brinkmanship but was accompanied bya prolonged campaign targeting prominent Sunnipoliticians: inDecember 2010 Iraq’s vice presidentTariqal-Hashimi was accused of having been involved interrorist activities and was sentenced to death in ab-sentia after someof his bodyguards (allegedly tortured)confirmed the accusations; a year later, theMinister ofFinance, Rafi al-Issawi, was targetedwith similarmeas-ures and resigned amid popular protests; inDecember2013 it was the moment of Ahmed al-Alwani, a politi-cian hailing from the restive province of al-Anbar whosupported local protests. The pressure was not limited

to politicians alone, but affected growing strata of theSunni community, targeted by controversial judicialmeasures (that resulted in thousands of arrests underthe aegis of anti-terrorism and de-Bathification laws)and neglected by Baghdad. Starting from the end of2012, a series of protests exploded in the whole Sunni“heartland” – fromal-Anbar in thewest toDiyala in theeast – paralyzing huge swaths of territory and prompt-ing the stiff response of Iraqi security forces.The resultwas a newwave of arrests and hundreds of victims – ashappened in Hawija in 2013, after Iraqi security forcesclashed with local protestors.

It is in this framework that ISmade its comeback inIraq, building on the new capabilities it acquired in Syr-ia and on Iraqi Arab Sunnis’ hostility towards a centralgovernment perceived as sectarian, aligned withTehran and inherently anti-Sunni. Al-Maliki signifi-cantly underestimated the risks stemming from a po-tential rapprochement between IS and disgruntledArab Sunni insurgents. He preferred to stick to his un-compromising agenda, focusing on presenting himselfas the protector of the nation and especially of hisArab Shia constituency. Doing so, he hoped to securestunning victories at the provincial (2013) and nation-

al (2014) elections, in order to support his bid for ama-jority government not impaired by improbable al-liances with rivals and political opponents. Despitelosing Baghdad and Basra, al-Maliki’s coalition faredwell at the 2013 voting, strengthening its hold over theIraqi system. National elections reflected this trend.Thoughobtaining only 92 of the 328 seats in parliamentand falling well short of amajority, the coalition led byal-Maliki secured many more seats than its main op-ponents, de facto strengthening the aspirations of theincumbent prime minister for a third term. The re-sults were particularly critical for Sunni aspirations,whose hopes were hindered by deep internal frag-mentation as well by the disillusion nurtured by a sig-nificant part of the community towards the politicalarena.

Building on this situation, IS stepped up its opera-tions in northwestern Iraq, extending its influence overgrowing swaths of territories and scoringmajor victo-ries between the end of 2013 and the beginning of2014, when it succeeded (with the fundamental help oflocal actors) in ousting Iraqi security forces from Ra-madi andFallujah. From thatmoment on, the group in-creased its operations dramatically, succeeding in es-

Iraqi Christians leaveSaint-Joseph churchafter a mass on July 20,2014 in Erbil, thecapital of theautonomous Kurdishregion of northern Iraq.Hundreds of Christianfamilies 3ed theirhomes in Mosul onJuly 20, 2014 as ajihadist ultimatumthreatening theircommunity’s centuries-old presence in thenorthern Iraqi cityexpired.

Abu Sa2yya, aNorwegian convert ofChilean descent andmember of ISISdeclares the end of theSyria-Iraq border.

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gic importance for the Iraqi Kur-dish people. Here is concen-trated almost half of the oil ex-ported abroad by Iraq and hereall the nodes of the country’sfuture stability are interwoven.In fact, since Saddam Husseinwas ousted, arguably the singlemost important unresolved is-sue has been the status ofKirkuk: the KRGwants to annexit to its own territory, while thecentral government in Baghdadwants to keep it under its sov-ereignty. Article 140 of the 2005Constitution provided for a ref-erendum in order to decide un-der whose sphere of influencethe city should fall, but so farthis has always been delayed toavoid throwingmore fuel on thefire in an already heated envi-ronment.

After the capture of Kirkuk,many have wondered whetherIraqi Kurdistan could finallyachieve the independence itcoveted for decades. While therest of Iraq seems destined forthe worst, between theCaliphate proclaimed by ISIS

and the bloody fitna between Sunnis and Shiites still inprogress, could Kurdistan achieve its final victory? KRGPresidentMasoud Barzani has tellingly raised the pos-sibility of a referendum on independence. Yet thingsseemmuchmore complicated and there are a numberof historical, economic, political and social factors in-dicating that the prospect of an independent Kurdishstate might not be imminent.

First of all, the historical factor. As alreadynoted, theMiddle East’s boundarieswere designed during and af-terWWI.When thewinning powers gathered in Paris todecide the region’s fate the creation of an independentKurdistan (not only in Iraq, but throughout Kurdis-tan’s historical region) seemed very near. Neverthe-less, a trend was immediately apparent: the perennialinternal division within the Kurdish nationalist front,which eventually contributed to the project’s abor-tion. If it’s true that history tends to repeat itself, whatwe are seeing today in Kurdistan is division rather thanunity. After the first Gulf War and the liberation ofKuwait byUS and allied forces, the creation of a no-fly-zone over Northern Iraq had in fact allowed the for-mation of a Kurdish autonomous region, even withinthe borders of a united Iraq. Nevertheless, this event,far from being a moment of unity within the Kurdish

front, suddenly created a do-mestic competition,which soonescalated into full-fledged civilwar between the twomain IraqiKurdish parties: the KurdistanDemocratic Party (KDP) ofMas-soud Barzani and the PatrioticUnion of Kurdistan (PUK) ofJalal Talabani. That intra-Kur-dish conflict caused the death ofabout 5,000 people and peacewas achieved only in 1998thanks to the mediation of theUnited States. Today, these twomen are respectively the Presi-dent of the KRG and the Presi-dent of Iraq. Even today, thequestion of the independencefrom Baghdad still manages todivide them,with the KDP (cur-rently governing in Erbil) favor-ing it and the PUK opposing it. Moreover, by takingcontrol of part of the border between Iraq and Syria fol-lowing the ISIS coup, the Peshmerga have drawn crit-icism and hostility from Syrian Kurds. The latter, rep-resented by the Democratic Union Party (PYD), areconsidered a sort of Syrian branch of theTurkish PKK,a group notoriously inimical to the Turkish govern-ment. And since Ankara has recently embarked on apolicy of rapprochement and support for the KRG, it isclear that the interests of these different Kurdish actorsdiverge. Thus, given this framework, is it possible toimagine an independent Iraqi Kurdistan without a re-balancing of thewhole area and the eruption of anotherconflict – even within Kurdistan itself?

Economic and external factors similarly lead us tobelieve that the time has not yet come for independ-ence. First of all the economy: what would an inde-pendent Iraqi Kurdistan stand on? Oil resources couldensure a certain degree of autonomy, especially whenconsidering the area of Kirkuk.That said, there is an in-adequacy of infrastructure and there are still prob-lems in the relationship with Baghdad, which hasthreatened sanctions against anyone purchasing oilfrom Kurdistan without first having entered into anagreement with the central government. The KRG hasstarted to export oil through the pipeline linking Kirkukto theTurkish port of Ceyhan. However, the cargos arestill therewaiting for potential buyers and only one hasmoved – according to some sources, intended for theIsraelimarket.To date, 17%of the revenues fromoil ex-ports (approximately 400,000 barrels per day of oilwould pass by the Kirkuk-Ceyhan pipeline by the endof the year) that Baghdad should pay to Erbil wasblocked and Baghdad has cut the KRG budget. If weadd that Turkey, probably the biggest investor in Iraqi

Kurdistan, is contrary to independence, we under-stand that this possibility is unlikely to be pursued.

Finally, we have the external actors. Turkey oppos-es Kurdish independencemostly for out of fear of suchdevelopment’s impact on its own Kurdish population.Iran similarly does not seem to welcome an inde-pendent Kurdistan. And the US, the architects of thecurrent situation in Iraq, have always supported theidea of a united Iraq. Israel remains the only actor thatwould welcome a secessionist choice by Iraqi Kurds,but its support is not enough to balance the opposingpositions. Under these conditions, what Iraqi Kurdis-tan could achieve will be greater bargaining strengthagainst Baghdad, not least by virtue of its role as ananti-ISIS bastion in the north of the country.

IS has demonstrated an unforeseen ability to cap-italize on the weaknesses and divisions of local actorsand the unwillingness of the US and internationalcommunity to act. It is likely that IS’s state project,given its intrinsic aggressive and expansionistic na-ture, will soon come into further collisionwithmany ofthese actors, possibly resulting in additional territori-al gains or in its demise. In either case, these develop-ments are clear indications of the need by the region’spopulations and power players alike for a new way ofinterpreting the concepts of state and citizenship un-dermined by the deep ethnic and sectarian divisionsthat have plagued the modern Middle East.

tablishing an arc of instability affecting much of theArab Sunni heartland and threatening the hold of thegovernment on the territories surrounding the capital.The fall of Mosul and the creation of the Caliphatewere then the result of a process with deep socio-po-litical and security roots. But the current partition ofIraq must not to be considered irreversible. IS’s holdover northwestern Iraq is far from absolute and it ispossible only thanks to the acquiescence of relevant lo-cal actors, whose stance is relatedmore to their hatredof al-Maliki than to their adherence to the IS agendaandmodus operandi. There is still room to maneuverin order to divide the IS-insurgents ticket and to regainthe support of the Arab Sunni community. This rift isBaghdad’s only hope to disrupt IS schemes and re-store the unity of the country.Without these conditionseven the defeat of IS forces risk being just anotherPyrrhic victory, especially if considered in the frame-work of the new geopolitical dynamics unleashed bythe fall of Mosul in northern Iraq.

A few days after the capture of Mosul by ISIS mili-tants, the Peshmerga forces of the Kurdistan RegionalGovernment (KRG) entered the city of Kirkuk, taking defacto control of it. The city has been dubbed as the“Kurdish Jerusalem” because of its symbolic and strate-

Map of the Caliphateas envisioned by AlBaghdadi, distributedthrough the internetand intended as athreat to the includedcountries.

Members of Kurdishsecurity forces take uppositions during anintensive securitydeployment and apatrol looking formilitants of the IslamicState of Iraq and theLevant (ISIS), on theoutskirts of Mosul,June 22, 2014.

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Lorenzo Vidino is a fellow at the Center for Security Studies,ETH Zurich.

Andrea Plebani is a fellow at ISPI (Istituto per gli studi dipolitica internazionale).

Stefano Torelli is a fellow at ISPI.

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01 | Tal afarLess than a week after the fall of Mosul, ISIS captured this city aftera two-day battle with the Iraqi Army.

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02 | MosulThe rout in Mosul was humiliating for Iraq’s security forces. Withindays of taking over the city, ISIS issued edicts laying out the strictterms of Islamic law under which they would govern, and singledout some police of!cers end government workers for summaryexecution.

03 | HawijaISIS exploited disenchantment among Iraq’s Sunnis to align withother Sunni militant groups, who have been critical in helping ISIScapture so much territory so quickly.

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08 | BaghdadISIS has pledged to march on Baghdad, but seizing and controllingthe sprawling Iraqi capital, with its large population of Shiites, will bemuch more dif!cult than advancing across the Sunni heartland.Large sections of Baghdad and southern Iraq’s Shiite provinceshave been swept up in a call to arms. The Shiite supreme leader,Ayatollah Ali al-Sistani, called for all able-bodied Iraqis to join militiaunits to !ght beside the army against ISIS.

10 | RawaISIS captured this town and neighboring Ana after Iraqi troops "ed.

09 | QaimISIS took control of this crossing on June 22 after Iraqi troops, sentto reinforce the border, "ed.

11 | Haditha DamWith the nearby towns of Rawa and Ana under ISIS control, of!cialsare concerned that the group could capture Haditha Dam, Iraq’ssecond largest, and wreak havoc. When ISIS !ghters seized theFalluja Dam in April, they opened it, "ooding crops as far as 100miles south.

12 | RamadiIn December, Iraq’s prime minister, Nouri al-Maliki, ordered securityforces to dismantle a protest camp – an outlet for disenchantedSunnis angered at their treatment by the Shiite-dominatedgovernment. The action ignited days of violence and created theopening ISIS needed to seize parts of the city, the provincial capital.

13 | FallujaJust days after the raid on the camp in Ramadi, ISIS !ghtersdestroyed the police headquarters, planted their "ag on governmentbuildings and decreed the city to be theirs.

14 | Abu GhraibISIS received an in"ux of recruits after a prison break in July 2013 atthe detention center here. The escapees, who were imprisoned bythe Maliki government or during the American occupation, are nowamong ISIS’s leaders and foot soldiers.

01 | JarablousAfter being pushed out of Aleppo, ISIS moved east, attacking rebelbases and taking over towns like this near the border with Turkey.

02 | AleppoIn 2013, ISIS emerged from the remnants of Al-Qaeda in Iraq andbegan to operate in Syria. Syrian rebel groups initially welcomedISIS as an ally, but ISIS was more interested in forming an Islamic state than topping the Syrian government. These tensionsculminated in a revolt against ISIS. The group was driven out ofAleppo, Syria’s largest city, in January by the other rebel groups.

03 | Deir Ha!rISIS has inspired a new generation of jihadists with its emphasis oncreating an Islamic state and its willingness to kill Shiites and evenrival Sunnis, like when it recently cruci!ed eight rebel !ghters in thetown square here for being too moderate. Al-Qaeda, severed ties toISIS in February.

04 | MaskamaISIS may practice a seventh-century version of Islam, but its publicoutreach is thoroughly modern. It has used Facebook as adeath-threat generator; the text-sharing app JustPaste to uploadbook lengthy tirades; and YouTube and Twitter to post gruesomevideos and photos to terrify its enemies.

05 | Tabqa DamSeizing infrastructure In addition to targeting cities and towns, ISIShas also sought control of major pieces of infrastructure, includingdams, oil !elds and a re!nery.

06 | RaqqaIn keeping with its goal of creating an Islamic state, ISIS hasinstituted strict rules in most of the towns it has seized. In this city,which is now ISIS’s de facto capital, smoking and music arebanned, women must cover their faces and shops must close atprayer time. The punishment for not complying: execution in themain square.

07 | Deir el-ZorWhile ISIS holds sway over much of the oil-rich province of whichthis city is the capital, control of the capital itself has been splitamong other rebel groups and the Syrian government. ISIS tookcontrol of a bridge leading into the city, creating a partial blockade.

08 | Abu KamalISIS seized the Syrian side of this border crossing on June 30 afterbrutal clashes with a Syrian insurgent group. Now, with both sidesof the crossing under its control, ISIS can move men and supplieseasily between Iraq and Syria. It is also another step closer to achieving its goal of creating an Islamic state across the twocounties.

06 | SamarraISIS, which has made no secret of its intention to incite anothersectarian war, has been trying to attack a sacred Shiite shrine here.An attack on the shrine in 2006 set off a wave of sectarian violenceacross the country.

07 | BaqubahAbout a week after capturing Mosul, ISIS militants took control ofseveral neighborhoods here but were pushed back by securityforces. The next day, the bodies of 44 Sunni prisoners were found ina government-controlled police station in Baqubah, about 40 milesnorth of Baghdad.

05 | TikritThe day after seizing Mosul, ISIS captured Tikrit, another major Iraqicity and the hometown of Saddam Hussein. ISIS boasted on socialmedia that it had executed 1,700 members of the Iraqi military here.

04 | BaijiOnce dependent on Persian Gulf donors, ISIS is becomingindependently wealthy. The group started building a bankroll afterseizing oil !elds in Raqqa, from which it sells much of crude. Ifcaptured, Baiji could provide ISIS with another potentially lucrativesource of income.

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manages to keep Israel in check,might raiseits profile to become a rival of Al-Baghdadi’sCaliphate under the banner of a holy warfor the “liberation of Jerusalem.”While Is-rael does not have many alternatives, itmust prevail onHamas to bring peace to itscitizens and demonstrate the ability to ap-ply the new “castle strategy” against the ji-hadists, a systemmade up of physical pro-tection, intelligence gathering and targetedoperations keep areas of growing instabil-ity along its borders at bay.

The Orientalist

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A stheMiddleEast reels fromtwowarsthreatening to change the map ofthe region, the Israeli Defense Force

has embarkedonyet another incursion intoGaza in order to quell the volley of Hamasrockets that have been launched into Israel.Any talk of a two-state solution has beenhushed under the din of explosions.

With the Sykes-Picot Agreement of1916, Britain and France laid the founda-tions of a colonial order in theMiddle East,based on the creation of an Arab nationalstate to protect the interests of London andParis in opposition to Berlin and Ankara.For a century this system of internationalrelations has held together, but now AbuBakr al-Baghdadi has blown it away withthe creation of a contiguous geographicalstate united by the Sunni faith of those livethere, the jihadist convictions of thosewhoguide them, and a general hatred of Shiites.With the Islamic State of Iraq and the Lev-ant (ISIS) declaring a Caliphate and theconquest of geographical areas in Syria andIraq, threatening even Jordan and SaudiArabia, we are witnessing a reorganizationof the Middle East along tribal lines.Whatcounts are not the boundaries of territories,but the identity of the clan. From here weget the scenario of three new entities risingfrom the ashes of theMiddle East’s old na-tion-states: a Sunni region, a Shiite regionand aKurdish region. It’s as if the borders ofSykes-Picot have fallen apart, bringing outthe identity of original populations.

It is also interesting to note that the Sun-nis, Shiites and Kurds live in different his-torical periods, behaving accordingly. TheSunnis have been hardest hit by the implo-sion of the Syrian regime and the Iraqi state.They feel that the states with which theyhave identified have slid into the Shia orbit,so now they must reproduce the bonds ofsolidarity among the tribal populations thatare now reemerging between the PersianGulf and the Mediterranean Sea. There areno longer states, presidents or prime min-isters, but rather an indefinite constellationof families, clans, andother groups ledby lo-calmicro-leaderswhose onlywish is to stopthe advance of the Shiites. This is a re-re-lease of Osama bin Laden’s 1998manifesto“Against Jews andCrusaders”; but insteadof

a holy war against the infidels it is the reaf-firmation of the fratricidal feud with theheretical Shiites.

Driving the behavior of the tribes fromIraq’s Anbar Province, Jordan and east-cen-tral Syria is not a project for a new state, butone based on a ethno-religious alliance in-tended at first to recover useful resources,and then to raid and loot and the Shiites. It’sas if history were accelerating backwardsand carrying the Sunni tribes back to thewhen the Ottoman Empire fell apart andthe Arab tribes, seeking the protection oftheir own interests, found the solution insubmitting to theBritish crown. In this case,the submission is to the jihadist idea thatSunni Islam is the only true belief.

This is why Abu Bakr al-Baghdadi is thelitmus test for a wider phenomenon thatcould lead to the affirmation of multipleleaders, with different political agendas,but united by the challenge to reignite thehistoric and bloody rivalry with the Shiites.Hence the focus on what is happening inthe Shiite camp, where tribal aggregationhas been occurring around an already ex-isting state: Iran. Shiite groups, parties andmovements fromLebanon toYemen, fight-ing for various ethnic populations with thesame faith, all have in common the factthat they orbit around Tehran. There istherefore an asymmetry in what is hap-pening between Sunnis and Shiites. Theformer exceed their national states, the lat-ter are found around a nation-state givingrise to cross-border alliances. This stemsfrom the fact that the Islamic Republic ofIran, since its creation in 1979, has me-thodically and determinedly invested instrengthening ties with Shiites throughoutthe Middle East, coming to use public fi-nances and instruments of national secu-rity organs – such as theQuds Force – to in-filtrate resources into Shiite populations.Shiite rebels inYemen,Hezbollahmilitantsin Lebanon, who have become the majorallies of Bashar al-Assad in Syria, andgroups of Shiite dissidents in Bahrain andSaudi Arabia are all actively supported byTehran, creating a network of religious andfinancial relationships whose epicenter isTehran.This is possible because the Shiiteshave coalesced around the Khomeini rev-

olution, allowing them to gain space and re-sources at the expense of the Sunnis.

Finally, the third piece: Iraqi KurdishleaderMassoudBarzani wants to give birthto a new nation-state through a referen-dum that will mark their aspiration for in-dependence. Iraqi Kurds are entrusting himwith the task of reuniting with their broth-ers living in Syria, Turkey and Iran. Thebirth of an independent Kurdistan, a dreamof the Kurds since the 1920s, is a grassrootsprocess of national self-determination suchas had already occurred in Europe.

So the Kurds are coming to build a new“European” nation-state. The Shiite camparound Iran in confrontationwith the Sun-nis has given rise to a great tribal pact.These are pieces of a Middle East in whichanything can happen because Israel andTurkey – mutual adversaries – are the only

ones to support Barzani. The Saudi royalfamily is attracted to themirage of a Sunniuprising, while Shiites see this thawing asan opportunity for a momentous achieve-ment, such as uniting the Iraqi holy cities ofKerbala and Najaf with Iran.

The unpredictability of events is assuredand the Arab League is the only one to fear.Perhaps this is because it is an interna-tional organization that reflects a division ofthe region into stateswhose strength is onlyon paper.

It remains to be seen how these sce-narios will affect the Middle East conflictbetween Israel and the Palestinians, espe-cially in Gaza and theWest Bank. Hamas’sstruggle with Israel offers Palestinian Pres-ident Mahmoud Abbas the opportunity toreturn as a protagonist on the scene inGazaif he can facilitate a truce. But Hamas, if it

by maurizio molinari

TheMiddle East is notunfamiliar with territorialdisputes. For the past 60 yearsthe borders between Jews andArabs have been the cause ofwars. Now the entire regionseems to be redrawing itsboundaries.

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Israeli tanks sitpositioned next to a gapin the wall separatingGaza and Israel, July 18,2014, near Sderot,Israel.

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maurizio molinari is the chief correspondent inthe Middle East for Italian daily La Stampa.

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Most Europeans alive today have had no tasteof war on their own soil. A continent that forcenturies had been plagued by disunity, land

grabs and bloody strife rose from the rubble of WorldWar II and shored up the conditions that allowed for al-most 40 years of peace (not counting the NorthernIreland conflict) – more than 60 years if you exclude theYugoslav wars in the 1990s.

Several factors enabled such a prolonged peace:First of all, the ColdWar had locked into place a geopo-litical configuration whose broad strokes were alreadyagreed upon at the Yalta Conference in 1945, whereFranklin D. Roosevelt, Winston Churchill and JosephStalin effectively redrew the future borders and spheresof influence in Europe. Shortly thereafter the specter ofmutually assured destruction through nuclear warmadeall parties think twice about any aggressivemoves.

InWestern Europe the presence of American forcesand interests establishedwhat is often referred to as thePax Americana: a sort of benevolent occupationwhich,combined with a flood of money through the MarshallPlan, generatedunprecedented levels of economicwell-being.The defeated nations ofWestGermany and Italy,in particular, experienced a veritable economicmiracle.With respect to security, NATO was founded, as its firstsecretary generalHastings Ismay so succinctly put it, “tokeep the Americans in, the Russians out and the Ger-mans down.” By 1995, when the Schengen Agreementtook effect, Europeanswere able to crossmost frontierswithin the EU without border controls.

Likewise, the presence of Soviet troops in EasternEurope ensured stability in a part of the world wheremuch of the population had been under some form ofimperial domination and only recently begun to ex-perience the dream of national self-determination,which had spread throughout the continent in the pre-vious century. Even though therewere rumblings of dis-content – a partisan war in western Ukraine and pop-ular uprisings in Hungary, Czechoslovakia and Poland– not even in Eastern Europe did postwar generationsexperience the levels of bloodshed their fathers andgrandfathers had grown accustomed to.

But like all things – good or bad – this situationcould not last indefinitely. In Western Europe therewas vocal resentment against a continued US pres-ence, particularly from leftist parties.Whereas inWar-saw Pact countries, the anti-Soviet discontent reachedrevolutionary proportions. With the fall of the BerlinWall and the subsequent dissolution of the SovietUnion, the house of cards built out of communist ide-ology seemed to collapse. As a result, the West’s arch-enemy for decades appeared to be neutered.The clashof civilizations between the capitalist and communistsystems simply evaporated because ideologies hadbeen revealed to be as ethereal as the concepts thatdrove them.

Radical Islam became theWest’s new enemy, espe-cially after 9/11. And yet, the real nightmare for Europein the near future may involve a more familiar phe-nomenon: ethnic and sectarian strife. As the SovietUnion was collapsing in 1991, analysts and the intelli-gence community seemed to be caught by surprise.Even more surprising was that the entire empire dis-integrated with almost no bloodshed. Nevertheless,almost simultaneously, Slovenia and Croatia, analo-gous republics within communistYugoslavia, declaredindependence. In the case of Slovenia, which was eth-nically homogenous, the Serbian-dominatedYugoslavNational Army (JNA) probed briefly into the moun-tainous republic, then pulled back. But in Croatia,

within whose borders there was a substantial Serbianminority, the JNA attacked and remained in control ofabout a third of Croatian territory throughout most ofthe brutal four-year war. In effect, the driving principleof Serbian aggression could be paraphrased as such:“You want independence? You can have it. But notwith these borders. The parts of Croatia that are ma-jority Serb must be ruled by Serbia.”

In the neighboring republic of Bosnia and Herze-govina, comprising three ethnic communities – Serbs,Croats and Muslim Bosniaks (essentially the same eth-nicity speaking the same language [though the Serbsuse the Cyrillic script], distinguishable only by reli-gious affiliation) – the situation was more complexdue to the patchwork distribution of populations andhigh incidence of intermarriage. The tactics employedthroughout this especially brutal war made the term“ethnic cleansing” a household word.

Ultimately, Croatia pushed back the Serbs, regainedthe same borders that existed when it was a republic

withinYugoslavia, and in a 1995 military offensive eth-nically cleansed many predominantly Serb areas thatthe Serbs had cleansed previously, at the outset of thewar. In Bosnia, it took NATO bombs to bring the bel-ligerent parties to the negotiating table and NATOtroops to keep a fragile peace. Bosnia and Herzegovinais still a dysfunctional patchwork in which all threeethnic groups share power, but at least they’re notmassacring each other.

As if the Bosnian nightmare weren’t enough, fouryears later, the Albanian majority in Kosovo rose up outof fear that Serbian leader Slobodan Milosevic wouldmake good on his threats to ethnically cleanse Kosovo,a historically and culturally important region for theSerbs, yet one that had long had an overwhelming ma-jority of ethnic Albanians. Again NATO entered thefray, bombing Belgrade into capitulation.The status ofKosovo is still hotly debated. The average Serb willnever accept it being anything other than Serbian holyterritory. But the desire to integrate into the European

Nightmare sansfrontières

European nations have relatively homogenouspopulations within their borders, and this has been asource of stability. But homogeneity often came at ahorrific price. And not all nations have managed tocomplete the process.

American tanks andtroops at CheckpointCharlie, a crossingpoint in the Berlin Wallbetween the Americanand Soviet sectors ofthe city at the junctionof Friedrichstrasse,Zimmerstrasse andMauerstrasse, February1961.

by stash luczkiw

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Union has managed to stifle the nationalistic rhetoricof the 1990s.

The Balkan experience was for an entire generationof Europeans their first glimpse of war in Europe.Theseweren’t Asians or Africans dying. This wasn’t the Mid-dle East, with biblical axes to grind. The soldiers werewhite, many with blue eyes; Christian churches weredamaged. The green temperate landscape and me-dieval villages perched atop hills could have easilybeen Alsace or Umbria when beamed into living roomson the nightly news. Footage of emaciated prisoners inconcentration camps looked like color versions of im-ages from Nazi extermination camps.

By theyear2000and throughout thenextdecade,Eu-rope’s borders had evolved radically. On one level, thereweremanynewcountries. But thesenewcountries’ bor-ders had already beendelineatedwithin the frameworkof larger political entities – namely, Yugoslavia and theUSSR – in a sort of nested hierarchy. The change en-tailed the dissolution of the greater, more inclusive,multinational political entity in favor of the smaller one,which in some cases was ethnically cleansed.

In the Yugoslav wars, NATO essentially enforcedthe safeguarding of national self-determination at theexpense of a multinational government which, byvirtue of being anti-capitalist, was theoretically antag-onistic to the liberal democraticWest. (Or, in the caseof Kosovo, simply a means of halting what was con-sidered a rogue state.)

In many respects, NATO merely fostered the laststage of a process that the rest of Europe had under-

gone in the 19th and 20th centuries: ethnic homoge-nization. The early modern period coincided with therise of nation-states, most notably Britain and France.The 19th century saw the unification of Germany andItaly. In the 20th century,WorldWar I caused the collapseof the German, Austro-Hungarian and Ottoman Em-pires, allowing for the political self-determination ofcountries from the Baltic Sea to the Aegean Sea.

But whatever homogeneity there may be in Easternand Central Europe has come at an enormous cost.First and foremost six million European Jews were sim-ply annihilated. Most of them came from Poland,Ukraine, Belarus and the Baltic states, all countrieswith very heterogeneous populations before WorldWar II.

Death tolls aside, there were also huge populationtransfers. In his book Bloodlands: Europe Between Hitlerand Stalin, historian Timothy Snyder estimates “sixmillion or so Germans had been evacuated by Germanauthorities or had fled before the Red Army” from tra-ditionally German lands in East Prussia, Pomeraniaand Silesia. This created the preconditions that al-lowed Poland to be shifted westward, to the Oder-Neisse line. In order to shift Poland westward – as hadbeen agreed in principle by Stalin, Roosevelt andChurchill at Yalta – “some 780,000 Poles were shippedfrom Soviet Ukraine to communist Poland, within itsnew frontiers, along with a comparable number fromSoviet Belarus and Soviet Lithuania… Meanwhile,about 483,099 Ukrainians were dispatched from com-munist Poland to Soviet Ukraine in 1944-46, most ofthem by force.”

A similar exodus occurred when more than 100,000ethnic Italians fled Istria and Dalmatia after the Yu-goslav communists had taken power at the end ofWorldWar II. And in the wake of Greco-TurkishWar in1923, Greece andTurkey signed the “Convention Con-cerning the Exchange of Greek and Turkish Popula-tions” in Lausanne, Switzerland, which involved ap-proximately 2 million people (around 1.5 million Ana-tolian Greeks and 356,000 Muslims in Greece), most ofwhom were forcibly made refugees and de jure denat-uralized from their homelands.

Today, with Russia’s annexation of Crimea and theongoing war in Ukraine’s eastern regions, Europe isagain faced with the grim prospect of ethnically drivenwar. The annexation of Crimea, though achieved withnary a shot fired, was an unquestionable act of war,which the Kremlin justified as a preventative defenseagainst potential attacks on ethnic Russians who con-stitute 60% of the peninsula’s population. ThroughouteasternandsouthernUkraine,Russiahas tried to fomentuprisings against the post-revolutionary Kiev govern-ment. But only in theDonbas region – oustedpresidentViktor Yanukovych’s stronghold – has the anti-Kiev re-bellion managed to gain control of any major cities. It

has become clear that whilemost of the separatists are locals(either ethnic Russians orUkrainian citizens who do notidentify themselves as ethnical-ly Ukrainian), they are led byRussianmercenaries andvolun-teers who have come across theborder and receive substantialsupport, both in terms of ma-teriel and coordination, fromRussia’smilitary intelligence, theGRU. In early July theUkrainianarmy gained the upper hand byrouting many of the rebelstrongholds, thus causinga flightof refugees across the border toRussia: the United Nations esti-mates over 100,000 since thestart of hostilities. Similar num-bers of ethnic Ukrainians havefled Crimea and the Donbas tostable Ukrainian cities such asDnipropetrovsk and Kiev.

How the situation plays outin Ukraine will depend largelyon how the new government handles the national is-sue. It will also depend on the degree to which the USand EU on one side and Russia on the other accept arevolution that was essentially driven by what Ukraini-ans perceive as the next phase in a long process of na-tional self-determination. Historically this process hasmeant breaking away from Moscow’s yolk. And whileaspirations to self-determination are familiar to mostEuropean nations, Ukrainian nationalism is unique inEurope because it is deeply tinged with a centuries-long anti-colonial struggle, the likes of which most Eu-ropean countries sawonly frompoint of viewof the col-onizer, not the colony.

Although, for the moment, it looks as if RussianPresident Vladimir Putin has decided against a full-scale invasion of Ukraine – he is currently in damage-contol mode following the shooting of a Malaysianairliner over Ukraine, almost certainly by pro-Russianrebels with Russian missiles – any perceived persecu-tion of the ethnic Russian minority in the Donbas willoffer him the pretext to shift from covert to overt inva-sion. And as Alexander Motyl, professor at RutgersUniversity, writes on the Al Jazeera website, “By sup-porting anti-Ukrainian militants in eastern Ukraine,Putin effectively arrogated the right to wage war in aEurope where it had been considered unthinkable.”

Barring a conventional military invasion from theeast, when the dust settles Ukraine will in all likelihoodbemore ethnically homogenous. Crimea,with its Russ-ian majority, will remain a frozen conflict administered

de facto by Moscow. In the Donbas, where for genera-tions thequestionof ethnicitywas almost irrelevant dueto frequent intermarriage and Soviet (as well asTsarist)suppression of anything that smacked of nationalism,therewill probably be a stronger sense of beingUkrain-ian among those who support the Kiev government, ir-respective of ethnicity, and a festering antagonismamong Russians who have remained and continue tofeel slighted by a government they deem illegitimate.

If Europe is to avoid the nightmare of a Balkan sce-nario spreading throughout the continent, there needsto be a delicate balance between enforcing nationalboundaries, based primarily on ethnicity, throughtransnational authorities – be they the EU,NATO, or theUN – and ensuring minority rights. Most of Europehas been able to establish borders based on clear-cutethnic divisions. But this has been possible onlythrough war and massive population transfers (usual-ly a euphemism for ethnic cleansing).

Nevertheless, if these borders are not consideredsacrosanct, then they can and will be challenged.Crimea is a perfect example. If the borders are chal-lenged, the only way to prevent military conflict isthrough an agreement within a framework that canminimize the disruption of such a change. For this tohappen peacefully, the change in borders would needto occur within a nested hierarchy in which much na-tional sovereignty has already been given over to atransnational entity. Such a situation allowed the Russ-ian SSR in 1954 to transfer Crimea to the Ukrainian SSR

A border crossingbetween Serbia andKosovo is set ablazeby hundreds of Serbyouths, in Jarinje,July 27, 2011.

Two Yugoslav Armysoldiers rest on theYugoslav side of theborder at Morina, April10, 1999. In thebackground, the bordersign for the FederatedRepublic of Yugoslaviahas been altered tospell the initials forSerbian Republic ofYugoslavia.

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in 1999 (Czech Republic, Hun-gary and Poland) 2004 (Bulgar-ia, Estonia, Latvia, Lithuania,Romania, Slovakia and Slove-nia) and 2009 (Albania andCroatia), should consider thatall these new NATO countrieshave been relatively stable sincetheir accession, and theprospect of joining the EU hasforced them to adhere to a min-imum economic and politicalstandard.

This does not necessarilymean that further NATO ex-pansion into Ukraine, Moldovaand Georgia will increase sta-bility in Europe. On the con-trary, it would almost surelyprovoke Russia into a belliger-ent response. But this is merelybecause Russian knows thatNATO and the EU are the onlyeffective bulwarks against Russ-ian attempts to destabilize

countries that have slipped out of Moscow’s sphere ofinfluence. Indeed, the only thing preventing Putin fromredrawing Europe’s borders beyond the Crimean an-nexation (borders between spheres of influence as wellas physical borders requiring passports) is the prospectof economic and military retaliation.

While the EU may be weak and prone to disunity,it is still a huge economic force and impossible forRussia to ignore. And even though NATO is in theprocess of soul-searching, as long as it continues to beled by theUSmilitary, Russia is simply outmatchedmil-itarily. Perhaps the only way to defuse the antagonismbetween Russia and the West would be to includeMoscow in an effective transnational organization oralliance that could play the role of guarantor, as hasbeen attempted through NATO. Realistically, though,such a rapprochement will probably have to wait for apost-Putin Russia. Moscow already has difficulty beingequal partners with any other nation; so subordinatestatus is a non-starter.

By now Putin’s strategic goal should be clear to allthose who aren’t blinded by some other agenda: restorein some manner Russian greatness politically, eco-nomically, culturally, spiritually and militarily to levelsconsidered by Russians to be worthy of their gloriousnation. In practical terms, thismeans to the levels of theUSSR in which Putin grew up, or the Russian Empirebefore the revolution.

One of the tactics meant to achieve such a goal is tofoment nationalismand ethnic tension in Europe itself,so as to eat away at its stability. After all, it was exactly

such nationalism that rotted the foundation of thetransnational USSR. No one understands the powerand unpredictable danger of nationalism and ethnicstrife as well as Russians who rue the day when they“went to sleep in one country and woke up in anoth-er,” as Putin has repeatedly put it.

In a July speech to Russia’s diplomatic corps inMoscow, Putin said: “When I speak of Russians andRussian-speaking citizens, I am referring to thosepeople who consider themselves part of the broadRussian community. They may not necessarily beethnic Russians, but they consider themselves Russ-ian people.” This definition of course covers about25% of the citizens in Estonia and Latvia – both NATOcountries.

Such a sweeping ethnographic observation by theleader of a nuclear power currently conducting a hybridwar on Europe’s border no doubt raises the hackles ofNATO generals. Some are already vocalizing their dis-may. “Changing borders with military means is whatalarms us,” a highly placed NATO official told Motyl. “Ithink it’s astounding to see people close their eyes andpretend the dinosaur doesn’t exist.”

The current war in Ukraine should serve to rouseNATO into rediscovering its raison d’être. Andriy Paru-biy, the head of Ukraine’s National Security and De-fense Council, said the war should be studied by the

world’s major powers because of its implications formodern conflict.

“Many other countries’ armed forces are unpre-pared for this type of war… We, of course, have stud-ied the experience of both Croatia and Israel, but herea lot of new features are added. And if Russia sees thatthis experience is successful, it can very easily be usedin any of the Baltic countries, and even in Belarus andKazakhstan.”

A century ago the world order was violently re-shaped byWorldWar One.That war was sparked by anethnic grievance against a multinational empire. Itended with a new world order based on nation-statesaspiring to self-determination. Unfortunately, con-flicting national aspirations also generated untold hor-rors up throughWorldWar II. Europe’s ethnic identitiesrun deeper than many would care to admit. Keepingthem in check has required means and methods mostwould rather not be reminded of. For the foreseeablefuture, NATO and the EU are the only transnational po-litical entities with the respective military and eco-nomic power to mitigate Europe’s ever-present poten-tial for ethnic strife. This obvious fact can only be ig-nored at great peril.

stash luczkiw is the author of numerous essays in Slavic Studies.

without any major problems, since whatever scant na-tional sovereignty there may have been was more orless determined by a centralized Communist Party.

Clearly Europe has been heading in that direction– albeit haltingly and with increasing resistance. In thefuture, should the EU strengthen its political union, sit-uations in which, say, Catalonia wishes to break awayfrom Spain or Corsica from France, would be less trau-matic because these countries would still, in theory, bebound to the EU.

And yet, while it would be gratifying to believe thata stronger political union in Europe, by itself, could al-low for more regional autonomy in countries withmore heterogeneous populations and/or significantethnic minorities, this political union, if botched, or ifit ignores any deeply rooted animosity, could also kin-dle the latent differences between peoples for whomsuchdistinctions now seem negligible. (Imagine south-ern Italy having to subdue armed rebellions inVenetoand Milan, or the Occitanian Popular Front turningaway from centuries of aggressive centralization fromParis.) Moreover, unwarranted optimism could alsoblind those in the more homogenous populations togrowing antagonism toward immigrant populations.

The reality is that any transnational political enti-ty would only be effective if backed by an authority in-vested with a legitimate use of force. In the Yugoslavwars the force was provided by NATO only after UNpeacekeepers proved utterly inadequate, practicallyenabling a Serbian massacre of Muslims in Srebrenicain 1995.Those who have criticized NATO enlargement

A Transdniestra borderpolice of4cer from theseparatist region ofMoldova looks at theUkraine border pointat Kuchurgan-Pervomaysk, April 15,2014.

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Pro-Russia men guarda Ukrainian borderguard post taken overby the Russian militaryin the Crimean town ofBalaclava in the Crimearegion March 4, 2014.

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1946 - 1989 | WORLD WAR II

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1993 - today | EU EXPANSION

Imperial Europe is dominated by theGreat Powers - Britain, Germany,France, Italy, Austria-Hungary andRussia. But by the dawn of the 20thCentury, the Ottoman Empire is indecline, resulting in increasinginstability in the Balkans.Already Serbia and Romania have alarge degree of independence.

Revolution and civil war plungeRussia, Germany and the remains

of Austria-Hungary into chaos inthe years that follow World War I.

The Europe that emerges from thisperiod is radically different: Russia

and Germany have shrunkdramatically; the Austro-Hungarian

and Ottoman Empires havedisappeared; and a host of smaller

states have appeared.The Russian revolution of 1917

leads to the creation of the SovietUnion, a self-declared revolutionary

socialist state.

By 1994 most of the formerCommunist countries of Eastern

Europe have applied to join theEuropean Union. After a century

which saw the collapse of empiresand the fragmentation of Europe

into dozens of small states, agreater alliance has been forged,

making it the biggest single marketin the world.

The European Community iscreated and continues to increasein economic power and size, asDenmark, the UK and Ireland join in1973, Greece joins in 1981, andSpain and Portugal sign on in 1986.Meanwhile Eastern Europe formsthe Warsaw Pact Alliance tocontrast NATO.

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A visual history of bordersin Europe

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Chinese President Xi Jinping has made his na-tion’s border relations amajor priority in his vi-sion for China’s foreign policy. However, when

focusing on this, outside observers often look to Chi-na’s sea borders, in particular China’s contentious re-lations in the East and South China Seas.This focus onrocks in the sea and nine dash linesmisses what is oneof themore significant border tussles that China is in-volved in to its west: where China’s economic push isslowly reshaping the geopolitical landscape in Cen-tral Asia and bringing China into confrontation withperennial “frenemy” Russia. International attentionmay focus onChina’s aggressive postures with its east-ern Asian neighbors as a lens through which to un-derstand the newChinese foreign policy towards bor-ders, but it is to China’s west that a framework can beseen showing how China is increasingly pushing itspower beyond its borders.

Central Asian borders are relatively new concepts.As late as the early 1900s the region was still dominat-ed by nomadic tribes whowould freelymove back andforth around the region following seasons and herds.

Creepingencroachment,China’s westernsurge

While many are concerned with territorial disputes inSoutheast Asia, the fact that China is quietly expandingits presence westward often goes unnoticed. Beijing hasnow become a huge player in Central Asia’s Great Game.

A Chinese workerstands in front of aposter during theinauguration ceremonyof the Kazakh stretchof the 1,833-kilometerTurkmenistan-Chinapipeline at Otar gasstation, outside Almaty,Kazakhstan.

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by raffaello pantucciand sarah lain

Concepts of nationhood and borderswere largely non-existent, with the occasional encroachment and dom-ination by aneighboring tribe or subjugation by anEm-pire emanating from Moscow, Beijing or London asthe only expressions of a collective supra-tribal or eth-nic identity.With the advent of the Soviet Empire, how-ever, this changedwith first Lenin seeking to bring thetribes of Central Asia closer into Moscow’s dominion,with his Commissar for Nationalities Joseph Stalin lay-ing out a map of the region sketching out the bordersthat continue to define the region to this day.

In drawing up the borders in Central Asia amongstthe various Soviet Socialist Republics (SSR), Stalinmade

aparticular point ofmaking sure that no single SSRwasclearly defined by one population or another. Each onewas given a name corresponding to the dominant eth-nic population, but no effort was made to ensure thatthere was ethnic homogeneity in each state. Rather,his redrawing of the region seemed specifically in-tended to ensure that the region would always be di-videdwith important historical and religious sites pur-posely placed in other SSRs. For example, the spectac-ular and rich religious capitals of Bukhara andSamarkand (both predominantly Tajik cities) wereplacedwithinUzbekistan. Osh, amajority Uzbek trad-ing hub, was placed in Kyrgyzstan, whileTajikistan be-

cameameltingpot of Badakhshanis andTajiks.TheFer-ghanaValley, themost lush and prosperous part of theregion,was divided amongst the various countrieswiththe awkward border intersection between Kyrgyzstan,Tajikistan and Uzbekistan creating a logistical night-mare in a region previously deeply interconnected.

The logic behind this awkward redrawing of theregion was to intentionally create local divisions andmean that no single state could emerge to challengeMoscow. Leadershipswere installed and the samenet-works largely remain in power today.The biggest threatto the countries came at the end of the Soviet Empirewhen dissolution of the USSR suddenly forced the

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countries to become independent entities no longerformally dependent onMoscow.While at first hesitanttowards this newfound independence, after realizingMoscow’s rejectionwas categorical, they shifted rapidlyto embrace national identities.

For China the dissolution of the Soviet empire wasamixed blessing. On the one hand it removed a strate-gic foe (with whom admittedly a gentle rapproche-mentwas underway), but on the other hand it suddenlyleft China with a rather exposed border to its west. Inthe years prior to the collapse of the Soviet regime, re-lations between China and the Soviet Union had beenimproving.Mikhail Gorbachev famously visited Beijingas the Tiananmen Square protests in 1989 were un-derway, and Jiang Zemin visited Moscow himself inMay 1991, a fewmonths beforeGorbachev’s formal dis-solution of the Soviet Empire. The groundwork laidduring these visits included declarations to increasestability along their common Central Asian border,something that both sides continued to embrace in thewake of the collapse of the Soviet Union.

Central to these discussionswas the grouping of theShanghai Five – China, Russia, Tajikistan, Kazakhstanand Kyrgyzstan – that formally declared itself an enti-ty in April 1996 at around the same time as Russia andChina formalized their warming relations. The entitybuilt on previous border demarcation discussions thathad been ongoing since the formal end of the SovietUnion and essentially sought to delineate China’s bor-ders with the former Soviet space.

The creation of the Shanghai Five, however, devel-

oped rapidly intomore than justa border demarcation organi-zation and by 2001 it was de-cided to formally expand thegroup to include Uzbekistanand to upgrade the structureinto a formal organization, theShanghai Cooperation Organi-zation (SCO). This became theumbrella entity through whichChina could handle its engage-ments in the region.Military ex-ercises were undertaken, a jointcounter-terrorism center wasestablished (initially plannedfor Bishkek, it was eventuallyopened in Tashkent as a sweet-ener to bring Uzbekistan intothe group), while China contin-ued to see it as a vehicle throughwhich it could look at expand-ing its economic cooperationinto the region.

But the root of the organiza-tion was border demarcation,

something particularly awkward in a part of the worlddominated by tribes and communities for whom theartificial borders imposed from foreign capitals arelargely at odds with historical realities on the ground.China may see its border with Central Asia as a clearone, but there areTajik, Kyrgyz and Kazakh communi-ties within China as well – whose lives, appearanceand language is far closer to those across the border inCentral Asia than in Xinjiang. Conversely, Xinjiang’sdominant minority community, the Uighurs, speak aTurkic language and aremore ethnically proximate totheir Central Asian counterparts than Beijing’s HanChinese. On top of this, substantial communities ofUighurs live in Central Asia, in particular in the borderregions with Kyrgyzstan and Kazakhstan. And none ofthis is to talk about the Dungan (ethnically Chinesefound dotted across Central Asia) who have no hometerritory, but are quite clearly ethnically Chinese andtend to have strong links to China. The center of theEurasian heartland, Central Asia has always been amelting pot of civilizations and populations, a realitythat can still be found today in travelling around the re-gion encountering the fascinating and confusing mixof languages, cultures and appearances.

This reality is something that has always compli-cated China’s relations with this region. In much thesame way as the artificial borders drawn by Stalincaused frictions between the Central Asian countries,the existence of these minority communities on bothsides of the border hasmeant Beijing has long had theawkward task of trying to redefine borders from above

that are relatively meaningless on the ground.Yet, theinstability in Central Asia (something that was high-lighted particularly for the Shanghai Fivewith the bru-tal civil war in Tajikistan from 1992 to 1997) meantthat China had a pressing imperative to define theseborders to create breakers between itself and the eth-nic strife that was inevitable in the tinderbox of CentralAsia. That continues to cause problems today inmod-ern Chinawith the angryUighurminority prevalent inXinjiang.

The answer from Beijing’s perspective to theseproblems is not only one of building local capacityand connections through border demarcation discus-sions and jointmilitary exercises. The longer-term so-lution ismassive economic investment – the point be-ing that economic disenfranchisement is seen by Bei-jing as the root cause of people’s discontent. This issomething that can be seen across Central Asia whereChina has become the dominant force.

China has become a major player for economicinvestment in all of the five Central Asian states, andthere are numerous examples of its work. Chinesestate-owned enterprises tend to provide the fundingand manpower to complete huge infrastructure proj-ects. It has invested heavily in a network of pipelines,

namely the Central Asia Gas Pipeline, bringing gasfromTurkmenistan to Xinjiang via other Central Asianstates. Currently, planning is underway for the nextstring in four routes to getTurkmen gas to China, withChineseNational PetroleumCompany’s (CNPC) plansextending to allow it to become not only an exporterback home of gas, but also a regional supplier. CNPCis one of the only foreign investors that has been ableto successfully enter Turkmenistan’s relatively closedgas market. CNPC has also helped to construct an oilpipeline between Kazakhstan and China, and boughtinto a piece of Kazakhstan’s super-giant off-shore oilfield Kashagan. Beyond energy, China also plans tobuild a high-speed China-Kyrgyzstan-Uzbekistan rail-road, and has helpedTajikistan to build the Shahristontunnel along the Dushanbe-Khujand road. This list ismerely a fraction of themassive investments and proj-ects that Chinese firms are currently undertaking inCentral Asia – for themost part funded by soft or linkedloans by theChinaDevelopment Bank orChina Export-Import Bank.

Theneed to developCentral Asia is not, however, analtruistic one. Rather, it is something that is undertak-en by Beijing to help develop its own restive CentralAsian region, Xinjiang. Landlocked and far from the

A Kyrgyz woman milksa mare on theSuusamyr plateau,2,500 meters above thesea level, along theancient Great Silk Roadfrom Bishkek to Osh,some 200 kilometersfrom Bishkek.

As China’s economygrows in its remotenorthwest, theperennial popularity ofthe donkey cart isgradually replaced bythe affordability ofmotorized scooters,seen here at theSunday Bazaar inKashgar, in northwestChina’s Xinjiang UighurAutonomous Region.Kashgar has been aSilk Road tradingcenter for over twomillenia retaining itsfascinating ethnic mixof Uighurs, Tajiks,Kyrgyz, Uzbeks andHan Chinese.

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of land for its agricultural busi-ness in the country. The publicoutcrywas immediate and sub-stantial, forcing Nazarbayev toback away from the deal.

A similar deal took place inTajikistan in 2012. Tajikistan’sMinistry of Agriculture agreed tolease 6,000 hectares of land toChina, while China offered $2million in direct investment tothe underdeveloped land. Thiscaused concern from the coun-try’s opposition groups. Theagreement also followedon fromanopaquedeal in 2011 inwhichTajikistan accepted China’s re-quest to grant China 1,100square kilometers of Tajik terri-tory. China claimed historicalownership of the land in thePamir Mountains, a long-dis-puted region on the border. Thelatter deal in particular gave risetowider concerns regardingChi-nese geographical expansion.

These border delineation discussions underlinedconcerns inCentral Asia about themore practical busi-ness deals with Chinese agribusiness. In Tajikistan,there was some question about whether Tajikistanwould be able to develop the land, while Chinese firmsoffered a technical capability. But the two discussionscoming so soon after each other, focused the growingsense in the Central Asian states that the borders theyhad only recently acquiredwith the collapse of the So-viet Union were now slowly being dissolved in a bathof Chinese investment and infrastructure. Anecdotal-ly reflecting these concerns, experts in Bishkek in 2012told one of the authors that a rumor circulating the citywas that the Chinese had built roads around the coun-try which were specifically designed to withstand theweight of Chinese tanks – the implication being thatChina was not only redrawing the borders publiclyand economically, but was also laying the foundationsfor a possible future invasion.

For anyone who has travelled within the formerSoviet space, these sorts of conspiracy theories willresonate.Videos and stories abound combining histo-ry and modernity together to weave fantastical sto-ries of empires fighting over Central Asia. Central Asiananalysts and officials will openly talk of their impor-tance in Brzezinski’s Chess Board or as Mackinder’s“Pivot ofHistory.” But aswithmost conspiracy theories,there is a kernel of truthwithin these tales – somethingparticularly visible in Russia’s increasing push to try toreclaim its former sphere of influence in Central Asia.

This is most vividly seen in the Eurasian Econom-icUnion (EEU), the latest iteration of the economic al-liance between Belarus, Kazakhstan and Russia thatwill come into force in January 2015. Although the ex-act details of the agreements are not clear, the signingof the EEU in 2014 was a symbolic demonstration byRussia that it still had influence in its relationshipswith these former Soviet countries. This is somethingRussia is particularly keen to demonstrate after eventsinUkraine, which have lost it credibility and trust in theinternational community. Russia hopes to draw Kyr-gyzstan andpossiblyTajikistan into this union in the fu-ture. Both countries have expressed intent to join,though talking to officials and businessmen on theground, there is often little evidence that great con-sideration has gone into the economic implications ofthis move.

Thenature of Russia’s desired influence in the regionis different to thatwhichChina is hoping to achieve. ForRussia, organizations like theEEUare ameansbywhichit hopes to possessmore overt leverage over theCentralAsian states. Russia not only wishes to encouragemu-tually beneficial economic development but alsowantsto ensure the loyalty of such nations in future disputes.HowChinawill react and fit into this picture is still un-clear, though the weight of Chinese investment andvisible economic presence on the ground suggest thatwhile Russia will seek to use the EEU as a way to bringCentral Asia back into its orbit, China’s economic surgein the region will mean it will remain an increasinglydominant player on the ground.

President Xi Jinping has made border diplomacya priority for his administration. The common per-ception in theWest is that this is something aimed inparticular at sea lane and border disputes with itsPacific neighbors, which are ultimately about its strug-gle with the United States. The reality, however, isthat it is to China’s west that people should look withgreater attention to see where China is redrawing itsborders in amore significant and permanent fashion.Through its increasing economic re-wiring of the re-gion, China is increasingly becoming the most sig-nificant geopolitical player in Central Asia. Some-thing that Russia has noticed with increasing con-cern, but is only now retrospectively trying to dosomething about. China remains focused on the im-portance of national determination in its relationswith other states, but the question becomes at whatpoint does this become irrelevant due to the over-whelming economic influence that China is alreadystarting to exert across Central Asia. Beijing’s policy-makers may talk a language of consensus and inter-national cooperation, but the reality is that a region isslowly being drawn into its orbit with little consider-ation by either side of the implications of the longer-term consequences of this shift.

raffaello pantucci is a senior research fellow at RUSI (RoyalUnited Services Institute), London.

sarah lain, is research fellow, at RUSI.

seas, Xinjiang has two ways to build economic pros-perity anddevelop trade links: one is long routes toChi-na’s seas, the other is through Central Asia. But forCentral Asia to be able to host these routes, stability andsecurity is essential, something Beijing sees as securedthrough investment and economic prosperity. Atopthis, growing China needs many of the natural re-sources that Central Asia possesses.

But Beijing’s push into Central Asia is somethingthat has not always gone smoothly. It has experiencedsome direct challenges resulting from the border de-lineations and subsequent ethnic clashes mentionedabove. LineDof the Central Asia Gas Pipeline is sched-uled to be ready in 2016 and runs through Tajikistanand Kyrgyzstan. Border disputes between these twocountries have called into question the feasibility of fur-ther expansion of China’s pipeline infrastructure proj-ects. In January of this year one such clash over dis-puted territory resulted in the wounding of securitypersonnel on both sides of the Kyrgyz-Tajik border.Often such tensions reflect the economic competitionand distrust between neighboring Central Asian states.For example, plans for a railroad linking Uzbekistanwith Xinjiang causedmajor concerns inTajikistan overthe railroad’s effects on its own economic status.

China itself has alsometwith opposition to someofits aspirations for the region. The question of land hasbeenoneof thebiggest hurdles. InDecember 2009Pres-identNursultanNazarbayev of Kazakhstan announcedthatChinahadexpressed interest in leasing a largepiece

Russian-built tanksrolling underTajikistan’s 3ags duringjoint counterterrorismmilitary exercises ofthe troops from the sixcountries in theShanghai CooperationOrganization (SCO) inKhujand, Tajikistan.Troops from Russia,China, Kazakhstan,Kyrgyzstan andTajikistan deployedmore than 2,000 troopsin the exercises.

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Panoramic view of thebeautiful and clear lakeSarez which sits 3300mhigh up in themountains of Pamir, along disputed region inTajikistan.

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Russia-China Crude Oil Pipeline

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Kazakhstan - China Gas Pipeline


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CRUDE OIL AND NATURAL GAS PIPELINES

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China’s alluring neighbors

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national borders, like we did for the last couple of cen-turies? Because let me tell you: that didn’t end well.

If it turns out that borders are unavoidable, neces-sary instruments of international politics, let us at leastdare to think about them differently than merely as thelines that separate us from our neighbors. Fortunate-ly, we don’t have to start from scratch. Here are a fewproposals made by borderline obsessives throughoutthe centuries.

1. Revolutionary squares.The French Revolution swept away not only the

Ancien Régime, but also its antiquated units of meas-urement. The metric system is the most successful ex-ample: it replaced a variety of local standards of length,weight and content. But not every rationalist innova-

tion proved as popular. The revolutionary calendar,with its 10-day weeks, was soon abolished in favor ofthe old Julian reckoning we still use today.

The Revolution’s overhaul of France’s internal bor-ders fell somewhere in between those two extremes.Yes, the ancient provinces were scrapped, and replacedwith a larger number of much smaller départements.But no, not in the radical way envisioned by the manwho had proposed the change in the first place.

Jacques-Guillaume Thouret (1746-1794) was amodel revolutionary: bourgeois by birth and democratby conviction, he combined a positivist and legalist zealwith a hatred of the clergy, the monarchy and irra-tional tradition in general. He was elected president ofthe States-General and helped draft the Declaration ofHuman and Citizen’s Rights. His proposal in 1790 to

dissolve France’s age-old provinces and replace themwith départements was accepted – but “not withoutsome modifications to his project.”

For Thouret’s break with tradition proved too ex-treme even for Revolutionary France. He wanted to di-vide France into about 80 perfectly rectangular depart-ments, completely ignoring rivers, mountains, citiesand other random elements of topography.This wouldhave led to some pretty awkward borders, especiallynear France’s (non-rectangular) outer boundaries.

Thouret’s radical idea, grounded in the take-no-prisoners rationalism of the age, has a certain theo-retical appeal: the square is an impartial, abstract fig-ure.What better way to demolish the favoritism, back-wardness and dysfunction built into the previous sys-tem with its provinces of varying size and importance?

There was a time not so long ago when humani-ty seemed to be moving inexorably towards aworld without borders. The European Union

was quietly dissolving the national boundaries be-tween its member states. Economic and cultural glob-alization were turning the nation-state into an anti-quated irrelevance. On top of that came the internet,projecting a borderless cyberspace across the globe.

Yet borders refuse to die. In fact, they’re back witha vengeance. The European project is in tatters, andpublic opinion in virtually every member state is clam-oring for the reinstatement of stricter border controls,to keep out illegal immigrants, vicious criminals andbattle-hardened terrorists.

So is that how Europe’s window of transnational op-portunity ends? We barricade ourselves behind our

58 - longitude #41 longitude #41 - 59

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Borderingon Utopia

War is stupid and treaties are boring. Unfortunately,that’s how borders are usually drawn. Throughouthistory, a handful of visionaries have refused thistyranny of blood and ink, and dreamed of bordersthat would make the world a better place.

Planet Voronoi looksalmost exactly like ourown Earth. Thecontinents are all inthe same place. Thenumber of countrieshasn’t changed, norhas the location of theircapitals. But theinternational bordersare all “interestingly”wrong.

by frank jacobs

Cover story

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But this proved a bridge too far; and perhapsThouret was a bit too insistent in pressing his point –for in 1794, during the Reign ofTerror, the Father of theDepartmental System was arrested, condemned andexecuted. The Hexagône (as the French often refer totheir six-sided land) would never look so square againas in his imagination.

2. Watershed democracy.If only Thouret had lived long enough to see how

theWest was won. Manifest Destiny provided the US,originally clinging to North America’s eastern seaboard,with a continent-sized territory. All that landwas carvedinto ever-squarer states the further west the countryreached. Especially between theMississippi and the Pa-cific:Wyoming andColorado are perfect rectangles, andabout a dozen states in the neighborhood have a very“boxy” look as well. That, however, may not have beenthe wisest choice. Perhaps the US government should

have listened to John WesleyPowell (1834-1902), the explor-er and geologist who knew thewest better than the people whoended up drawing the bordersof its states.

In 1869, Powell was with thefirst European Americans topass through the GrandCanyon. In 1881, he was ap-pointed director of the stillyoung US Geological Survey.Lake Powell, the gigantic man-made reservoir on the ColoradoRiver straddling Utah and Ari-zona, is named after him. Thepainful irony is that he arguedagainst large-scale reservoirs ofthis kind in his Report on theLands of the Arid Regions of theUnited States (1890).

In that report, Powell pro-moted drainage districts as theessential units of government inthe arid West of the UnitedStates. The map that accompa-nied his report illustrated theproposal. Most of Montanawould fall under the MissouriRiverDistrict, for example,whilethe mighty Colorado Riverwould command a district cov-ering parts of six different states.The political system generatedby these “watershed common-wealths” would be as differentfrom the current one as their

curved borders clash with today’s straight lines.Those districts would have given the region a sys-

tem of government not unlike local water boards inHolland – although the Dutch waterschappen haveworked to keep water out rather than in. The Dutchwa-ter boards have been essential instruments in keepingDutch feet dry – and in nourishing both the country’sdemocratic and its scientific tradition.

By concentrating local government efforts on col-laboratively managing the scarcest, most precious re-source of the arid region, Powell’s drainage districtswould probably have been a lot better at preservingwa-ter – by preventing irresponsible urban developmentlike LasVegas, for example – thus avoiding today’s con-flicts over theWest’s fast dropping water tables. But thepower of the railway and agriculture lobbies provedstronger than Powell’s prescient warning. The miserycaused by the Dust Bowl in the 1930s was a first indi-cation that he may have been right...

3. Mathematical borders.Borders are a major source of trouble and strife.

Thumbnail sketch of a depressingly large number of in-ternational conflicts: country A wants to move the line,country B disagrees, war ensues. But what if borderswere immovable by conflict because they were totallydependent on mathematics? Border wars would be-come impossible!

That is the logic behind the Voronoi Map of theWorld. Some people will be familiar with the conceptof a Voronoi diagram: it consists of a space dividedinto a number of zones, each surrounding a point insuch a way that each zone contains the entire areacloser to a particular point than any other zone. Nowtransplant this logic to the world map. Each nationalcapital becomes a Voronoi point, and the countriesre-arranged around themconsist of themathematicallymost contiguous area surrounding them.

The advantage of this is double: not only are inter-national borders inviolable because they are mathe-matically fixed, but each state also profits from terri-torial compactness and proximity to its capital. In ourworld, extreme distance to the capital city occurs in ex-tremely elongated states like Chile, or countries witheccentric capitals, like London, tucked away in thesoutheast corner of the UK.

This insight wasn’t one of the original ideas of Geor-gyVoronoy (1868-1908), the Ukrainian mathematicianwho formulated the diagram concept named after him,but a more recent application of his diagram by data vi-sualization specialist Jason Davies. On his PlanetVoronoi, international borders follow impartial path-ways, with some remarkable results.

In South America, Brazil would lose more than halfits territory to its neighbors, Chile would expand great-ly at the detriment of its eternal rival Argentina, andBo-livia split in two... because it has two official capitals (LaPaz its executive and Sucre its judicial capital).

In North America, Cuba and the Bahamas wouldsplit Florida, Mexico would reclaim much of the terri-tory it lost to the US in 1848, and Canada would movein south to claim Seattle and Boston for the MapleLeaf flag. On the other hand, Ottawa would lose itsHigh North to... Iceland!

Some remarkably well-fitting new countries inAfrica:Voronoi Morocco resembles the Grand Maroc ofcenturies past, and the dramatically enlarged Rwandaand Burundi reflect the unofficial influence the Rwan-dans at least have in eastern Democratic Republic ofthe Congo. Could it be that theseVoronoi diagrams un-wittingly reflect “ideal” country sizes and shapes?

4. The lay of the land.For the American geography professor George Et-

zel Pearcy (1905-1980), ideal shapes of states had verylittle to do with mathematics, and all the more with the

lay of the land. In 1973, he published a proposal to re-duce the number of states in the US from 50 to 38.Theremaining states would be demarcated by borders thatwould be wobbly, curvy and anything but straight.

And for good reason, Pearcy contended: the exist-ing state borders were fixed before the land held largenumbers of people. As a result, they often cut throughlarge metropolitan areas (like Kansas City, sprawlingacross the Kansas-Missouri border), or cut off big citiesfrom their natural hinterlands – causing all sorts ofpolitical, fiscal and economic problems. The straightlines also often ignore natural boundaries such asrivers and mountain ranges.

By attempting to draw his state lines through less-er-populated areas or mold each new state aroundone metropolis, Pearcy ended up with 38 “natural”states, eliminating the conglomeration of smaller statesin the Northeast and increasing the average state sizeby a quarter (even though he sliced Alaska in two).The new states were also a lot more rounded in shape.

John Wesley Powell’sbeautifully coloredpatchwork map ofwestern watersheds.

An initial geometricproposition presentedto the committe bySiéyes-Thouret in Paris1789.

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his influence on the green movement. In The Break-down of Nations, he applied his motto to the problemsailing themodernnations state: “There seemsonly onecausebehindall formsof socialmisery: bigness…When-ever something is wrong, something is too big.”

Kohr opposed growth for the sake of growth, andadvocated not union but division. But only if the re-sulting smaller states had the same size. According toKohr, Europe’s seemingly endless series of wars was theresult of geopolitical inequality between a lot of small-er states, and a few bigger ones attempting to dominatethe rest.

Kohr advocated chopping up Europe into a largecollection of smallish states, expressly disregarding ex-isting cultural, religious, linguistic and natural bound-aries. In this – andby the straight borders he uses to cre-ate new European states – Kohr seems an heir to the ra-tionalist philosophy of Thouret. But his approach ismore subtle than the French revolutionary’s.

His proposal, not long afterWorldWar II, is rootedin the devastating wars that ravaged 20th-century Eu-rope. His patchwork map thus seems primarily de-signed to neutralize larger states like Germany andFrance, evenwhile leaving smaller ones like theNether-lands, Switzerland or Denmark intact – even enlargingthem. Kohr even resuscitates historical nations, if ithelps him chop existing ones into smaller bits: Cat-alonia, Scotland, Aquitaine. But other states seem theresult of whimsy: the border between Norway andSweden is turned 45 degrees, now slicing the Scandi-navian peninsula in a northern and southern halfrather than an eastern and western one.

6. United States of Europe.Freddy Heineken (1923-2002) wasn’t just a Dutch

brewing tycoon, he was also a committed Europhile.Towards the end of his life, he published a map that onthe surface shows some resemblance toKohr’s proposalfor a reshuffled Europe. But even though Heineken’s“Eurotopia” also presents a continent broken up intomany more smaller states, it is not just so that theywould keep each other in balance and out of trouble.No: this fragmentation should make the final goal ofever closer union – a federal United States of Europe –easier to achieve.

Heineken made sure most of the new states, allcreated within the borders of existing countries (so notransnational entities like in Kohr’s proposal), wouldhave roughly similar populations: mostly between fiveand ten million. Also unlike Kohr, he took pains to en-sure that his new states would be ethnically homoge-nous, and/or have a basis in history. Hence the re-emergence of old names like Mercia and Wessex inEngland, or Burgundy and Provence in France.

Heineken published his idea in the early 1990s,when it was timely for two reasons. Eastern Europe was

experiencing a period of turmoil, following the col-lapse of communism. The resulting wave of national-ism led to the re-emergence of several nation-states (i.e.the Baltics) and the break-up of several others (Czecho-slovakia and Yugoslavia). And in 1992, the MaastrichtTreaty would transform an initially mainly economic“European Community” into a more political “Euro-pean Union.”

Heineken’s Eurotopia was surely utopian, even inthose less Euroskeptic times: creating more borders inorder to make them irrelevant sounds counterintu-itive, impractical and unpopular.

7. And today?It’s ironic that many people now longingly think

back to the ColdWar as an era of stability. But it’s true:leave aside the permanent threat of imminent nuclearwar, and you have to conclude that at least the bordersstayed in the same place for a good 40 years.

The collapse of the Soviet Union and of Yugoslaviaproved that border permanence was an illusion. Andevents in recent months have shown that border fluid-ity may be the new normal: Russia boldly annexingCrimea, and still pondering whether to do the samewith easternUkraine; the so-called Islamic State erasingthe Iraqi-Syrianborder in the areas it has conquered, butin the process also pushing the Kurds ever closer to de-claring their own state, thus creating a new border.

8. An ancient solution.So are weback to drawing borders in blood and ink?

Perhaps the problem of borders can be solved not bywishing them away, but by un-fixing their geographicpermanence. An ancient religious concept might provean ideal fit for ourVirtual Age.

Observant Jews, who are forbidden to perform ahost of activities on the Sabbath, can still do some ofthese tasks (e.g. carrying keys, food or their children) byerecting an eruv – a virtual border around the areathey live in. The eruv is a legalistic solution. It extendsthe home of a Jew to the limits of the eruv itself, thusallowing himor her to observe the Sabbath and still car-ry out some tasks that he or she otherwise could notperform outside the house.

An eruv usually consists of pieces of rope and/orwire that form a full circle around a certain area. It isstrung high above passageways; non-Jews mostly don’teven notice it’s there. Nevertheless, for the observantJewish community itself, the eruv is far from symbolic:each week, the entire length of the wire and other ele-ments that constitute the eruv’s boundary needs to berechecked, repaired in case of a breach, and reapprovedin time for the start of the Sabbath on Friday evening.

There are at present about 200 eruvin outside Israel(and many more in the Jewish state itself), each the re-sult of careful exegesis and dialogue with local gov-

ernments. But as crucial as the establishment of aneruv is for the observant Jewish community, for the out-side world it is of no practical consequence – all but in-visible and completely irrelevant, except for such timeswhen utility and public works that may interfere withthe eruv’s integrity.

Both rooted in the desire to conform to God’s lawand subject to nuts-and-bolts inspection and mainte-nance like any other public utility, eruvin are a curioushybrid of the divine and the mundane. To believers,they are of paramount ritual importance; to non-be-lievers, it’s almost as if they weren’t there. This simul-taneous existence and non-existence of eruvin is rem-iniscent of the quantum state of Schrödinger’s cat,both alive and dead in that box.

That quantum state might be the eruv’s most im-portant modern quality: the fence that separates usfrom them is redefined as purely abstract and symbolic,relevant only to those who choose to acknowledge it.An interesting alternative to the territorial exclusivityimplied by today’s borders.

The professor calculated that the smaller, fewer andbetter organized states would save the taxpayer a cool$4.6 billion, or $100 per citizen per year. And that’s in1973 money, mind you.

Yet even that financial incentive didn’t concentratethe minds of the American taxpayers. Perhaps Pearcy’sproposal was a bit too far out, even by the more relaxedstandards of the 1970s. Maybe the new state names heproposed sounded too unfamiliar. Deliberately, almostnone matched existing ones: Talladego, Kennebec,Bighorn, Mohawk...

Or maybe Americans are just too attached to thatbig round number of 50 states, and changing it wouldjust grind too many gears – especially because the newnumber was a smaller one. And yet, his central argu-ment still stands: an impractical border imposes aheavy cost on the people it hinders.

5. Small is beautiful.One of the most influential thinkers in the (admit-

tedlynarrow) fieldof border rearrangementwasLeopoldKohr (1909-1994) an Austrian philosopher also notablefor launching the “small is beautiful” meme, and for

An artist’s impressionof the United States ofEurope. A modern day example

showing the boundaryof an eruv.

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The parallel tragedies ofMalaysian Airlines Flight17 in easternUkraine and

of Israel’s ground campaign inthe Gaza Strip signal an inter-national security environmentspinning out of control. The At-lantic community is at the cen-ter of it. Crises, both to its eastand to its south, havemorphedinto wars. Russia, once part ofthe solution, has chosen to bepart of the problem. As a result, theWest is confront-ed with a scenario of European and global insecurity.InWales, on September 4-5, NATO leaderswill have thechance to tackle it together. Should they fail to do so,the 65-year old alliancewill have outlived its coremis-sion.

Between 1989 and 1992 the ColdWar was won bytheWest “without firing a single shot.” The prevailingnarrative (in theWest) conveniently overlooks the in-ternal dynamics of the Soviet implosion and demise ofcommunism; it ignores the fact that too many shotswere fired in the periphery, especially in the appallingwake of Yugoslavia’s disintegration. Yet, it is funda-mentally correctwith regard to the 40-year standoff be-tween the US and USSR (and by extension betweenNATOand theWarsawPact) and to the overhanging nu-clear shadow that came with it. It all vanished. Noblood was shed.

Havewe spoken too early?Thosemissing shots arebeing fired now in easternUkraine, betweenUkrainianforces andpro-Russian rebels, in a late aftershock of theSoviet Union’s collapse. There is a war going on in themidst of the European plains. So far it has been a rel-atively low intensity conflict, yet casualties now num-ber in the hundreds, and mounting, and weaponryhas been getting heavier andmore sophisticated.Thenon July 17 it took a turn for the worse when Flight MH17 was downed by a surface-to-air Russian-made SA-

11 (Buk)missile. Suddenly the local turned global. Thehorrific images of debris, bodies, personal effects scat-tered throughout theUkrainian fields rippled across theworld, leaving a long trail of mourning and humansuffering, that stretched from the Netherlands toMalaysia and Australia, while the scientific communi-ty grieved the loss of several brilliant AIDS researchers– a loss that could significantly set back cure and treat-ment.

All evidence points to the rebelsmistakenly shoot-ing at theMalaysian Airlines Boeing 777, because theythought it to be a Ukrainian military transport plane;two days earlier they had proudly downed an Antonov26, at a lower altitude. Irrespective of further details,whichwill have towait for the international investiga-tion – if ever allowed to take place in such incredibleconditions – theMH17 tragedy raises twowider polit-ical and security issues. First, a separatist war in themiddle Europe cannot be isolated and managed as aside-show; either it is “peacefully and diplomaticallysettled,” as Angela Merkel put it, or it will not onlydestabilize Ukraine, but also spill over and affect Eu-ropean security and Russia’s relations with the West.This has already happened. Further deteriorationwould be a gigantic step backward for Europe and inthe Atlantic community. Second, Russia’s responsibil-ities for supporting and arming the rebels in easternUkraine take center stage. Diplomacy and politics

A newworlddisorder

The upcoming NATO Summit must deal with a growingconstellation of global disarray, from Ukraine on itseastern edge to Syria and Iraq on the southern border.Otherwise NATO will fade into irrelevance.

A piece of wreckagefrom Malaysia Airlines9ight MH 17 on July 18,2014 in Shaktarsk,Ukraine, the day afterit crashed. US of8cialsbelieve Boeing 7779ying from Amsterdamto Kuala Lumpur washit by a surface-to-airmissile 8red by pro-Russian separatists,killing all 298 peopleon board.

by stefano stefanini

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might finesse it – and I hope theywill – but Russia’s pol-icy in Ukraine cannot escape the jury of commonsense.With flaming rhetoric andwily deeds, PresidentPutin has stoked upRussian ethnic nationalism.Hehaslet the rebels of the Donetsk People’s Republic betrained and equipped, with tanks,man-pads and nowwith anti-aircraft missile batteries. Like an apprenticesorcerer he does not fully control the forces he hasunleashed. The fire he has ignited has now come toburn him.

Letme be clear. Russia does have legitimate inter-ests inUkraine.Moscow should be entitled to be at thetable with Kiev and Brussels in a trilateral discussiononUkraine-EU-Russia relations. Energymatters: Rus-sia is a main supplier, Ukraine is a main transit route;there are no alternatives in themedium term. After the1999 NATO enlargement, which was accompanied bya strong and consistent diplomatic outreach toMoscow, Russia has often been taken for granted onmatters of European security.More generally,Moscowhas a real grudge toward theWest for having long be-ing treated with complacency and disdain. ThoughRussia contributed in distancing itself fromEurope, es-pecially in the last eight to ten years, there is quitesome truth to a Russian perception of “not beingwant-ed” by theWest. TheWestern narrative about the “de-clining power” cannot have gone down verywell in theKremlin.

That said, Russian behavior,namely the annexation ofCrimea and covert activity ineasternUkraine, is internation-ally unacceptable.What is hap-pening in theDonbas, includingthe unwanted MH 17 tragedy,is a direct consequence of thatbehavior. Not to recognize thisis to be in denial – and to en-couragemore of such behavior.

The key to George H. W.Bush and Brent Scowcroft’s“new world order” wasMoscow’s cooperative posture,namely in the UN SecurityCouncil. It lasted through the1990s, in spite of the significantdifference over Kosovo. (Al-though that did not preventMoscow from initially partici-pating in KFOR, as it had par-ticipated in IFOR in BosniaHerzegovina.) When al-Qaedastruck in 2001, President Putinput Russia squarely on theAmerican side, granting un-precedented access to

Afghanistan through Central Asia. The relationshipprogressively frayed and deteriorated, with tense situ-ation like Georgia and Libya, during the Medvedevpresidency. In the last 12 months, the Syrian andUkrainian crises have completed the u-turn in Russianforeign policy, from cooperation to opposition withrespect toWashington and Brussels.

Such change does notmean that the EU andNATOshould not talk to the Russians. On the contrary, itmakes dialogue the more necessary, albeit difficult.Nor does itmean that theWest cannot do businesswithRussia.What it means is that Moscow, or rather Presi-dent Putin, perceivesRussia’s national interests as com-petitive or contrary to those of the United States andEuropean Union. Witness Ukraine. Negotiations andcompromise remain possible, desirable, and even like-ly, but they will requireWestern and European aware-ness that engagement, in the current prevailing Russ-ian mindset, is a zero-sum game. Such awareness hasoften been lacking in some European quarters.MH 17might change that.

This is the state of play todaywith regard to Russia.In the meantime the “world order” has turned intoglobal insecurity, and risen well outside Europe, irre-spective ofMoscow’s policy. As I write, the other head-line news is the Israeli ground attack against Hamas inGaza and the pain it is inflicting on the Palestinianpopulation of the Strip. Without analyzing this new

destructive turn in the Palestinian-Israeli conflict, theGaza crisis proves first that, contrary to Prime Minis-ter Benjamin Netanyahu’s claim, the Palestinian issuecannot be simply “managed.” It has to be solved diplo-matically with the two-state solution, or it will contin-ue to be fought unendingly. Second, the Palestinian cri-sis is certainly not the only conflict in theMiddle East,but it is not one that will go away if the rest subside –which is not going to happen anyway. In other words,the road to peace and stability in theMiddle East doesnot go through Jerusalem only, but it certainly goes alsothrough Jerusalem. Just as simplistic is the narrativethat sees all existing conflicts only through the prismofthe Sunni-Shiite secular divide and of the Iran-Gulfrivalry for hegemony. The clash exists and runs deep,but other forces and issues conflate the overallMiddleEast powder keg.

The list of crises, threats and flashpoints in the re-gion stretching from Afghanistan to Northern Africawould be unending. At least two, at the moment,should be constructed as threats to international peaceand stability, i.e. as posing challenges beyond the re-gional dimension – where it has already been devas-tating: the Syrian civil war; and the Islamic State ofIraq and of the Levant’s (ISIS) barbaric consolidation inthe Sunni triangle in Iraq, while successfully fightingagainst a weak and fractured Baghdad government.

The two, combined, could de facto break up Syria andIraq, redraw the Sikes and Picot map, disrupt oil sup-plies, threaten Jordan and Lebanon, and last but notleast, send Europe and the US a steady flow of welltrained would-be terrorists with Western passports.Needles to say, the accumulation of crises and warsfrom Northern Africa and the Levant has its naturaloutlet on the longMediterranean arc, which is EuropeandNATO’s southern and southeastern border. Illegalimmigration toward the EU is the immediate effect ofMediterranean instability. It will not be the only one ifstrife and lawlessness continue unabated.

Therefore, today, Europe finds itself at the unhappycrossroads of two main sources of international inse-curity. Itmay be argued that themain geopolitical haz-ards remain centered inAsia and in thePacific, becauseof China’s claims in the South China Sea, of the sim-mering rivalrieswith India, Japan, SouthKorea,Vietnamandother ASEANcountries, of theKoreanpeninsula, ofthe Taiwan issue. Unlike Europe, Asia does not have acollective security organization, and relies on US mili-tary presence to keep stability. A case could also bemade for the existence of an across-the-board terroristthreat that does not spare anyone and has actually tar-geted theUS, India andRussia (Chechen inspired)morethan Europe. However, the fact remains that in the firsthalf of 2014 themost pressing security challenges have

A Palestinian womancries inside herdamaged house, whichwas targeted in anIsraeli air strike, inGaza City, July 17,2014.

Israeli 8re8ghtersextinguish a 8re thatbroke out after a rockethit a petrol station inthe southern Israeli cityof Ashdod July 11,2014.

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stefano stefanini is Vice President of Oto Melara, aFinmeccanica company and Nonresident Senior Fellow of theBrent Scowcroft Center for International Security, AtlanticCouncil. He was the Italian Permanent Representative at NATOfrom April 2007 to December 2010.

come from the Ukrainian crisis and from the Mediter-ranean/Middle East instability and wars.

Moreover these deteriorating developments haveoccurred against the backdrop of an often distractedEU, of an engagement-averse America and of a fairlyindifferent rest of the world. Like it or not, Europe isnot the center of the world it once was during theColdWar.While theUS has toomuch at stake in the At-lantic community and the Middle East, and will notwalk away from European security, the rest of theworldwill not bemoved by Europe’s travails nor will bedragged into them. It will watch and thrive. Euro-peans, Americans and Russians have to solve their is-sues by themselves.

In this context, the lack of a EU foreign policy andthe lackluster performance ofmany European capitalsin confronting the fallout of Russian behavior inCrimeaand eastern Ukraine, are striking – and worrisome. AsCorriere della Sera’s Luigi Offeddu commented, “Eu-rope stands still, while diplomacy is on leave.” The ap-pointment of the new EU High Representative hasbeen postponed to the end of August, after a incon-clusive European Council that argued about namesrather than policy. 2014 might not be 1914, but thehabit of sleepwalking through crises dies hard on theOldContinent. In the immediate aftermath of theGazagroundwar and of theMalaysian Airlines crash, noth-ing could highlight itmore cruelly than the contrast be-

tween the flurry of activism inWashington and the longweek-end lethargy in Brussels.

Foreign policy aside, the se-curity crossfire should have theEuropeans sticking together tocopewith a gathering of threatsthat by any stretch of the imag-ination no nation can confrontalone. Instead, Europe seems tobe falling prey to the sirens offragmentation and break-up:euroskeptic populism in Franceand Denmark, separatism inScotland and Catalonia, EU re-jection in Britain – to name afew. Politically, these trendy at-titudes cannot be dismissedand will influence the EU insti-tutions, starting with the newlyelected European Parliament.In purely security terms they goagainst common sense.

While the combination ofwars, rivalries, fundamentalism,nuclear proliferation and pop-ulation displacements makesthe Greater Middle East the

biggest threat to international peace and security in themedium to long term, today it ismainly Russia that di-vides Europeans. Left only to themselves, they are un-likely to reconcile their views. To be sure, differencesrun deep also between Americans and some Euro-peans – as the European External Action Service Sec-retaryGeneral, PierreVimont, put it recently, “we are indifferent geographical situations” – but such a gap canstill fit into the traditional transatlantic pattern: USand Europe have a long tack record of bridging dis-agreements into allies’ unity. NATO, of course, is thevenue where to manage such differences. Hence theimportance of the SeptemberWales Summit.

Policy divisions at NATO are rooted in different se-curity perceptions: Eastern Allieswant the Alliance’s re-turn to be a bulwark against Russian expansionism;Southern Europeans want it to remain focused on theMediterranean; free from any specific threat on theirborders, other Western Europeans look at NATO as arain check; North Americans believe that they havedone enough for European security and that it is timefor European Allies to take more of the burden andmore responsibilities, within and outsideNATO.Thesedifferences are sharpened both by defense budgetaryconstraints and the need to credibly respond to theUkrainian crisis. Meanwhile the Middle East burns.And the Mediterranean is no buffer, witness the boatpeople coming to European shores, and a crucial ally,

Turkey, shares border with Syria, Iraq and Iran.Yet the very fact that European and Atlantic secu-

rity is challenged on both sides, East and South,makesNATO the only forumwhere theWest can still unite. Acredible political response has to be backed by credi-ble and convincing security deterrence and supportedby consistent diplomatic outreach.OnlyNATO, as a po-litical-military alliance, can do it. OnlyNATO can keep“the Americans in” as a shared policy.

Will NATOdo it? Only if, in September’sWales Sum-mit, NATO leaders rise to this new challenge. New, be-cause it is not a ColdWar redux. In spite of theUkrain-ian crisis, the relationshipwithMoscow remainsmorecomplex than purely adversarial. NATOneeds to talk toRussians as much as to deter them from further ex-pansionism and destabilization in Central and EasternEurope. Russia has a powerfulmilitary (not tomentionits nuclear arsenal) but it also has legitimate securityconcerns that should be dealt with at a negotiatingtable rather than in the fields of easternUkraine and onthe Crimean coast.

NATO is entering a new phase. The Russian prob-lem exists and demands reassuring the eastern Allies.But NATO cannot fail to recognize the much widercontext of global insecurity, and the other looming

threats at its very doors. The summit should not be asterile debate between opposite, static and flexible,visions of the alliance and of common defense. EitherNATO leaders are able to assess and acknowledge thedual security challenge, in the Central European plainsand on theMediterranean shores, or, for the first timein its 65-year history, it will have given up on its coremission of providing long lasting security to all itsmembers.

Soldiers of NATO-ledpeacekeepers inKosovo (KFOR) on July4, 2014 at the US CampBondsteel near thevillage of Sojeva,Kosovo.

People look at the9owers left inremembrance for thevictims of the MH17plane crash at SchipholAirport, nearAmsterdam, July 21,2014.

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It is a turbulent time for sov-ereign debt markets. Eversince the outbreak of the eu-

rozone crisis, which rocked en-tire economies and broughtgovernments crashing down,sovereign debt managementhas become a hotly debatedtopic among scholars and poli-cymakers around the world.And even as the eurozone crisis cools down, the sov-ereign debt debate has been heating up in light of therecent legal victory of Argentina’s “holdout” creditors– a minority group of creditors who continue to holdbonds that Argentina defaulted on in 2001 andwho re-fused to restructure those same bonds in the 2005 and2010 debt exchanges.While the eurozone debacle awakened policymak-

ers to governance challengesof sovereigndebt crises, Ar-gentina’s courtroom drama has raised fresh uncertain-ty around the legal aspects of sovereign debt as well asthe attractiveness ofNewYork as a financial hub. In try-ing to confront these challenges and quell uncertainty,the International Monetary Fund (IMF) has put for-ward a proposal to change its lending framework in away that balances the interests of debtors and creditorsand provides a workable solution to the seemingly in-transigent problems at the core of sovereigndebt crises.At a broad level, the recent economic and legal de-

velopments in Europe and the United States haveprompted a rethink of sovereign debt governance. Al-though sensitive to the needs and concerns of financialmarkets, states – especially the most powerful ones –are still in the driver’s seatwhen it comes to shaping theinternational sovereign debt regime.The global consequences of the Argentina case, for

instance, will depend on how states – primarily sover-eign borrowers – respond to the new legal precedentthat has been set. Sovereign borrowersmay find it wiseto re-write their bond contracts to include provisions

that prevent or sterilize the type of legal action takenagainst Argentina. They may also increasingly movetheir business away fromNewYork and choose to issuebonds under their own domestic laws or those of an-other foreign financial center. The fate of the IMF’s re-cently proposed change to its lending framework willalso be determined by states; this time in amultilater-al setting. Here, it will be up to the IMF’s executiveboard – itsmain decision-making body – to approve orreject the proposal when it comes up for review laterthis year.In both cases – Argentina’s legal saga and the IMF’s

proposed reforms – the preferences of market partic-ipantsmay verywell influence the decision-making ofstates (especially those reliant on borrowing from in-ternationalmarkets or those with their own advancedand globalized financial markets).The eurozone crisis kicked off in 2009 when the

newly elected Greek government revealed that the re-ported fiscal deficit of 6.5% of GDP was actually dou-ble that. Unsurprisingly, Greece’s borrowing costsspiked and its bondswere downgraded, compoundingthe underlying debt problem. Moreover, as the econ-omy set itself on a downward spiral, the ratio of debt-to-GDP rose.Before long, trouble started to spread to other

economies in the eurozone’s periphery. Governmentsin Portugal, Ireland, Spain, and Italy saw borrowingcosts rise as investors began to sell what now appearedto be risky sovereign bonds to cover the losses incurred

Sovereign debtin turbulent times

In recent years sovereign debt crises have posed anumber of dilemmas. As a result, the IMF and variouscentral banks have come up with an array of approachesto governing them.

Managing DirectorChristine Lagardespeaking at IMFheadquarters inWashington, July 1,2014.

by Domenico Lombardi and Skylar Brooks

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on their Greek debt holdings. At the time, the IMF, inconcert with the EU Commission and the EuropeanCentral Bank, was compelled to act in order to stave offa deeper andwider financial collapse inGreece and therest of the euro zone.It was clear that Greece would need a lot ofmoney

and a lot of help, but according to the “exceptional ac-cess” lending criteria, the IMF could only lend toGreece if therewas a“high probability” of the country’sdebt being sustainable over the medium term. Theproblem: there was not. Still, the IMF wanted to helpresolve the crisis and was under mounting pressurefrom its powerful Europeanmembers to get involved.Normally a country like Greece –whose debt could

not be deemed sustainable with high probability –would be required to restructure before accessing large-scale IMF resources. But when faced with the earlyspillover effects from Greece and the heightened po-tential for debt defaults and restructurings to triggercontagion in a tightly-linked economic andmonetaryunion, the Funddecided to offer Greece a bailoutwhileavoiding restructuring.To enable the Fund to lend toGreece in the absence

of a restructuring, the executive board approved in2010 an amendment to the exceptional access frame-work, allowing the “debt sustainability” criteria to bewaived in cases where there is a “high risk of interna-tional systemic spillover effects,” as our CIGI colleagueSusan Schadler has highlighted in her research.Unfortunately, the combination of external sup-

port and internal adjustment provided by the IMF

bailout failed to put Greece’spublic debt back on a sustain-able footing; in fact, its econo-my and debt position only con-tinued to deteriorate. In 2012,the inevitable could no longerbe forestalled: Greece under-went the largest sovereign de-fault and debt restructuring inhistory (surpassing Argentina’shistoric 2001 default).Even though it achieved

very large debt relief – morethan 50% of 2012 GDP – the re-structuring was not enough torestore growth and debt sus-tainability. In retrospect, theFund admitted that the Greekrestructuringwas “too little, toolate.” If some debt restructur-ing had been required at the be-ginning of the crisis, as theFund’s pre-2010 lending rulesspecified, Greece’s return toeconomic health could have

beenmuch sooner and stronger. It was not. The Fundalso conceded that its lending framework, even be-fore the 2010 amendment, was not optimally designedto deal with cases where there is considerable uncer-tainty regarding the sustainability of a country’s pub-lic debt.Aside from failing to restore growth and debt sus-

tainability, the Greek debt restructuring came at a costin terms of holdout creditors.While the Greek restruc-turing enjoyed a high rate of participation amongbondholders (97%), those who refused to participatewere successful in recovering their investments in full,which only strengthens the incentive for others to holdout from future deals.Since January 1, 2013, all new euro zone sovereign

bonds have been required to include“collective actionclauses” (CACs), which are supposed to facilitate cred-itor coordination and render holdouts less effective. Butevidence on the actual effectiveness of CACs in pastdebt restructurings is mixed and thus inconclusive.Moreover, CACs do nothing to address the “too little,too late” problem – a problem that many now consid-er more challenging than holdout creditors.Further still, as economists Carmen Reinhart and

Ken Rogoff point out, underlying debt dynamics sug-gest that in the coming years more sovereign debt re-structurings will prove necessary in the eurozone’s pe-riphery. Other advanced economies do not lookmuchbetter, for that matter, as central government debtacross the developed world reaches a 200-year high-point. The message from the eurozone crisis is thus

clear: sovereign debt crises, which now affect relative-ly rich societies, are not going away anytime soon norgetting any easier to handle. This realization hassparked serious discussion and debate, both insideandbeyond the Fund’swalls, about how to best preventand manage such crises going forward.The ongoing sovereign debt debate has only been

revved up by the recent legal battle between Argenti-na’s central government and a small group of “holdout”creditors, led by New York-based hedge fund ElliotManagement, who refused to participate in either ofthe country’s post-2001 restructurings. In June 2014, theSupreme Court of the United States (the country inwhich Argentina’s bonds were issued) had the finalword in the dispute, denying Argentina’s request tohear an appeal of a lower-court ruling in favor of theholdouts.Based on a particular interpretation of the pari

passu (equal treatment) clause contained in Argentina’soriginal bonds, the ruling specified that Argentina can-notmake payments on the debt it restructured in 2005or 2010 unless it also repays in full the creditorswho re-fused to partake in those restructurings. Even thoughthe vastmajority of bondholders agreed to the debt ex-changes and the country was able to restructure over90% of its debt, if Argentina complies with the court’sruling it could be required to pay around $15 billion toholders of defaulted bonds.The problemwith the court’s decision, beyond the

severe financial strain it puts onArgentina, is that it sets

a legal precedent under New York law – the law gov-erning a large portion of sovereign bonds – that threat-ens to make restructuring unsustainable sovereigndebtmore difficult than it already is. By ruling that Ar-gentina’s holdout creditors, many of whom boughttheir bonds on secondarymarkets after default and ata deep discount, must be repaid in full if anyone is tobe repaid at all, the court’s decision has rewarded re-calcitrant creditors – referred to pejoratively as “vulturefunds” – and punished cooperative ones, thus creatinga perverse incentive for all creditors to holdout from fu-ture restructurings.As a recent IMF staff paper put it, “by allowing

holdouts to interrupt the flow of payments to creditorswho have participated in the restructuring, the deci-sions would likely discourage creditors from partici-pating in a voluntary restructuring” and “by offeringholdouts a mechanism to extract recovery outside avoluntary debt exchange, the decisionswould increasethe risk that holdouts will multiply and creditors whoare otherwise inclined to agree to a restructuringmaybe less likely to do so due to inter-creditor equity con-cerns.”As The Economist commented, strict adherence to

the pari passu clause “would make restructuring sov-ereign debt sold in NewYork impossible, since no onecould be paid without 100% participation in a swap.”Clearly, then, the decision has potentially made re-structurings much harder to agree to, let alone en-force. For those who believe that restructuring unsus-

Laid off FinanceMinistry cleanersscuf4e with police inAthens ahead of thearrival of theinternational troika ofcreditors, July 10, 2014.

Poster on a wallagainst the “vulturefunds” in Buenos Aires,June 18, 2014. Theposter reads “EnoughVultures – Argentinaunited in a nationalcause.”

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rigorous and systematic analysismust indicatewith“highproba-bility” that a member’s publicdebt will remain sustainable inthe medium term. If debt sus-tainability can be assured withhigh probability, the Fund willrely on its traditional approach:provide money to repay credi-tors with maturing debt obliga-tions (i.e., to bailout creditors)as longas theborrowing countryagrees to an economic adjust-ment program.If a country’s debt sustain-

ability cannot be assured withhigh probability, however, itmust undergo a debt restruc-turing sufficiently deep to re-store sustainability before it canreceive IMF assistance. As aconsequence of this approach,“debt restructuring will be re-quired not only in cases where

there is a high probability of unsustainability, but alsowhere it is not clearwith a high probabilitywhether thedebt is sustainable or unsustainable; i.e., in caseswherethere is uncertainty.”The problem with this approach is that, despite

the increasing sophistication of the Fund’s debt sus-tainability analyses (DSAs), there are many cases inwhich considerable uncertainty exists; in these cases,requiring a deep debt restructuring, which imposessteep costs on creditors and debtors, may be an un-necessary and suboptimal outcome. As such, in casesof uncertainty, where neither the sustainability northe unsustainability of a member’s debt can be estab-lished with “high probability,” Fund staff advocate anapproach that relies on reprofiling debt rather thanrestructuring it.Under a reprofiling, therewould be an extension of

maturities on existing sovereign debt, but no change tothe nominal interest or principal. According to IMFstaff, in cases of genuine uncertainty, reprofiling sov-ereign debt would be more effective than the currentcrisismanagement strategy for at least four reasons: (1)it would be less disruptive to financialmarkets and lesscostly to debtors and creditors than a potentially un-necessary debt restructuring; (2) it would be more ef-fective and fair than allowing creditors with maturingclaims to “exit” if a debt restructuring does indeedprove necessary; (3) it would buymore time to imple-ment necessary policy adjustments, better assess debtsustainability as those policies go into effect, and, inturn, reduce the likelihood of needing a restructuringin the first place; and (4) since Fund resources would

not have to be used to servicematuring debt obligations, theIMF could support a moregrowth-friendly (i.e., less aus-terity-based) adjustment pro-gram with a greater chance ofrestoring debt sustainability.In addition to genuine un-

certainty, reprofiling would beconditional upon a membercountry alreadyhaving lostmar-ket access; that way, reprofilingwould follow, not trigger, a lossof confidence or certainty in acountry’s debt sustainability.Fund staff also note the impor-tance of securing broad creditorsupport for a reprofiling, andthus the need to implement re-profiling in a way that, if possi-ble, avoids a payment default.Overall, the Fund is seeking

a broader range of economical-ly potent and politically accept-able policy tools for managing severe sovereign debtcrises. Compared to the status quo, argue IMF staff,providing a greater role for debt reprofiling in the IMF’sexceptional access lending framework will allow theFund to better tailor its policy actions to the specific cir-cumstances of a given country and crisis.The IMF’s proposal is far from the only new idea for

how to improve the handling of severe sovereign debtcrises. In fact, the last few years have seen several newnoteworthy proposals. Experts from the Bank of Cana-da and the Bank of England propose the introductionof two complementary types of “state-contingent debt”– “sovereign cocos” and “GDP-linked bonds.” The for-mer are bonds that would automatically extend inma-turity when a country receives an IMF loan; the latterare bonds that directly link principal and interest pay-ments to the nominal level of a country’s GDP, sowhenits GDP falls, so too do its debt servicing payments.Our CIGI colleagues RichardGitlin andBrett House

advance the idea of a Sovereign Debt Forum (SDF): asemi-formal institutional venue that would, in thewords of its architects, “provide…a venue for proactivediscussions between debtors and creditors to reachearly understandings on treating specific sovereigncrises.” A group of distinguished economists and sov-ereign debt experts known as The Committee on Inter-national Economic Policy and Reform have also tableda series of proposals, ranging from strengthening sov-ereign bond contracts and immunizing payments onrestructured debt from“interference” by holdout cred-itors, to creating a new lending facility at the IMF anda formal international bankruptcy regime in Europe.

In many ways, reprofiling would have much thesame effect as something like sovereign cocos. Themain difference between any of the proposals men-tioned above and the one developed by the IMF, how-ever, is that the Fund’s proposal already enjoys the in-ternal support of its staff andmanagement, who are ina position to bring their recommendations directly tothe executive board for formal review and considera-tion. And since the Fund is itself a key actor in globalfinancial governance, if its member states vote to re-form the institution’s lending framework, it may havean impact on the governance of sovereign debt crises.Summing up, the recent economic and legal de-

velopments in sovereign debtmarkets have prompteda rethink of sovereign debt governance. The choice tochart a new course in debt governance lies with thestates that comprise the IMF’s membership. Collec-tively, these states can redefine the Fund’s role in sov-ereign debt crises. Individually, they can ensure thattheir own bonds are issued in favorable legal jurisdic-tions and with more protective legal provisions. Ifstates choose to take such actions, it will have a trans-formative – and arguably positive – impact on the func-tioning of sovereign debt markets and the manage-ment of sovereign debt crises.

tainable sovereign debt needs to bemade quicker andeasier, the generous treatment of Greece’s holdoutsduring the 2012 restructuring and the legal ruling in fa-vor of Argentina’s holdouts are most unwelcome de-velopments.The outbreak of the euro zone crisis, combined

with the legal saga surrounding Argentina’s debt obli-gations, has put sovereign debt restructuring at thetop of the IMF’s agenda. In June 2014 the IMF releaseda staff report considering a newapproach to Fund’s “ex-ceptional access” lending framework as it relates tosovereign debt restructuring. The report identifies keydeficiencies in the Fund’s current lending framework– brought into stark relief during the eurozone crisis –and outlines a new, potentially improved, institution-al approach to managing sovereign debt crises.Established in 2002 and amended in 2010, the cur-

rent framework stipulates that in caseswhere there is a“high risk of international systemic spillover effects,” amember’s debt sustainability does not have to be as-sured to gain exceptional access to IMF resources. Thewisdom of introducing this “systemic exemption” in2010 has since been scrutinized, as critics argue that itundermined the framework’s ability to constrain IMFlending decisions to the ultimate detriment of theFund’s legitimacy and ability to manage future crises.Whether or not the Fundheeded such criticism, the firstmajor recommendation of the June 2014 staff paper isto eliminate the “systemic exemption.”If the “systemic exemption” is removed, the Fund is

left with its 2002 framework, which states that in orderto be granted exceptional access to IMF resources, a

A woman walks pastthe Espirito Santo Bankbranch in LisbononJuly 10, 2014.Fears over the healthof ESB, Portugal’slargest listed bank,sent its shares intofreefall, shaking stockmarkets in Lisbon andacross southernEurope.

IMF Managing DirectorChristine Lagardethanks Fed Chair JanetYellen for participatingin a discussion at theIMF, July 2, 2014 inWashington, DC.

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Domenico Lombardi is Director of the Global Economy Programat the Centre for International Governance Innovation (CIGI),Canada.

Skylar Brooks is a research associate in the Global EconomyProgram at the CIGI, Canada.

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STANDARD AND POOR 500 INDEX - USA

2014 FORECAST MACRO DATA - USA (in percent) 2014 FORECAST MACRO DATA - EUROPE (%)

EUROSTOXX 600 - EUROPE

PRICE (in dollars)

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+0.3 11.5 11.9+0.7

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Financialmarkets are navigating perilouswaters asall-time high equity indices are threatening im-minent reversals and a new banking crisis may

well unfold.The fixed income markets have prospered im-

mensely from the expansionary monetary policies im-plementedby theUSFederal Reserve and the EuropeanCentral Bank over the last few years, and their massiveliquidity injections have pushed interest rates to ex-traordinarily low levels. Investors’ perception of risk hasradically changed. Issuers that were once consideredhigh-risk have managed to secure tight risk premiumsin this environment.

A strong mismatch has been established betweenthe intrinsic risk metrics of fixed income issues and themarkets’ perception of risk, with investors now seem-ingly ready to do anything in order to generate returns.

In this scenario, it would be useful to analyze themarkets from another angle in order to determine thepossibility of generating returns in conditions of ac-ceptable risk.

In recent years, the“flight to quality” propensity andthe absolute pursuit of capital protection have driveninvestors towards the eurozone’s core nations, the onlyplaces deemed “safe havens.”

It is necessary, however, to focus one’s attentions ona lesser-known geographic region in terms of fixed in-come investments, Eastern Europe, an area charac-terized by a younger demographic profile which, forthis reason, could reveal itself as the future locomotiveof economic growth in the European Union. It is en-tirely plausible to imagine that the region’s economiescould benefit from the increasing domestic demand ofthe younger members of their populations. Theseeconomies have recorded impressive performanceswhen compared to Italy and France, with growth ratesin most circumstances more than double compared to

Europe’s financialfringe

The EU countries on the periphery ofthe eurozone might be as rewarding asthey are risky.With their economiesadapting to required standards, theycan benefit from both access to theworld’s biggest market andindependent monetary policy.

by moreno zani

longitude #41 - 81

Economy

80 - longitude #41

Europe

the latter two. In many cases their debt levels are belowthe EU average and hence portray an elevated level ofsustainability. Recent reforms implemented with thesupport and targeted aid of the EU have impacted sev-eral areas such as the infrastructure and technologysectors, and market liberalization. Smart decisionswhich, when combined all together, may have laid thefoundations for a sustainable and lasting growth cycle.

The characteristics described above denote, at firstsight, a higher quality credit profile than the other Eu-ropean countries. However, as too often happens, thereare both positive and negative elements that the mar-kets are unable to correctly price.

Let us look at Romania, Bulgaria, Croatia, and theCzech Republic, which continue to offer interestingrisk/reward profiles in their government and corporatefixed income securities.

Analyzing the yield curves of the aforementionedcountries, we can observe that there is essentially no di-rect relationship between the yields tomaturity and thequality of the macroeconomic fundamentals.

In more detail:Romania, after leaving the Soviet orbit of influ-

ence in 1989 with a highly obsolete industrial system,and joining the EU in 2007, generated a middle classand reduced a widespread level of poverty throughthe modernization of its economy. Romania, alongwith all the other members of the EU, adhered to the“Europe 2020” project, in which the European Com-mission outlines the growth strategy for all its member

states. The plan focuses on reforms (public adminis-tration, an increase in the absorption rate of structur-al funds, and business environment) and objectives(unemployment levels, R&D, reduction of harmfulemissions, and the reduction of early school leaving).

The 2008-2009 crisis did not overly impact thecountry, contrary to most other European memberstates, which was able to maintain a positive GDPgrowth rate and contain unemployment levels, due toprudent macroeconomic measures.The crisis was alsoan opportunity to undertake long-awaited reforms inthe economic-financial, social security, public finances,and national healthcare sectors.

The strong performance of the Romanian economyduring 2013 was led by the industrial sector (mainly fo-cused on the automotive, construction, and IT indus-tries).

The European Commission estimates that GDPgrowth will remain above potential up until 2015 notonly due to the favorable international context (aidpackage from the EU) but also due to the implemen-tation of macroeconomic reforms in the labor andgoods & services markets. It is also predicted that thekey drivers of growth will shift from the export sector(which benefits from relatively lower labor costs) to in-ternal demand, which will grow on the back of in-creased standards of living and middle class expansion.

Bulgaria, formerly belonging to the Soviet bloc,joined the EU in 2007. During the four-year period2004-2008, it registered considerable growth rates, an

average of 6% per annum.This growth was supportedby a solid financial system, high levels of internal con-sumption, and foreign investment flows.

Bulgarian GDP grew by 0.6% (below its potentialoutput) in 2013, driven by exports and governmentspending, coupled with a contraction in householdspending.

The economic recovery will be more diversifiedthan in the past, with internal demand that will gath-er steam and assist the already strong export sector onthe back of a favorable corporate tax regime that willstrongly incentivize the industrial sector.

The budget deficit will remain stable at about 1.9%in 2014, and will decline further in 2015. This is an im-portant factor as it leaves ample room for maneuver al-lowing the Bulgarian government to implement ex-pansionary economic reforms.

Croatia joined the EU on July 1, 2013. The countryremains one of the richest of the Slavic countries. Thenation was heavily impacted, even in economic terms,by the 1991-1995 War, during which output fell dra-matically. But more importantly, it missed out on thefirst investment flows going into Central and EasternEurope after the fall of the BerlinWall.

Between 2000 and 2007, the Croatian economyperformed rather well. GDP growth rates of between4% and 6% were registered, driven primarily by thetourism sector and by internal consumption, whichwas spurred by an extensive use of consumer credit,while the inflation levels and the kuna’s foreign ex-

change rate remained quite stable.The 2008 financial crisis hit the country hard. Un-

employment reached historic highs, and hugely dif-fering growth rates were registered among the differentgeographical areas. The central government reducedpublic spending and increased taxes, hiking up thevalue added tax as well.

GDP contracted by 1.03% in 2013. Factors that con-tributed to this negative growth in 2013 included in-ternal demand and the export sector.With the currenteconomic policies, it is estimated thatGDP will grow by0.5% in 2014, with major contributions coming fromthe exports of goods & services, from tourism, andfrom structural investments.

The latter will mainly come from the public sector,whichwill benefit from funds received from the EU. Ex-portswill be driven by stronger demand fromEUmem-ber states. Croatia’s foreign demand for its goods will beweaker than others’ as its main trading partners areItaly and Slovenia.

Internal demand (private consumption) will fallfurther in 2014 as households continue their “delever-aging” process. There should be a modest increase ininternal demand in 2015.

The budget deficit, which stood at 6% in 2013, is ex-pected to fall to 5.4% in 2014 and to 4.8% in 2015 on theback of reforms to the national pension system, ap-proved in January.

The Czech Republic is characterizedby a stable andflourishing economy, highly integrated into the other

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I40 (06/23/14) BI629 (06/23/14-Bid) I259 (06/24/14, 08:01:40) YCCUOOZG (06/24/14, 08:01:40)I260 (06/24/14, 08:01:40) I679 (06/23/14)

I40: I40 EUR Italy Sovereign Curve BI629: BI629 Czech Govt BVAL Curve I260: I260 EURO Romania Sovereign Curve I679: I679 EURO Croatia Sovereign CurveI259: I259 EURO Slovenia Sovereign Curve YCCUOOZG: YCCUOOZG My Bulgarian Euro

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I84 (06/02/14,15:07:42) I84 (05/02/14) I40 (06/02/14,15:07:42) I40 (05/02/14) I61 (06/02/14,15:07:42)

I84 (06/02/14 - 05/02/14) I40 (06/02/14 - 05/02/14) I61 (06/02/14 - 05/02/14)

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I84: I84 EUR Portuguese Sovereign Curve I40: I40 EUR Italy Sovereign Curve I61: I40 EUR Spanish Sovereign Curve

BI629 - I40 (06/23/14) I259 - I40 (06/24/14-06/23/14) YCCUOOZG - I40 (06/24/14-06/23/14)I260 - I40 (06/24/14-06/23/14) I679 - I40 (06/23/14)

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mentioned countries have debt/GDP ratios well belowthe European average. Only Slovenia and Croatia haveestimated 2014 GDP growth rates below the EU aver-age. And with the sole exception of Croatia and Slove-nia, unemployment levels are below the European av-erage.

Following ECB President Mario Draghi’s an-nouncement of ordinary and extraordinary monetarypolicy measures on June 5, the effects of these policiesare expected to be quite significant on their economies.Ultra-low interest rates and targeted loans tied direct-ly to business lending will boost the eurozoneeconomies. Not only will the core European countriesbenefit from these, but the frontier nations of the EUperiphery, such as Bulgaria and Romania, will alsoreap the rewards. These economies are, in fact, heavi-ly geared toward manufacturing, which will be posi-tively impacted. In reference to the fixed income mar-kets, themonetary policies of the ECBhave contributedto the further yield tightening of the traditional pe-ripheral countries, rendering more attractive EasternEuropean debt instruments.

On the other hand, however, significant politicalrisks remain, with widespread corruption and a bank-ing system that is not yet on par with European stan-dards, despite enjoying the ECB’s financial safety net af-ter joining the EU. This has recently been demon-strated by the European Commission’s $2 billion cred-it line (partially guaranteed by the EU) in support of

Bulgaria’s banking system following bank runs on twoof the main Bulgarian credit institutions not owned byEuropean banking groups.

This case demonstrates how, even in the presenceof a solid financial system, panic can insinuate itselfand wreak considerable damage.

These are the risks and opportunities of investingin the frontier countries of the outer periphery of theEU. Unfortunately, despite the last few years dedicat-ed to creating and fostering solidity in the European fi-nancial systems, the eurozone is still facing cases, suchas Bulgaria, that provide systematic risk and conta-gion to nearby countries. At the same time, Portugal(which is neither Bulgaria nor Romania) is currentlyfacing a national crisis through the troubled BancoEspirito Santo.

This highlights the important work that the EU andthe ECB are still required to undertake in order to re-store stability and confidence to the eurozone andprovide a “safe haven” status to investors.

Do not forget that other European financial insti-tutions (such as BNP and UBS) are struggling due todifferent problems, but of a size and gravity of far big-ger dimensions that risk throwing the EU back into thethroes of the recent crisis, a reminder that even the coreEU countries are not without risks. For both peripher-al and core EUcountries, it is a case of risk/return, bear-ing in mind thatmarkets are“globalized” and problemsare transmitted quickly throughout the global system.

Clearly, within the banking system, a quicker adoptionand implementation of the EU banking regulatory andsupervisory framework outlined by Draghi would helpin stabilizing the situation.

So the perceived macroeconomic risks are under-and over-estimated by the markets, according to theprevailing “state of grace” of the markets. Personally, Iwould evaluate the risks not on an individual level butin a more general context, within a European frame-work, to which each risk is linked by a two-way street.Let us not forget that the aforementioned countries aremembers of NATO, have access to the EU’s structuralfunds, and, for a certain number of years, still maintaintheir own central banks and currencies, allowing themto be very competitive from an industrial point of view.

Considering that investors are faced with invest-ment decisions, the government and corporate debt in-struments of these countries, expressed in euros, offerinteresting economic returns throughout the entirematurity spectrumwhencompared to the current yieldsoffered by Italian, Spanish, and Irish instruments, andat absolutely favorable risk/return conditions.

moreno zani is Chairman of Tendercapital Ltd

European markets. On the one hand, we find an es-tablished financial system, relatively conservative andfocused on domestic dynamics, and hence substan-tially in good health. On the other, the economy ismainly geared towards the export sector, extremelydependent on the European economy, Germany inparticular.

The country’s main industry is the automotive sec-tor which, together with the industrial sector, consti-tutes 25% of the manufacturing sector in the Czech Re-public. For the first time, automotive production hit 1million units in 2010, 80% of which went to exportmarkets.

For the foreseeable future, the Czech Republic’seconomy is expected to improve its performance, driv-en primarily by the export sector which will benefitfrom the recovery of the eurozone.Very positive signalsare also expected from the manufacturing and indus-trial sectors which will benefit from increased new or-ders and higher profit margins. In this context, thedownside risks for the Czech Republic are essentiallyexternal, deriving from the euro area.

The budget deficit stood at 2.7% of GDP in 2013,and is forecast to remain substantially stable at 2.8% in2014. The main reforms aimed at reducing this deficitconsist of the reduction of the indexation of pensions,the increase in excise duties, and new revenues fromthe concession of radio and TV frequencies.

Summing up, the positive elements: The afore-

forecast forecastforecast forecast

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ROMANIAREAL GDP GROWTH AND CONTRIBUTIONS (in pps)

Dom. demand, excl. invent. Employment growth (y-o-y%)

Net exports Inventories

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Real GDP (y-o-y%)

Real GDP (y-o-y%)

Real GDP (y-o-y%)

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BULGARIAREAL GDP GROWTH AND EMPLOYMENT GROWTH (in pps)

CROATIAREAL GDP GROWTH AND CONTRIBUTIONS (in pps)

CZECH REPUBLICREAL GDP GROWTH AND CONTRIBUTIONS (in pps)

longitude #41 - 85

Investment

84 - longitude #41

Europe

The venture capital (VC) industry in Italy is un-dergoing a phase of growing popularity. Thissector is strategically important for increasing

the country’s competitiveness globally. The protago-nists of this virtuous circle are universities, researchcenters and institutions, companies, investors andyoung entrepreneurs.

In Israel, since its launch in 1985,VC has played anextraordinary role in translating “know-how” into en-terprises and, therefore, employment and global lead-ership. In Israel VC accounts for 0.5% of GDP, in theUnited States for 0.2%. To transform local start-upsinto multinationals, Israel has favored a US businessculture, which is conducive to risk capital, market size,and liquidity of the financial markets for the purposeof exit options. Today Israel has more companies list-ed on the NASDAQ than any other country outsidethe US, save China. In absolute terms, in 2012 the USinvested $26 billion inVC, Israel $ 67 million, Italy $97million.

In Italy, in 2013, 171 active financial players weremonitored, of which 24 were venture capitalists (earlystage), compared to 28 in 2012. Resources collected byprivate equity and VC in Italy totaled €4 billion. TheItalian Strategic Fund represents 85%. Funds of fundsare the primary source of raising capital (32%), thanksto the institutional component, followed by pensionfunds (18%) and insurance (13%). It is estimated thatthe use will be for expansion of operations (49%), 27%for infrastructures and 17% for early stage high-tech.

In this scenario, theVC challenge for Italy is three-pronged: culture, education and relationship with the

United States; involvement of companies and institu-tions; and return of private investors.

There is, however, a great opportunity for policymaking, but this alone could not solve the challengeslisted.

In a typical VC portfolio of 10 start-ups, the exit of3 ensures a return of 10 times the total capital invest-ed. In the ICT sector, the exit can be up to 30 times theEBITDA.To achieve these objectives the following musthappen: double-digit annual growth of sales volumes,scalability of business and different exit options (IPO,secondary market, mergers, acquisitions).The US con-tinues to offer the best opportunities as demonstratedby the case of Israel and, for example, the European ini-tiatives in Silicon Valley (Switzerland-Swissnex – andthe UK – SiliconValley Comes to the UK).

Themost important 2014 second-quarter IPO in theUS is JD.com, an online shopping company based inChina. It collected $2 billion and began trading on theNASDAQ on May 21. The stock is worth 50% morethan the IPO price of $19.

In Italy,VC is still predominantly local, only a coupleof funds have any presence in the US. The domesticmarket solo option reduces the chances of growth, in-ternational exposure, and thus the exit. Phase I of theItalian epic hasmagnified the concept of“start-up” andmade it part of the common slang. But this is just oneofthe steps.Today the focushas tobeonPhase II – the exit– the real reason for theVC to exist: to create wealth forinvestors andentrepreneurs.TheUScontinues tobe theplace where this is more likely to happen.

The Italian Business & Investment Initiative, orIB&II, (in cooperation with Atlante, Innogest, IntesaSanpaolo Start-Up Initiative, LUISS Enlabs Mind theBridge, Quadrivio/TTVentures, Vertis and other Italy-basedVC funds) organizes three symposia per year forItaly-originated start-ups to meet USVCs (two in NewYork, one in San Francisco by Mind the Bridge). Since2011, 215 start-ups have benefited, raising $5 million.The next meeting will be on November 2 to 7 in NewYork in collaboration withVentureOutNY.

Involvement of companies and institutions. Makingthis “shift” in ItalianVC industry, from“local” to “glob-al,” requires the support of companies and institu-tions (central and local). The BEST (Business Exchangeand StudentTraining) scholarship is an efficient and ef-fective programavailable to both and ready to be scaledup nationally. Every company needs to innovate prod-ucts and processes of its core business and to enter innew segments. The institutions need technology toenable and accelerate change.

The US Embassy in Italy launched BEST in 2007within the “Partnership for Growth” program. BESTreaches four strategic goals for Italy:

First of all, it prevents the “brain drain” by offeringyoung Italian graduates less than 35 years old whohave an innovative high-tech business idea to spend anacademic year in Silicon Valley to learn how to trans-late this idea into a start-up: two-month entrepre-neurship course at Santa Clara University and a five-month working internship for a start-up in the BayArea; upon returning to Italy, winners are mentored forsix months to launch their own start-up. The US-ItalyFulbright Commission selects the winners. Since BESTwas launched, 26 have been created.

Secondly, it provides an opportunity for companiesto identify innovation for their core business indicat-ing to potential BEST candidates the technologicalchallenges on which they can build an enterprise.

Thirdly, it provides the Italian regions and otherlocal authorities with the opportunity to establish high-tech start-ups; the Italian regions have the opportuni-ty to exploit the European Social Fund for Entrepre-neurship to sponsor BEST scholarships, each is worth€35,000; Campania, Emilia Romagna, Puglia, Tuscany,

Veneto and the Province of Bolzano are already BESTdonors.

BEST would not have happened without the crucialsupport of the Consulate General of Italy in San Fran-cisco.

In 2014 INVITALIA, the Italian Agency to promoteeconomic development and attract foreign direct in-vestments, became a partner of BEST. Among other ac-tivities, the agency administers the program Smart &Start intended for highly innovative entrepreneurialprojects, promoted by new firms located in the South.

CNR, National Research Council, has supportedBEST since its launch in 2007 and its researchers are animportant reservoir for the success of BEST.

In 2013, the sector of early stage (seed and start-up)showed positive signs: the number of transactions in-creased from 136 in 2012 to 158 in 2013, an increase of16%, while the amount invested fell by 39% (€81 mil-lion in 2013 against €135 million in the previous year).

While the presence of government-backed opera-tors has positive aspects in terms not only of resourcesbut also of pragmatic actions, the challenge remains thereturn of private investors. Experience shows how thedrive and anxiety of private investors regarding the re-turn on capital invested is unmatched by any other op-erator. This investor is engineered to test and identifyall the possible ways of achieving the goal and is inde-pendent of any kind of constraint as he works only fora return on invested capital.

Spurringventure capital

Competitiveness is essential for Italian businessesto overcome the current stagnation in the economy.Encouraging venture capital into the markets is oneof the most effective methods.

The Italian start-upAtooma, founded in2012 by four Italianstudents is seen beingvoted best app in theworld at the 2013Mobile World Congressin Barcelona.

by fernando napolitano

MPA

fernando napolitano is the Chairman of e Italian Businessand Investment Initiative in New York.

longitude #41 - 87

BerlaymontBerlaymont

It seemed like the Juncker erawas gettingoff to a good start in Brussels. But thebirth came with complications. First

there was open opposition from GreatBritain’sDavidCameron andHungary’sVic-tor Orban, then a reconciliationwithin theEuropean parliament and support from thecoalition among Socialists, the EuropeanPopular Party (EPP) and Liberals, then thepermission of Strasbourg with almost 50votes more than the minimum majorityneeded.

But no. The wave of optimism wasshort-lived.

The Brussels summit on July 16 wassupposed to close the door on EU ap-pointments, with the choice of the newPresident of the European Council an newEU High Representative of the CommonForeign and Security Policy andPresident ofthe Eurogroup, but instead it ended in anatmosphere of extreme tension among the28 heads of state and government.

The decision will now have to wait forthe new EU summit on August 30, but theanticipated squaring of the circle will notcome easy. And not just because the distri-bution of the seats will need to reflect a po-litical, geographical and gender balance,which in itself is not so easy to put togeth-er, but also because it will necessarily haveto intersectwith the division of portfolios inJuncker’s newCommission, all within a verynarrow time frame.The hearings in the par-liament of the 27 new commissioners arescheduled for September. And they can’tbe postponed very long because the newCommission as a whole will have to pass anew vote in Strasbourg before being able totake over from José Barroso’s outgoingCommission on November 1.

The defeat of Matteo Renzi, who wasunable to overcome the serious objection of11 out of 28 countries to the candidacy ofItalian ForeignMinister FedericaMogheri-ni, is likely to leave its mark. Not so muchbecause of the possible threat of Italian re-taliation,which is not in the tradition of thecountry (at least not so far), nor because ithappens to hold the rotating EU presiden-

cy, but because new appetites are config-uring around the missed appointments.

For example, it is no longer a certainty,as had been previously assumed, that thenew EU foreign minister would be a So-cialist. Both German Chancellor AngelaMerkel (EPP) and French PresidentFrançois Hollande (Socialist), who seemedto be Renzi’s staunchest allies now declarethat“it is notwritten anywhere” that the po-sition should go to a socialist.

It is unclear if Prime Minister Renziwants to insist on Mogherini and on thatspecific position or whether he might notprefer to change both or at least one of thetwo. There are rumors say that Hollandecould present Élisabeth Guigou, a formerFrench minister with a lot of experience,and quite neutral with respect to relationswith Russian. The Elysée could play thiscard if it fails, to obtain the portfolio of eco-nomic and monetary affairs for PierreMoscovici, as they expect. But this is not asure thing either.

Merkel, in fact, would prefer a well-known hawk for that post, which is of greatstrategic importance for the next five years,to ensure the application of the orthodoxrules of the Stability Pact and ensure themargins of flexibility contained in them:someone like the former Finnish PrimeMinister Jiri Katainen, who, moreover, al-ready occupies it temporarily in place ofOlli Rehn.

But of course, the German chancelloralso has a vital need to recover constructiverelations with France in order to strength-en the political and economic governanceof the eurozone. For this reason, it is not ex-cluded that in the endHollandewill get hisway with Moscovici.

The question is very relevant for the fu-ture Juncker era.

The ex-prime minister of Luxembourgwho is preparing to be the newPresident ofthe EU Commission is a well-known aus-terity hawk, but with common sense. Hedemands respect for the rules of the Sta-bility Pact because he considers fiscal con-solidation and structural reforms essential

for the boosting economic growth in a sta-ble and lastingway. But he also judges it un-sustainable in the long run for Europe tolive with what he calls the 29th State of theUnion, formed by the 27 million unem-ployed, tormenting it.

With this inmind he announced a pro-posed plan of€300 billion for investmentsin infrastructure for energy, transport anddigital communications in the next threeyears, along with the re-industrializationof the continent to be combined with theintroduction of aminimumwage.They areambitious projects. To be approved, theymust pass through the gauntlet of the EU

Council, namely the governments. HavingKatainen or Moscovici at his side can stillmake a big difference.

It can alsomake a big difference for hisrelationswith the EuropeanParliament andits Socialist President Martin Schulz, noless than for maintaining the grand coali-tion in Strasbourg between EPPs, Social-ists and Liberals. The solidity of this “trian-gle” is necessary to keep at bay the eu-roskeptic groups that might otherwise ex-ercise destabilizing guerrilla actions on anassembly with legislative powers and thegrowing political clout.

In short, much more than in the past

will depend on how the puzzle of appoint-ments gets pieced together this time: theevolution of Europe, its ability to spur dy-namic growth and consensus among itscitizens.

by adriana cerretelli

Europe was supposed to havechosen its top names by now,but wrangling over which partywould represent whatdepartment of the vastbureaucracy convinced all topostpone any decisions untilAugust.

Don’t do today what you canput off till tomorrow

adriana cerretelli is the Brussels correspondentfor the daily Il Sole 24 Ore.

86 - longitude #41

President of theEuropean CommissionJean-Claude Juncker iscongratulated byEuropean ParliamentPresident MartinSchulz after hiselection in Strasbourg,July 15, 2014.

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longitude #41 - 91

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Jeff Bezos,tracing new directions

93 The Grand Disruptorby stefano cingolani

98 Amazing Amazon – graphmap by marie joveneau

100 Playing with Fireby christopher caldwell

102 The Empire of Flying Pizzasby francesco galietti

longitude #41 - 93

Amazon

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Hehas changed the way people read, shop andentertain themselves. He has reshaped thepublishing industry, introduced the first e-

reader and reshuffled the e-commerce when it wasonly in the cradle. After having already attackedWal-mart, the world’s biggest retail corporation, he is nowchallenging Apple and Samsung with a new 3D cell-phone built to become a purchasing platform and hewants to transform logistics by using drones to deliv-er packages. Finally he is trying to revitalize an estab-lished newspaper like the Washington Post. Who isthisman? A robber baron of the digital age? A newCit-izen Kane?His original name is Jeffrey Jorgensen, but Miguel

Bezos, a Cuban immigrant whomarried Jeff’s mother,adopted him when he was only three years old. Aftergraduating as a computer engineer at Princeton, heworked briefly as investment banker onWall Street, un-til he decided to quit and start something totally new,taking advantage of the nascent internet revolution. Itwas 1994, Jeff and his wife Mackenzie had just met inhis previous office, gotmarried and decided to changetheir lives: they left toTexas and then to Seattle to starta new life.Today Jeff Bezos is not only one of the most suc-

cessful businessmen, but he is one of the major dis-ruptive innovators of recent history. More disruptivethan innovator according to hismany enemies, even ifhe introduced new products (like Kindle) and, aboveall, a new businessmodel with Amazon, the company

The GrandDisruptor

Amazon started by selling books. Now the publishingindustry will never be the same. As the companypursues its founder’s vision and expands in variousdirections, look for innovations and attendantdisruptions to increase.

Amazon.com founderand CEO Jeff Bezosattends a launch eventfor the Bezos Centerfor Innovation at theMuseum of History andIndustry on October 11,2013 in Seattle,Washington.

by stefano cingolani

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he founded naming it after the biggest river in theworld which attracts waters from many sources andbrings them to the great ocean. He has strong com-petitors, like eBay or theChinese e-commerce platformcalled Alibaba, which is about to go public on WallStreet. But both of themare different fromAmazon and,above all, they are catching up.Meanwhile, Bezos is al-ready moving to new uncharted territories: he is be-coming a publisher himself and not only a bookseller,trying to build a new kind of convergence betweencontainers and contents.Amazon carries 230million items for sale in Amer-

ica, 30 times more than Walmart. Its total revenueswere $74.5 billion last year with net profit of only $274million, partly because of Bezos’s business model: in-vesting all the earnings andoffering to shareholders notdividends but market value. The company is worth$154 billion on the stock market, twice the revenuesand 500 times the profits. The multiple forWalmart is34. People trust Bezos as far as he delivers (literally)books and everything else.Steve Coll wrote in TheNewYork Review of Books in

July: “Bezos is at once a visionary, an innovator, and adestroyer. Perhaps hewill yet rescue thePost, revive thenewspaper business, and also recast Amazon’s role indigital books from predator to something more cre-ative.” But so far, “Amazon’s success has arisen fromex-cellence in data science, distribution, and businessexecution, not creativity with content. The company’sattempts to publish its own trade books and to devel-

op original television have sofar failed. It is not clear howwellBezos understands the humanagency involved in writing andpublishing, or the ecosystemsin which editors and writershave worked for centuries. Likeother Silicon Valley disruptors,Bezos’s impatience with pub-lishers cansound likecontempt.”Coll was reviewing The

Everything Store, Jeff Bezos andthe Age of Amazon a recent bookwritten by Brad Stone, who cov-ers Amazon forBloomberg Busi-nessWeek, full of inside infor-mation and inner views, with acritical though not necessarilynegative attitude. Instead Coll,former reporter for The Wash-ington Post is mirroring thepoint of viewof a liberal opinionvery suspicious towards “Citi-zen Bezos.”The risk of oligopolistic con-

centration limiting freedom ofthepress andopinion is not to beunderestimated. BradStone and Steve Coll do not hesitate to call for an inter-ventionof the antitrust authority against Amazon’smo-nopolistic behavior toward publishers. Butmost of thecriticism comes from the old industry that refuses toadapt itself to the new times.This is especially clear in France where the gov-

ernment has just approved a law to limit what is calleda price war that is destroying the independent book-shops and publishers. Actually, the French govern-ment acted to protect the major national publishinghouse, Hachette, which is not exactly small (at least inFrance) andnot at all independent as it is owned by theLagardère group born asMatra, established in 1941 tosupplyweapons to the France Libre and grownafter thewar to produced aircraft and missiles for the Frencharmy and even sport cars.The so-called anti-Amazon law approved by the

French parliament in June forbids online sellers to of-fer free shipping on discounted books. The purpose isto protect the “biblio-diversity” that is allowing inde-pendent bookstores to compete. Amazon has a 41%share of new book sales in America and 65%online. InFrance the shares are 12% and 70%but only 18%of thebooks are sold online. So there is no dominance asyet; although the French are still convinced that to de-fend their “cultural exception” you need to subsidize itinmany ways. The best way is to control the prices. In1981 Jack Lang, the socialist minister of culture pro-hibited offeringmore than 5%discount on newbooks.

Every European country has its own version of fixedprices for books but it did not prevent bookstores fromclosing down. Is a free price approachworking better?Not exactly: the pro free market Britain did not man-age to save small, independent bookstore either. Theprotectionists as well as the liberalists miss the corequestion: the impact of innovation on old industries.From mining to publishing, it has always been thesame story. Nobody got it better than Jeff Bezos.To understand the nature of Amazon, its success

story and even the risk of becoming bigger and bigger,let’s back to the early 1990s. Bezos understood the po-tential of the electronic revolution. But why did hestart with books? Some biographers say he was underthe influence of his wife who actually became an au-thor. Another more plausible reason is that he wassearching for an industry without high barriers to en-ter and he found his opportunity in the very tradition-al and low-tech bookselling. In the beginning it was justa new kind of home delivery service, but Amazon in-troduced a very important novelty: a secure and well-protected use of credit cards. This allowed them toovercome traditional distrust of giving away personalinformation. It was the breaking point that led to awin-win game.A very demanding boss, Bezos has always played a

dominant role in his company. Everybody over the last

20 years has written about his obsession with the pri-macy of customers, his bullying attitude toward staff,his rude behavior with suppliers. ”Work hard, havefun andmake history” is Amazon’s slogan. In themid-1990s, Coll recalls, whenAmazon emerged as an onlinebookseller, publishers welcomed the company as a“savior” that could provide an alternative to the stiflingmarket power of that era’s dominant chain stores,Barnes &Noble and Borders. Book publishers with ex-ceptional foresight may have understood that they“had to view Amazon as both an empowering retailpartner and a dangerous competitor,” as Brad Stoneputs it in his book.Actually, Bezos is a multi-faceted entrepreneur. In

its early days of creative chaos, Amazon seemed towant to use the internet to expand the potential ofreaders and publishers alike. It hired writers and edi-torswho supplied critical advice about books and triedto emulate on Amazon’s website “the trustworthy at-mosphere of a quirky independent bookstore with re-fined literary tastes,” as Stone puts it.

But Bezos was also inspired byWalmart’s exampleof delivering low prices to customers and profits toshareholders by wringing every dime possible out ofsuppliers. As soon as Amazon had acquired significantmarket power it began to squeeze publishers for morefavorable financial terms. If a bookpublisher didnot ca-

The basic Kindle canhold up to 3,000 booksin its internal memoryand last for up to 3months withoutneeding charging.

A $69 Kindle readingdevice. Amazonunveiled the KindlePaperwhite and theKindle Fire HD in 7 and8.9-inch sizes.

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In 2006 Bezos launched the pioneer AWS (Ama-zon Web Service) a collection of remote computingservices located in ten geographical regions (USWestin northern California, USWest in Oregon, Brazil (SãoPaulo), Europe (Ireland), South Asia (Singapore), EastAsia (Tokyo), China (Beijing) and Australia (Sydney),comprising a cloud computing platform. And the tech-nological frontier extends further still. The next one isFire Phone a device with some impressive features,most notably its 3-D-like Dynamic Display, which al-lows navigation by tilting the device, and its Fireflyapp that can visually identifymillions of products andlink the user with information or a purchasing plat-form. “People like being surprised and charmed, butthe real danger,” wroteWiredmagazine, “is that Ama-zon has launched it with the samemistakemost everymobile device company makes: they’ve fallen toodeeply in lovewith the idea of delightful interactions.”Apparently Bezos has grand projects in web com-

munication and new technologies. He has just hiredBabak Parviz, who led the development team onGoogle’s high-tech spectacles. Parviz announced hismove on July 15 in cryptic fashion, posting Amazon’slogo on his Google+ page, with the comment “status:super excited.” In the past year, Google has been activein acquiring robotics and artificial intelligence com-panies, hiring experts in those fields for its Google X

laboratory, which is developingthe Glass headset and driver-less cars. The idea, shared byMark Zuckerberg, the founderof Facebook, is that glassescould become the next platformin computing. So it is clear thatBezoswants to play amajor rolein this field too, competingwithGoogle and Facebook.Amazon is already testing

drones to deliver parcels andlooking for permission fromUSauthorities to experiment nearthe headquarters in Seattle.Theflying robots, called Octo-copters, could carry packagesweighing up to 2.3 kilograms tocustomerswithin 30minutes ofthem placing the order. How-ever, it could take up to fiveyears for the service to start.TheUS Federal Aviation Adminis-tration has yet to approve theuse of unmanned drones for civilian purposes. ”I knowthis looks like science fiction, but it’s not,” Bezos said.The service will be called Prime Air, and it could revo-lutionize logistics and delivery.Visionary as it is, couldit become another killing innovation?Having reached the apex of his success, Bezos

boughtTheWashingtonPost – not throughAmazonbutwith one personal shell company – in August 2013 andstunned the world, as Brad Stone wrote in BusinessWeek. BobWoodward andCarl Bernstein’s old stompingground has suffered a 44% drop in revenue over thepast six years.DonaldGraham, the family scionwhosoldthenewspaper and related assets toBezos, saidhe couldnot in good conscience continue to lose his sharehold-ers’ money. Nor could he stomach further diminishingthe reputational value of the Post. Something had togive, or in this case, someone: Bezos offered 250milliondollars; that pricewas 17 times adjustedprofit, or about4 times whatmajormetro dailies usually fetch.Bezos has always loved thewrittenword. As a child

he devoured a library full of science fiction novels nearhis grandparents’ ranch in Cotulla, Texas, and he’s stilla voracious reader who tackles several newspapers aday on his Kindle. Books inspiredmany of hismost im-portant strategic decisions, fromAmazon’s origins as anonline bookstore to the creation of the Kindle andAmazonWeb Services to his cultivation of a frugal, ac-tion-oriented corporate culture – principles he pluckedright from the autobiography of SamWalton, the leg-endary founder ofWal-Mart Stores.Since the purchase, TheWashington Post has been

rising from its ashes. Bezos confirmedMarty Baron as

executive editor. In Spring 2014 the newspaperwon thePulitzer Price for covering the Edward Snowden leaksand cyber-spying at the US National Security Agency.The newspaper has also become increasingly critical ofthe Obama administration, attracting the disappoint-ed Democrats as well as the more libertarian point ofview. The atmosphere in the paper has changed radi-cally. ”We are full of enthusiasm,” declared the pub-lisher Katharine Weymouth, a member the Grahamfamily. And they are full of money, even though Bezosis a very cautious spender. The immediate decisionwas to invest in the digital edition but without reduc-ing the potential of the written paper that has alreadystarted to hire young journalists. The real strategy is tocombine both of them and make money, a bet no-body has won up to now.But Bezos has to face new challenges in his core

business, coming primarily from China. Alibaba, aname taken fromOne Thousand andOneNights, is al-ready big and it is about to become stronger in Augustafter the IPO on Wall Street. Unlike Amazon, whichbuys goods from suppliers and sells them to customers,Alibaba acts as a middleman, connecting buyers andsellers and facilitating the transactions between them.Its role is very similar to the one of eBay even if the Chi-nese group is not an auction company. Alibaba is a con-stellation of websites. Taobao, the biggest one, hasabout 760 billion products from seven million sellers.Merchants don’t pay to sell their products; just pay foradvertising and any kind of service offered by Alibaba.From this point of view it ismore similar toGoogle.Thesecondwebsite, Tmail is a sort of digital shoppingmall

pitulate, it would modify its algorithms to reduce thevisibility of the offending publisher’s books; within amonth, “the publisher’s sales usually fell by asmuch as40%,” Stone reports, and the victim typically returnedto the negotiating table. Amazon also jettisoned its in-housewriters and editors and replaced themwith an al-gorithm, Amabot,which relied on customer data ratherthan editorial judgment to recommend books. Thespreadof aggression and automationwithinAmazon asthe company grew larger and larger echoed the sci-ence fiction classics Bezos was a fan of.But hewas not satisfiedwith delivering only books.

He changed our way of reading and publishing. Thereal killing innovation was Kindle the first e-reader.According to Brad Stone, ”Bezos created publishingimprints that encouraged authors to experiment andsell their books directly to readers while collecting anabove-average royalty.Thiswas immediately framedbyobservers as an attack onAmazon’s oldest partners, tra-ditional publishers – and it was, in part. But Kindle Sin-gles, which distributes bite-size novellas, andKindle Se-rials, books that are meted out in chapters, have alsogivenwriters newways to find an audience and earn aliving. He’s attempting to do something similar withAmazon Studios, which backs original television showsand gives filmmakers an outlet for their work outsidethe usual Hollywood power structure.”

Amazon’s vicepresident of Kindle,Peter Larsen, displaysthe Amazon Fire TV, anew device that allowsusers to stream video,music, photos, gamesand more through theirtelevision, on April 2,2014 in New York City.

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The main entrance toThe Washington Poston August 5, 2013 inWashington, DC, afterit was announced thatAmazon.com founderand CEO Jeff Bezosagreed to purchase thePost for $250 million.

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stefano cingolani is a columnist for the Italian daily Il Foglioand author of Guerre di Mercato.

for big companies like Nike, Gap and Apple, whichopened a store on it. For that the company charges anannual fee aswell as a commission on each transaction.Alibaba has its own payment system called Alipay.Thebusiness model is a patchwork of different ones rang-ing from an e-version of a Chinese market to the lux-ury shopping centers, which pullulate in the presentmega-cities. Alibaba’s revenues are one third of Ama-zon’s but it is much more profitable with a margin of44% according to Yahoo, a major shareholder with astake of 24%, which has made a deal to keep a greatershare of its stake in the Chinese e-commerce groupwhen it goes public.The IPO planned for August, the biggest for a Chi-

nese company onWall Street, is going to raise up to $15billion, making its chairman Jack Ma even richer. Aformer English teacher in Hangzhou who togetherwith 17 other partners founded the online platform in1999, when internet in China was taking its very firststeps. So far Ma is different from Bezos because hedoes not want to change theway commerceworks; heis using theweb as a gigantic bazaar not as a tool to re-shape themarket. From this point of view, he is not yeta disruptive innovator.“Citizen Bezos” isn’t trying to kill the media busi-

ness; he’s trying to reinvent it, racing against the likesof Apple andGoogle to build themost comprehensivearray of devices and innovative online news and en-tertainment services, according to Stone: “In Bezos’simplied argument, Amazon’s catalytic creative de-struction, in the economist Joseph Schumpeter’sphrase, will clarify whowill prosper in an unstoppablyfaster, more interconnected economy.” So Amazon is

merely an instrument of an inevitable digital disruptionin the book industry, where the company is clearingaway the rust and cobwebs created by inefficient ana-log-era gatekeepers – i.e., editors, diverse small pub-lishers, independent bookstores, and the writers thissystem has long supported. “Yet the more Amazonuses its vertically integrated corporate power tosqueeze publishers who are also competitors,” Collwrote, “the more Bezos’s claim looks like a smoke-screen. And the more Amazon uses coercion and re-taliation as means of negotiation, the more it looks tobe restraining competition.”Who is right? Both the market-friendly Stone as

well as the liberal Coll touch important points. Com-petition is not a free lunch andwhen the innovator be-comes a dominant and successful boss, he is temptedby the fatal attraction of monopolistic behavior, untilhe decides to start a new enterprise. This is the bronzelaw of the business cycle. Bezos always opened newfronts as soon as he consolidated the previous con-quests. Could this strategy go on forever? His businessmodel (customer first, long vision, investing the prof-its, pointing on the share value) hasworked thus far, butwill it work in the future? Can Amazon go on skyrock-eting in the stock market to guarantee shareholdersever growingmarket values? Nobody knows, not evenBezos. But he is ready to change again, destroying andcreating, forever.

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SHARE PRICE

Sales, Q2 of each years

0

BREAKNECK GROWTH

$200

$16b

18-29

30-49

50-64

65+

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8b

4b

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0

AMAZON’S RECORDS IN 2013

WEAVING THE WEB: THE INTERNET’S GROWTH AND USES

30 TIMESMORE THAN WALMART

A PRESENCE WORLDWIDE... IN SELECTED COUNTRIES...

AND YOUTH LEADS THE WAY

Socialnetworkingand forums

16’

Norway95.1

Iceland96.6

Netherlands94.0

Bahrain90.0

U.K.89.8

U.A.E.88.0

Switzerland86.7

Japan86.3

South Korea84.8

U.S.A.84.2

Germany84.0

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74.5

Australia83.0

IN EACH HOUR OF THE DAY...

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40

60

20

1996 ’98 ’00 ’02 ’04 ’06 ’08 ’10 ’12 ’14(estimates)

** in billions of dollars* in millions of dollars

0

DEVELOPEDCOUNTRIES

WORLD DEVELOPINGCOUNTRIES

Individuals using the Internet per 100 inhabitants A sampling of countries that rank among the highest in % of individuals using Internet

For every hour that Americans spend online, the greatest proportion of time(roughly 27%) is spent on social networking and forums.

HEAD COUNTNumber of employees

But everyone else is catching up.The share of people in these age groups who use social media.

Entertainment (5’)

Shopping (3’)

Business (3’)

Lifestyle (2’)

News (2’)

Other

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REVENUES**PROFIT* MARKET VALUE**

230 MITEMS FOR SALE

(VOLUMES)

20’24’

Bookstores, even largechains such as Barnesand Noble, arethreatened byAmazon’s success.

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The talent scouts who gave Fred Astaire his firstscreen test were correct when they reported:“Can’t sing, can’t act.” But theymissed the point

of theman who becameHollywood’s most celebrateddancer.Thosewhodismiss the newAmazonFire Phonemay bemaking a similar mistake. The early reports ofproduct testers have been lukewarm. Tech bloggershave been skeptical that Amazon will be able to com-pete with Apple and Samsung. There is no pressingneed for a new smartphone. Amazon’s offering is notrevolutionary enough to justify the steep price of $649unlocked ($199 with a long-term contract). Yet, theseskeptics aremissing the point of the newphone, whichis a machine not for talking but for shopping.

Amazon is trying to attract customers to the FirePhone with three main features. The first is an almostgyroscopic systemof cameras that will permit users todo by tilting and leaningmuch of what they nowdo bydragging and tapping. This “dynamic perspective”sounds like an advantage in theory. In practice it mayfeel like one of those rolling-ball games that leave theplayer feeling frustrated and slightly queasy. It is fortop-end users. Those less comfortable with cutting-edge handset technology may find useful the Fire’ssecond heavilymarketed feature – a “MayDay” instanthelp service. Others may value the third – free Cloudstorage for photos – but such storage is getting cheap-er all the time for those who want it.

The phone’smost striking feature is its “recognitionengine,” Firefly. It is the offspring of Amazon’smost no-torious and excoriated innovation ever – the PriceCheck app, which Amazon introduced in 2011. PriceCheck allowed users to scan bar codes in shoppingmalls and main street stores, compare prices at Ama-zon, and then to order online. To its detractors it was aform of outright piracy, allowing Amazon to “borrow”the commercial spaces other companies had paid forand use them as showrooms. Unregulated, it wouldportend the end of almost all physical retail. Amazonseemedbent not just on entering but on cornering a va-riety of retail markets. In terms of shopper choice,there has always seemed to be something not verycapitalist about theworld that would result fromAma-zon’s kind of capitalism. The most obvious rivals toAmazon over the long term are its Chinese equivalentAliBaba and its Indian one Flipkart.

Firefly is a much more ambi-tious iteration of Price Check. It al-lows the scanning and identificationnot just of bar codes but also of ob-jects. It will also, like the app Shazam, al-low you to identify snatches of songs andmovies. It has impressed reviewers deeply.Thewriter for the tech design blog Gizmodowrote, “Not only was it effective, it was kind ofbeautiful.”

No wonder Firefly is well designed. It is thephone’s raison d’être. Howevermuch itmay do forthe customer, it does much more for Amazon. LikeAmazon’sMusic App or its Fire TV, which uses an appcalled ASAP to chart people’s viewing habits and sug-gest new shows and movies to watch, Firefly conveysthe buyer’s wants directly to the company. Howdoes itdo this?There is a curious aspect to the Firefly function– the button for using it is the camera button. Perhapsthe offer of free online cloud storage is not just a bonusfeature but a functional necessity.

Amazon is in the business of customer psychology.Firefly is a powerful tool in understanding the objectsthat attract people at a basic level. It fits perfectly withCEO Jeff Bezos’s philosophy of reducing as close tozero as possible the “friction” between an urge and apurchase. (Hence such Amazon innovations as “One-Click” buying.) The concept is becoming more andmore central to cyber-commerce, at least in the Unit-ed States, where instant-shopping sites have flour-ished in recent months. Drizly is a cyber-liquor storethat rushes alcohol to thirsty customers in four cities(Boston, NewYork, Chicago and Los Angeles) in as lit-tle as 20 minutes. Burpy delivers groceries to majorcities in Texas. Postmates (in San Francisco) is an all-purpose deliverer that has branched out to a dozen oth-er cities. A desire to maintain control over the onlineshopping trend it pioneeredmay bewhy Amazon feelsthe need to produce a smartphone, andnot just an app.

There is a tension in the Amazon Fire Phone. Itdoes four innovative things, three of which serve thecustomer and one of which serves Amazon – and theone that serves Amazon is the only one that is really im-pressive. There will not be enough interest in the cus-tomer-centered functions to make immediate moneyfor the Amazon-centered function.

But to repeat, Amazon’s business model is not ori-ented around immediate profits. It is oriented aroundinformation that will produce long-termprofits. And itmay not require a lot of customers to accumulate sig-nificant amounts of information. It is another of the in-novations thatmake cyber-commerce exciting for bothsellers andbuyers.The excitement for sellers is, like thatof anticipating a big profit, shadowed by uncertainty.The excitement for buyers is, like that of entering a casi-no, shadowed by risk.

Playing with Fire

Rather than “reach out and touch someone,” the newAmazon Fire Phone is urging its potential owners toreach out and buy something – cheaper. Retail maynever be same again.

Amazon’s %rstsmartphone, the Fire

Phone, was presentedby founder Jeff Bezos

on June 18, 2014 inSeattle, Washington.

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Christopher Caldwell is senior editor at e Weekly Standardas well as a regular contributor to the Financial Times.

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Amazon’s latest move into drone delivery marksthe beginning of a newera for theworld’s largeste-commerce player, an era in whichwhat used

to be an almost impalpable,mostly digital giant resortsmore and more to physical supports and vertebrae.With the benefit of hindsight, one can in fact argue thatthe key defining feature of Amazon has always been itsrelentless endeavor to renew itself, and constantly re-morph its contours in a contemporary version of acombine that provides a very large numbers of servic-es for the wider public – almost a public service, onedaresay. This should not come as a surprise, becauseEuropean history shows that private operators – underthe umbrella of empires – played a pivotal role in thedevelopment of modern communications. In the late15th century, for instance, Emperor Maximilian I cre-ated the firstmounted courier service that linked Brus-sels with France, Italy (via Innsbruck) andVienna (viaSpeyer and Augsburg). This service also accepted pri-vatemail. This new regular postal service soon provedto be a success. While it was the aristocratic familyThurn undTaxis that built the postal service on behalfof the empire, the counts of Thurn-Valsassina undTaxis took the project into their hands in Tyrol and inthe Austrian pre-alpine regions. The Paar family wasgranted the postal rights inmost hereditary lands of theAustro-Hungarian Empire.This lasted until 1722, whenCharlesVI declared the postal service to be a statemo-nopoly. UnderMariaTheresa and Joseph II, the postal

service was standardized by the introduction of postalcarriages with regular service.

In a way, continuous innovation and cross-polli-nation has always been in the DNA of postal, deliveryand, more generally, communications services. The18th century, for instance, was a time of numerousimportant innovations in the area of postal services.Some of these key innovations can be attributed toAustrians.We owe the first “modern-day” postmarks tothe royal postal officer Johann Georg Khumer ofFriesach,who introduced them in 1787. Innovations in-troduced after 1800 included letterboxes, money or-ders, cash-on-delivery items and – stamps. The Aus-trian tax officer Laurenz Koschier had submitted aconcept for the introduction of stamps back in 1836,but he was ahead of his time. It wasn’t until the firststamps were introduced in 1840 in England that theidea of stamps caught on in Austria. The first Austrianstamps were produced in 1850, making Austria the15th country in the world to introduce “adhesive letterlevy stamps.” The first postmark that imprinted exactinformation about time and location on the letters

was introduced in 1867. The first predecessors of thepostcardwere introduced in the second half of the 19th

century, followed by picture postcards shortly there-after. In 1869, Dr. Emanuel Herrmann, an economicsprofessor in Klagenfurt, had a far-reaching idea. Heproposed a never-before-seen option of sendingmail:simple “postcards,” no bigger than an envelope thatone could send“open through the postal service.”Thisidea was enthusiastically received and in the sameyear, the first “correspondence cards” were producedin Austria. Theywere a resounding success: asmany as1.4 million pieces were sold in the very first month. In1885, private personswere granted the right to producesuch cards.This was yet another step towards the post-card’s worldwide success. In the late 19th century,telecommunications also saw great progress followingthe invention of telegraphy in 1847.Mail servicesmadegreat progress towards the end of the 19th century, es-pecially because trains greatly increased mobility, atleast by yesterday’s standards. However, it took a longtime and quite a fewnegotiations until a business part-nership between the postal service and the railway

service was signed. It wasn’t until 1850 that the first“royal post office on rails” started operating on theroute that connectedVienna toOderberg. In 1914, ap-proximately 700 train carswere used for shippingmail.In 1907, the first steps towards creating a car-basedpostal service were taken.Mail was not onlymoved onrails and roads, but also took to the air shortly after thefirst airplanes were invented. As is often the case, mil-itary interests accelerated the introduction of swiftcommunication channels. The first airmail service,created in 1915, carried combat orders and messagesrelevant for war. The first civil airmail service startedoperating betweenVienna andLviv in 1918. Servicewasfirst limited to Europe and extended to overseas desti-nations in 1928. Since postal services were largely de-pendent upon the available means of transportation,resourceful postal employees invented the so called“pneumatic tubemail facility,” which started operatinginVienna in 1875 and was used to move telegrams.

Amazon launched its website in July 1995 to sellbooks online. Bezos’s idea was to provide low prices,vast selection and convenience to customers by creat-

The Empireof Flying Pizzas

Much as the postal service combinedwith newmeans of transportation,Amazon’s foray into same-day deliverymay mark the beginning of an era thatwill set our skies abuzz.

Amazon is busy testingits octadrones for theirPrime Air deliveryservice.

by francesco galietti

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ing a virtual store with unlimited inventory and lowfixed cost. Amazon reliedmainly on a“hub-and-spoke”model of distribution: a large central warehouse servesas a hub from which orders travel in different direc-tions, or “spokes.” A typical Amazon order will go froma distribution center – the Amazon hub – to a UPS orFedEx sorting facility (another hub), from which theyare then divided up among trucks tomake local deliv-eries. Soon Amazon expanded its product line intomusic, movies, electronics and general merchandise.In November 2000, Amazon launched itsmarketplaceto allow third-partymerchants to use its platform to selltheir products. By 2012, almost 9%-12% of Amazon’sannual revenue came from its marketplace, wheremerchants paid 6%-15% of their revenue to Amazon.

In 2002, the company launched AmazonWeb Serv-ices (AWS) to provide cloud computing services to alarge number of companies, not just Amazon’s third-party retailers. AWS provided firms an elastic infor-mation technology infrastructure that could be ex-panded at a low cost on a need basis. Bezos continuedto invest heavily in AWS even though it accounted forless than 5%of Amazon’s annual revenue by the end of2012.The cloud computingmarketwas growing rapidlyand it was highly competitive, with large technologyplayers such as IBM and Microsoft vying for a domi-nant share.

In 2006, Amazon launchedUnbox, later rebrandedas Amazon Video-on-Demand, which allowed con-

sumers to instantly streamvideos on their laptops, andtablets. By 2013, Amazon In-stant Video offered a large se-lection ofmovies andTV showsto consumers, andwas catchingup with competing servicesfromNetflix and Apple. In 2011,in partnership with WarnerBrothers, Amazon introducedAmazon Studios to produceoriginal content formovies andshows. Later, if formed multi-yearmulti-billion-dollar licens-ing agreements withViacom tobring hundreds of TV shows toits Instant Video Service.

In 2007, Amazon introducedKindle to compete with Apple’siPad and other tablets. Kindlewas priced significantly lowerthan the iPad and other com-peting tablets, and provided aconvenient device for con-sumers to shop and downloaddigital books and movies fromAmazon’s store. In July 2012,

Amazon acquired UpNext, a 3D mapping company,putting the company on a collision course with Apple– as well as Google Maps. The same week, there wererumors that Amazon was planning to launch a smart-phone in late 2013. Amazon had already built an App-Store that was available to millions of consumers innearly 200 countries and which rivaled Google andApple’s AppStores for apps and games.

In its early days of e-commerce, Amazon had pio-neered the recommendation system that allowed it tosuggest books,music and videos to its customers basedon the purchases of other customers with similar pref-erences and buying patterns. In 2011, Amazonlaunched its own advertising network to serve target-ed ads to customers. A customer who visited Amazonfor, say, a camera but did not buy, could be tagged andserved a camera ad later when that customer visited acamera or photography related site. In 2012, Amazongenerated $610 million in ad revenue from its ad net-work, which was expected to increase to $835 millionin 2013.

On August 5, 2013, Jeff Bezos, founder and CEO ofAmazon decided to buy The Washington Post newspa-per for $250million. A few weeks earlier, Amazon hadannounced financial results for its second quarter of2013 and reported sales of $15.7 billion. So far the fi-nancial markets have rewarded Amazon for its long-term vision andboldmoves – its stock had risen almost17,000% since the company went public. This has al-

lowed Bezos to diversify intowhat some saw as unrelatedbusiness, while others see as anevolutionary process.

A few weeks ago, Amazonwas asking the US Federal Avi-ation Administration permis-sion to use drones as part of itsplan to deliver packages to cus-tomers in 30 minutes or less.The online retailer created amedia frenzy inDecember 2013when it outlined aplan onCBS’s60 Minutes to deliver packageswith self-guided aircrafts thatseemed straight out of sciencefiction. In a letter to the FAAdatedWednesday, Amazon saidit is developing aerial vehiclesas part of Amazon Prime Air.The aircraft can travel over 50miles per hour and carry loadsof up to 5 pounds. About 86%ofAmazon’s deliveries are 5pounds or less, the companysaid. The FAA allows hobbyistsandmodel aircraftmakers to flydrones, but commercial use ismostly banned. Amazonis asking for an exemption so it can test its drones in theUS. The Seattle company says its drone testing willonly take place over Amazon’s private property, awayfrom airports or areas with aviation activity – and notin densely populated areas or nearmilitary bases. TheFAA is slowlymoving forwardwith guidelines on com-mercial drone use. Last year, Congress directed theagency to grant drones access to US skies by Septem-ber 2015. So far, two dronemodels – Boeing and the In-situ Group’s ScanEagle, and AeroVironment’s Puma –are certified to operate commercially, but only in Alas-ka. One is being used byBP to survey pipelines, and theother is supporting emergency response crews for oilspillmonitoring andwildlife surveillance, according tothe FAA.

Although this is just in its infancy, drone deliveryseems to represent a genuine paradigm shift fromAmazon’s initial hub-and-spoke logistics. In fact, dronedelivery is meant to ensure same-day delivery, whichrequires a point-to-pointmodel. In the hub-and-spokemodel, the additional steps of connectingwith a same-day shipper take too much time to actually make adelivery on the same day. Instead, merchandise musttravel straight from its origin to the customer, which atany kind of distance becomes deeply inefficient. InSan Francisco, for example, the nearest Amazon dis-tribution center is roughly 60miles to the east. To havea single order brought that far by truck on the “on de-

mand” timetable required by same-day delivery is pro-hibitively expensive compared to the 120 packages anaverage UPS truck can hold.

Even if the numberswith point-to-pointmaynot bequite right now, Amazon’s story reflects its attitude vis-à-vis the future: backcasting and not forecasting. Back-casting starts with defining a desirable future and thenworks backwards to identify policies and programsthat will connect the future to the present. The funda-mental question of backcasting asks: “If wewant to at-tain a certain goal, what actions must be taken to getthere?” Forecasting, on the contrary, is the process ofpredicting the future based on current trend analysis.Backcasting approaches the challenge of discussingthe future from the opposite direction. So, even ifpoint-to-point still doesn’t make much sense today,what really matters to Amazon is whether it will makein the future – for which it is already preparing.

Employees select anddispatch items in thehuge Amazon“ful+lment center”warehouse onNovember 28, 2013 inPeterborough, England.

The Princely House ofThurn and Taxis is aGerman noble familythat was a key playerin the postal servicesin Europe in the 16th

century.

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francesco galietti is the founder and CEO of Policy Sonar, aRome-based independent political risk consultancy. He is also analumnus of SingularityUniversity 2010 graduate studies programin exponential innovation.

Potomac watch

longitude #41 - 107

Potomac watch

“Pitchforks, anyone?” Duringthese lazy, hazy, crazy days of atypically muggy Washington

summer, this call-to-arms sounds particu-larly far-fetched.Who on earth would creepout of his air-conditioned bunker to uttersuch nonsense? In the US capital, August isthe month when political life enjoys a briefseason of lethargy as Congress goes on re-cess, and politicians and bureaucrats alikedrift through their daily chores until LaborDay weekend at the beginning of Septem-ber, when normal cutthroat partisan war-fare resumes in earnest.

This year, however, is different. Repub-licans smell blood in what they perceive tobe a much-diminished President Obama,weakened as a world leader and ineffectiveon the domestic front. As a result, they haveset their sights on capturing the Senate intheMidtermelections nextNovember. And,unless they fail to get their act together(which, being split as they are, is also a pos-sibility) they may well achieve their goal.

If the Senate falls to the Republicans,and with the House of Representatives al-ready firmly in their hands, the two re-maining years of Obama’s final term wouldlikely relegate him to the humiliating statusof “lame duck” constantly squeezed be-tween two bad options: either compromisewith an unforgiving GOP whose real ob-jective is to destroy his presidency; or courtparalysis and risk a constitutional crisis bytrying to run the country against Congressand mostly by decree.

But for the former hero of the “Yes WeCan” campaign of 2008, the endgame doesnot necessarily have to play out this way.Relief for the beleaguered president is com-ing from unexpected quarters – not fromthe often demonized “liberals” the Repub-licans love to hate, and not from the rela-tively impoverished and frustrated middleclasses, who in 2008, and then again in2012, rooted for Obama at the polls. In-stead, the President’s new and unexpectedcheerleaders are a small but seriously richdemographic who would normally be seensupporting a conservative agenda.

These “enlightened” multi-billionaires,such as Bill Gates, Warren Buffett and theformer Mayor of New York Michael

Bloomberg, have long warned that the cur-rent pattern of wealth accumulation in thehands of a tiny minority of less than 0.001%– while the impoverished middle class lan-guishes under water with its mortgages andpersonal debts, including masses of grad-uates struggling or failing to repay theirstudent loans – is not only unfair, but desta-bilizing and unsustainable.

Now, a close associate and investor inJeff Bezos’s Amazon.com (the global elec-tronic commerce behemoth worth $123billion) has joined the fray with a rough-edged 21st-century neo-capitalistmanifestopublished on Politico.com under the head-line: “The Pitchforks Are Coming… For UsPlutocrats.”

The author, Nick Hanauer, an other-wise undistinguished philosophy graduatefrom NewYork with no technical or mana-gerial know-how, became the first non-family investor in Amazon.com and thenfounded, co-founded or funded more than30 companies, including part-ownershipof a bank, and aQuantive, an internet ad-vertising company that was sold to Mi-crosoft in 2007 for $8.4 billion in cash. Nota tycoon in the big league, by any means,but with a net worth of some $1 billion –still more or less on par with Madonna.

“You probably don’t know me, but likeyou I am one of those .01%ers, a proud andunapologetic capitalist,” Hanauer sarcasti-cally tells his fellow billionaires. “And alsolike you, I have been rewarded obscenelyfor my success, with a life that the other99.99% of Americans can’t even imagine...Now I own a very large yacht.”

How did he do it? Hanauer explains thathard work and “talent” (that magic pass-word that, crisis or no crisis, tries to legit-imize grotesquely inflated bonuses for theMasters of the Universe of business) are farless important than connections, a hightolerance for risks and an intuition aboutwhat is likely to happen in the future. But hefrankly admits that the current economicpattern is unsustainable and ultimatelydoomed. “What do I see in our future now?I see pitchforks.”

Hanauer may have a point. While bil-lionaires are thriving, the rest of the UnitedStates – the 99.99% – is lagging far behind.

At a superficial level, the economy is grow-ing, even if not enough to fully wipe out thewreckage caused by the Great Recessionsix years ago. Sure, unemployment is downto 6.1% and hundreds of thousands of newjobs are being created – though many areadmittedly of low-quality and low salary.

But with trophy condos showing offtheir $90 million penthouses bubbling upeverywhere, and the Dow Jones busy cele-brating its rise above 17,000 points for thefirst time in history, the signs that the gapbetween the haves and the have-nots isgrowing, at what the former Federal Re-serve chief Alan Greenspan might havecalled an irrationally exuberant rate, arehard to ignore.

To give just one example, since 1950 theCEO-to-worker pay has increased 1000%,with chief executive officers who used toearn 30 times the median wage now rakingin 500 times that. Economists, includingthe Nobel Prize winner Joseph E. Stiglitzandhis highly fashionable French colleagueThomas Piketty, the author of Capital in

the Twenty-First Century (who controver-sially advocates a global wealth tax), areincreasingly concerned about inequality.But politically in the US the issue is so di-visive as to be effectively a non-starter.

Some might say that while it’s not quite“Morning in America,” as president Rea-gan once optimistically declared, the fu-ture for the world’s largest economy ap-pears to be relatively bright. But is it really?Most Americans are unconvinced.The US,they believe, is on the wrong track, withonly 26% approving, and 63.5% disapprov-ing of the country’s direction, according toa recent Real Clear Politics poll.

The debate on inequality and the econ-omy is in fact strangelyunfocused,with con-servatives arguing for that mythologicalcreature, the “freedom of choice,” and at-tacking anything that smacksof governmentand state, while progressive “welfare sta-tists” devoutly see salvation in generouspublic intervention and social engineering,without bothering too much to explainwhere the money will come from. Maybe,

with crumbling infrastructures such as theonce-admirable andnowpoorlymaintainedinterstate highways, built under theRepub-lican president Dwight Eisenhower withgasoline taxes and federal money, the neg-lected railroads, themediocre state schools,and an above-ground electrical grid whereblack-outs are as normal as thunderstormsinAugust, politicians inWashingtonwill oneday decide to get real withwhat needs to bedone – even if, as St. Augustine once saidabout chastity, “not yet.”

The central issue in the 21st century iscalled “governance.” It is no longer the oldand tired dichotomypublic-private, or evenBill Clinton’s once-popular slogan “it’s theeconomy, stupid,” which today rings datedand hollow.

It’s good governance, stupid.

by renzo cianfanelli

Getting the economy back ontrack is not enough if the onlyones who really benefit are thesuper rich. As the wealth gapwidens, the government willneed to lay off the laissez-faire.

The wealth of nations

renzo cianfanelli is currently based at the UnitedNations in New York. As a war correspondent forItalian daily Corriere della Sera, he has reportedon most recent con�icts, from Bosnia to Iraq.

106 - longitude #41

The Million DollarHome page is one ofthe early successstories of the internetgenerated market.Created by Alex Tew in2005 to raise money forhis student fees itquickly grew intosomething bigger.

MDHP

Venice International University (VIU) issomething unique in the international academic panorama: a group of Universities from all over the world sharing a common campus on the serene island of San Servolo, in the Venice lagoon. All involved in jointly creating interdisciplinary programs that go beyond the traditional academic curricula. A novel approach to face the global challenges of today: Sustainable Development, Climate Change, Innovation and Entrepreneurship, Population ageing, Global ethics, and the preservation of Cultural heritage.

We are convinced that these questions cannot be adequately addressed if not together, across national and cultural borders, through a constructive collaboration between universities, from different countries and continents, bridging the worlds of academia, governments and business.

We established therefore a new methodology based on joint in-depth discussions and collegial decision-making, which give rise to specific courses and research programs to address these global challenges.

The students of VIU are led to understand that social unrest, ecological devastation and market disturbances - no matter how near or far - have a real impact on business, capital and trade flows, public opinion and productivity. Day after day we try to explain to them how important it is to close the gap between the adoption and the implementation of principles, between “say and do”. They return to their home universities after spending time at VIU and in Internships holding a new view of the globalized world and a new approach to the challenges it presents. We help to form responsible citizens andfuture leaders from very different cultures who are aware that the fundamental objective is to find solutions that ensure a fair, prosperous and lasting development.

VIU organizes two semesters of courses on Globalization issues in Fall and Spring, focusing on Cultural Heritage and Sustainable Development respectively. VIU promotes research programs with the Universities in its network and regularly develops summer schools, workshops, and conferences, to establish and reinforce research networks involving the scientific community at large. Advanced training opportunities are available to policy makers, civil servants and other government officials, with special attention to developing countries. The VIU Multimedia Laboratory provides students with special training in the use of the latest digital visualization tools applied to cultural heritage and environmental management.

Venice, with its lagoon, its islands and its mainland, is a living laboratory which isalso very fragile, with an extraordinary cultural and environmental heritage: the perfect setting for studying some key aspects of today’s global challenges.

VIU Members: Boston College, USADuke University, USA European University at St. Petersburg, RussiaInstitut National de la Recherche Scientifique, Canada Ministry for the Environment, Land and Sea, ItalyKoç University, Turkey Ludwig-Maximilians-Universität, GermanyNational Research Council, ItalyProvince of Venice, Italy Tel Aviv University, Israel Tongji University, P.R. China Tsinghua University, P.R. ChinaUniversity Ca’ Foscari Venice, ItalyUniversity IUAV of Venice, ItalyUniversity of Lausanne, SwitzerlandUniversity of Padova, ItalyWaseda University, Japan

For further information, please visit: www.univiu.org

longitude #41 - 111

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Muhammad was a merchant, so it should comeas no surprise that the Quran and Islamiclaw forbids neither capitalism, nor the mar-

ket, nor private propriety. But in Islamic jurisprudence,fiqh, every form of interest is considered riba, or usury,and thereforeharam, forbidden. It is not just a problemof Islamic orthodoxy. Greek philosophy and Jewishethics, too, condemned some instances of interest asimmoral, and the Fathers of the Church followed suit.Dante Alighieri, in his Divine Comedy, sent interestlenders to hell, in a desert of flaming sand with fieryflakes raining from the sky. But since an economy with-out the lubricant of credit works poorly, many loop-holes for allowing interest were created. For instance,leaving the lending to a few“infidels,” exempt from therigors of religious law. So in the Middle Ages not onlydid the Jews lend to Christians and Muslims, but alsoChristians to Jews and Muslims to Christians and Jews.Another idea was the invention of the anonymouscompany, which had no soul to be damned. But in thelong run not all interest was considered usury, only ex-cessive interest. Already in 528 AD, Justinian estab-lished a legal interest rate of 6%. Thomas Aquinas ac-knowledged the right to compensation, know as lu-crum cessans. In 1462 the first Mount of Piety wasfounded in Perugia, to fight exorbitant interest rateswith moderate ones. In 1515 a Papal Bull by Leo X de-clared interest licit, as long as it was moderate.

Islam, on the other hand, kept the medieval bans,and also considered aleatory contracts haram. Usurers

and gamblers went on to flourish at the interstices ofsociety, but modern banks and insurance companiesonly gained footholds with Western colonialism. In1963 the Misr Ghams Savings Bank was founded inEgypt, the first institute that tried to depurate theWest-ern institution from all contracts not deemed consis-tent with Islamic ethics. On the basis of this pioneer-ing example, in 1975 the Lahore Summit of the Islam-ic Conference recommended the creation of an Is-lamic Development Bank able to foment the growth ofcredit institutions “consistent” at every level. In themeantime, the first oil shock had put at the dispositionof the producer countries, most of them Islamic, a glutof petrodollars with which to finance the operation.

But how is it possible to secure remuneration whileavoiding riba? The general formula is to associate thefunding with entrepreneurial risk, the specific solu-tions are many. Mudarabah, for instance, is a specialkind of limited partnership similar to the GermanKommanditgesellschaft or the Italian accomandita,where one partner gives money to another for invest-ing it in a commercial enterprise. The capital invest-ment should normally come from both partners. Bothshould have some skin in the game.With mudarabah,one party provides 100% of the capital and the otherparty provides its specialized knowledge to invest thecapital and manage the investment project, or its work.Profits generated are shared between the parties ac-cording to a pre-agreed ratio. If there is a loss, rabb-ul-mal, the first partner, will lose his capital; the mu-darib, the other party, will lose the time and effort in-vested in the project. Indeed the bank can have aneven greater remuneration than with usurious interest,but it is involved in the risk.

Musharakah is also a limited partnership, but theother party has to provide a part of the capital. A jointventure is thus created between two parties or more, todivide the net profit and loss pro rata. This is oftenused in investment projects, letters of credit, and thepurchase of real estate or property, instead of loans and

mortgages. In the case of real estate or property, thebank assesses an imputed rent and will share it asagreed in advance.

As an alternative to these forms of limited part-nership, the bank can buy the good and then sell it tothe other party at a higher price. If the bank is paid ina fixed term it is murabaha; if the bank is paid in in-stallments it is bay’mu-aggal. The bank is not com-pensated for the time value of money outside of thecontracted term, but the asset remains as a mortgagewith the bank until the default is settled. The bank canalso buy goods to be produced with an advance pay-ment. If a farmer sells his future crop to the bank, it iscalled bay salam, the Islamic equivalent of agricultur-al credit; whereas the Islamic equivalent of the indus-trial or artisanal credit is bay’al-istisna.

Ijarah in Islamic banking is the equivalent ofWest-ern leasing. Selling the benefit of use or service for afixed price or wage, the bank makes available to thecustomer the use of service of assets and equipmentsuch as plants, office automation or motor vehiclesfor a fixed period and price. In the ijarah thumma albai’ the parties sign two contracts. The first contract,the ijarah, outlines the terms for leasing or renting overa fixed period, the second contract, the bai triggers asale or purchase once the term of the ijarah is com-plete. For example, in a car financing facility, a cus-tomer enters into the first contract and leases the car

from the owner (bank) at an agreed amount over aspecified period. When the lease period expires, thesecond contract comes into effect, which enables thecustomer to purchase the car at an agreed price. Thistype of transaction, where the bank generates a profitby determining in advance the cost of the item, itsresidual value at the end of the term and the time val-ue or profit margin for the money being invested inpurchasing the product to be leased for the intendedterm, is similar to the contractum trinius used by Eu-ropean bankers and merchants during the Middle Agesto sidestep the Church’s prohibition on interest-bear-ing loans. In the ijarah-wal-iqtina the Islamic bankprovides equipment, buildings, or other assets to theclient against an agreed rental together with a unilat-eral undertaking by the bank or the client that at theend of the lease period, the ownership in the assetwould be transferred to the lessee. The rentals as wellas the purchase price are fixed in such manner that thebank gets back its principal sum along with profit overthe lease period.

All Islamic banks provide current accounts to theirclients. Depositors authorize the bank to use theirfunds at its own risk, and their accounts are nominat-ed and structured on the basis of amanah, trust or fi-duciary contract, or al-qard al-hasan, benevolent loan,without remuneration. The latter was created by Is-lamic law for the poor, but today is used also for en-

Banking minusthe interest,or so it seems

The history of banking has long dealt with the issueof usury. In Islamic banking the general rule is that allparties concerned in the transaction must share someof the risk. Over time, many ingenious ways ofcircumventing the proscription against interest havebeen devised.

Leading the wayamong traditionalbanks offering Sharia-compliant services isBanque Misr.


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longitude #41 - 113

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112 - longitude #41

Finance

trepreneurs and companies in trouble, aswell as for de-velopment cooperation. The ban on interest can alsobe bypassed by the hibah, a “gift” that is given volun-tarily by a debtor in return for a loan. Hibah usuallyarises in practice when Islamic banks voluntarily paytheir customers a gift on savings account balances,representing a portion of the profit made by usingthose savings account balances in other activities. Is-lamic law accepts it because it is at the sole discretionof the giver, and not a contractual obligation made inadvance between the parties.

Islamicbanks can also operate investment accountson behalf of individuals or companies for a specific pe-riod (3, 6, 9, 12months, ormore), thehisabat.The returnon investment is determined according to the actualprofits earned from the investment operations under-takenby the bank.During the investment period (lock-upperiod), depositors donothave the right towithdrawfrom their accounts. However, withdrawals may be al-lowedunder extremecircumstanceswherebydepositorsare no longer entitled to their share of the profit for thewithdrawn amount. There is also a kind of savings de-posits, whichmay reward their holderswith someprof-its on the principle of al-wadi’ah, safe custody. In gen-eral, the bank requests permission to use funds mobi-lized through savings deposits so long as these funds re-mainavailable to thebank.Thedepositors canwithdrawtheir funds at any time and the bank guarantees to re-fundwhenever instructed to do so.The bankmay, at itsown discretion, assign a portion of any investment re-turns from time to time. Somebanks calculateprofits on

the basis of the minimum bal-ancemaintainedby a client for amonth or so. Depositors partic-ipate in theprofits of savings ac-counts with effect from the be-ginning of the month followingthe month of depositing. How-ever, certain banks don’t calcu-late profits with effect from thebeginningof themonth inwhicha withdrawal was made. Thebank can also receive from theclient a wakalah, a representa-tion to undertake transactionson his behalf, similar to a powerof attorney.

Amwal on the other hand isan Islamic fund. It is very similarto conventional funds in theway they are established. Thesefunds need to have a manager,because conventional funds areIslamically acceptable only ifthey carry the concept of risk-sharing among all participants.

But above all that, an Islamic fund cannot have for ob-ject an act that isharam (sinful) or any other act whichviolates Islamic law, so it may not invest in highly spec-ulative instruments or in interest providing instru-ments, or in certain industries like those involving al-cohol, gambling, or pork. Also, an Islamic fundneeds tohave a sharia supervisory board that supervises theobjectives of the fund and the nature of instruments inwhich the fund is intending to invest andwhich verifieswhether it is sharia compliant or not.

Indeed, in the 19th century many Islamic powersissuedbonds,whichweremainly bought byWestern in-vestors. Because of the Egyptian debt problem in 1882,the British occupied it. The Ottoman bond was verypopular too, mainly among French rentiers. But todayIslamic financehas also invented a kindof financial cer-tificate that would be the Islamic equivalent of bonds,called sukuk. But since a conventional bond is a prom-ise to repay a loan for a fixed interest forbidden by theIslamic law, sukuk constitutes partial ownership in adebt, sukuk murabaha; in an asset, sukuk al ijara,which is also tradable; in a project, sukuk al istisna; ina business, sukuk al musharaka; or in an investment,sukuk al istithmar. According toGlobal Islamic FinanceReport 2012, $1.34 trillion of assets in sukuk are beingmanaged according to Islamic investment principles.

Insurance is also a problem for the Islamic econo-my. Takaful is an alternative form of coverage that aMuslim can avail himself to against the risk of loss dueto misfortunes, based on the idea that what is uncer-tain with respect to an individual may cease to be un-

certain with respect to a very large number of similarindividuals. Insurance by combining the risks of manypeople enables each individual to enjoy the advan-tage provided by the law of large numbers, and this sys-tem was used in the age of the Prophet himself.

As of 2005, sharia compliant financial institutionsrepresented approximately 0.5% of total world assets.By 2009, there were over $822 billion in assets beingmanaged in over 300 banks and 250 mutual fundsaround the world complying with Islamic principles.Iran, after the Revolution of 1979, was the first countryof the modern world to develop a wholly Islamic fi-nancial sector, followed by Sudan and Pakistan. In2009 Iranian banks accounted for about 40%of total as-sets of the world’s top 100 Islamic banks. Bank MelliIran, with assets of $45.5 billion came first, followed bySaudi Arabia’s Al Rajhi Bank, Bank Mellat with $39.7 bil-lion and Bank Saderat Iran with $39.3 billion. Iranholds the world’s largest level of Islamic finance assetsvalued at $235.3 billion, which is more than double thenext country in the ranking, with $92 billion. Six out often top Islamic banks in the world are Iranian. Qatar,Indonesia, Saudi Arabia, Malaysia, United Arab Emi-rates andTurkey in 2012 represented 78% of the inter-national Islamic banking assets excluding Iran.

Debate is open, because on December 2, 2002 thecollection of interest in the context of bank depositswas legitimized by a fatwa issued by the Al-Azhar In-stitute of Islamic Jurisprudence inCairo, considered themost important theological and juridical center in theSunni world – although many radical Islamists contestthis supremacy because of its notorious dependenceon Egyptian political power. This fatwa follows Azhar’sview that interest is simply a form of profit on a mu-darabah and characterizes the depositor-bank rela-tionship as that of an investor and his investment agentand legitimized collection of a fixed profit percentage.“Allah (Most High) said: ‘O people of faith, do not de-vour each other’s property unjustly, but let there beamong you trade by mutual consent,” is the Quranverse quoted by the fatwah. “In other words, O youwho have the proper faith in Allah, it is not permissi-ble for you, and not proper for any of you, to devour theproperty of another in invalid and forbidden ways thatAllah (MostHigh) has forbidden – such as theft, usurpa-tion, riba, and other acts that Allah (Most High) has for-bidden. However, it is permissible for you to exchangebenefits among yourselves through transactions initi-ated by mutual consent in a manner that does notmake permissible what has been forbidden, or makeforbidden what has been permitted. This applieswhether the mutual consent is established verbally, inwriting, by physical signaling, or in any other way thatimplies mutual acceptance and agreement of the twoparts. In this regard, there is no doubt that mutualagreement over pre-specification of the profit is ac-

ceptable legally and logically, so that each party mayknow his rights… In summary, pre-specification ofprofits for those who invest their funds through an in-vestment agency with banks or other institutions islegally permissible, and above legal suspicion. Thistransaction belongs to the domain of benefits thatwere neither explicitly permitted nor explicitly forbid-den, and does not belong to the domain of creeds orformal acts of worship, wherein change and alterationis not allowed. Based on what has been stated [we rulethat] investing funds with banks that pre-specify prof-its or returns is legally permissible and there is noharm therein, and Allah [only] knows best.”

Western banks and financial institutions, of course,are happy to open up to Islamic finance so as to collectthe savings of devout Muslims and more of thepetrodollars from Islamic Sovereign Funds. Speaking atthe ninthWorld Islamic Economic Forum in LondononOctober 29, 2013, David Cameron unveiled plans ofBritain “to become the firstWestern sovereign to issuean Islamic bond,” worth around £200 million. “I don’tjustwant London to be a great capital of Islamic financein theWestern world,” he said. “I want London to standalongside Dubai as one of the great capitals of Islamicfinance anywhere in the world. There are some coun-tries which naturally look inwards, pull up the draw-bridge and refuse to recognize that the way the worldis changing affects their future success. But Britain willnot make that mistake.”

British Prime MinisterDavid Cameron speakson stage during theLeaders Panel at the 9th

World IslamicEconomic Forum atExCel, October 29,2013 in London.

The Qibla ColaCompany is a softdrinks producer basedin the UK, formed toprovide alternativebrand for consumersconcerned by the so-called practices of themajor Westernmultinationals.Founded uponprinciples of fair trade,ethics and donation of10% of their pro6t tothird world causes (likeIslamic Aid), the QiblaCola Company alsoclaims to adhere to theQuranic teachings ofIslam in its operation.

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maurizio stefanini, journalist and essayist, is the author ofa research paper on emerging economies for Nomisma.

114 - longitude #41

Finance

longitude #41 - 115

Islamicmodel

Islamic finance has beengrowing rapidly in recentyears.Motivated by a height-

ened interest in financial in-struments that emphasize risksharing, it has been attractinggreater attention in thewake ofthe recent financial crisis. Thisclass of instruments appears tohave avoidedmany of themostsevere consequences of the crisis. Several features un-derpin the expansion and performance of Islamic fi-nance. Addressing key regulatory and governance is-sues will be essential for Islamic finance to achieve itsfull potential. Several multilateral development insti-tutions, including theWorld Bank, have longstandingprograms to support the development of the industryand have used Islamic instruments, to varying extents,to tap capital markets.Global sharia-compliant financial assets have in-

creased significantly over the past three decades, reach-ing about $1 trillion in 2010, up from about $5 billionin the late 1980s, according to theWorld Bank. Bank-ing assets account for the bulk of this increase, com-plemented by sukuk and assets under management(AUM). Banking assets have been growing rapidly forseveral decades and rose from about $386 billion in2006 to $939 billion in 2010. Preliminary estimates byDeutsche Bank suggest that they climbed further toabout $1.1 trillion in 2011. In recent years, growth in Is-lamic financial assets has generally outperformed con-ventional financial instruments, particularly follow-ing the onset of the financial crisis that has been grip-ping the world since 2008.The global sukukmarket has expanded rapidly dur-

ing this period. A sukuk, or Islamic bond, is certifi-cates of ownership based on the concept of joint own-ership of an asset by several financiers, giving it featuresmore like securitized equity-type financing. After dip-pingwith the start of the global financial crisis in 2008,

the total volume of issuances more than doubled toreach roughly the equivalent of $48 billion in 2010.Markets absorbed an average of 800 new issuances ayear during 2009 and 2010, driven by a heightened de-mand for asset-backed instruments. In the first tenmonths of 2011, for example, the total volume of sukukissuances rose further to about $50 billion. Althoughthe sukuk market is small compared to conventionalfixed-income or securitized products, the weaker per-formance of conventional instruments during the cri-sis is combining with a greater recognition by issuersthat sukuk are a feasible alternative to boostmarket ap-petite.In the coming years, Islamic finance could account

for a substantial share of financial services in severalcountries,meeting the preferences of significant num-bers of people, enhancing financial inclusion and in-termediation, and contributing more broadly to fi-nancial stability and development. Identification ofthe reason why Islamic finance is moving outside thedomestic borders is relevant for understanding how itsprospects will evolve. “There are four main drivers forexpansion of Islamic finance out of the Islamic bound-aries,” explains Hasan Shakib al Jabri, CEO of SEDCOCapital, the group that has built the largest sharia-compliant platformof funds globally with around $1.6billion of assets managed through its Luxembourgplatform and partnerships with leading asset man-agers around theworld. On the regulatory side some ofthe jurisdictions and financial centers are leading in

Sharia-compliantEurope

Islamic finance is blossoming inWestern countries.Since the economic crisis, sharia-compliant strategieshave come to be seen as ethical and less riskyapproaches that in many respects go back to thefundamentals.

Bank staff seen insidethe Bank Islam branchof6ce in Shah Alam,outside Kuala Lumpur.

by enrico verga

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terms of regulations, legal framework, stability, repu-tation, and this gives the confidence of international in-vestors a boost. On the investor’s side: Islamic financehas no borders, whichmeans that you can gowherev-er the good opportunities are, whether this happens tobe in an Islamic country or elsewhere. Several countrieshave offered great opportunities, like China a few yearsago andUS real estate for the past three years, with Eu-rope expected to offer interesting opportunities in thenear future as well. From the finance angle, we ob-serve a growing interest by international institutionsthat want to offer sukuk to broaden their sources offunding.The latest financial crisis has proven to the in-vestmentworld that Islamic finance ismore resilient toshocks than conventional investments due to its low-er risk and leverage appetite, thusmaking investmentsmore stable.”A four-angle vision is also embraced, according to

Ashraf Ammar, senior manager of Deloitte in Luxem-burg. “The surplus of petro-dollars that looks for in-vestment opportunities and the space for investmentwithin Islamic nations is getting narrower by the day.Growing international trade and tourismbetween Eu-rope and Muslim countries is allowing the EU to getmore used to Islamic nations (their culture, their fi-nancial system, etc.) which in turn makes it relativelyeasier to accept an increased interest from these coun-tries in local investmentswithin EU.” But Erik vanDijkof LMG Emerge, a well-known European investmentconsultant who worked for many years together withNobel Prize laureate Harry Markowitz – the “king ofportfolio diversification and structured risk manage-

ment” – adds: “It is, however,interesting to see that Europeangovernments and politicianshave far more problems withthe growing interest fromMid-dle Eastern investors than theirpopulations,maybewith the ex-ception of those in the lowerlayers of society who follow theguidance of nationalist politi-cians like the [Marine] Le Pen inFrance of [Geert]Wilders in theNetherlands. We had no prob-lemswhatsoever to add Islamicfinance as diversifier to our Lux-embourg-based fund solutionsfor conventional investors, butwe have struggled when one ofour bigMiddle Eastern partnerswas interested in coming to therescue of a struggling largebank! In the latter case it wasclear that government officialswould rather have that entity

nationalized than accept the foreign investment com-ing from elsewhere than theUS, UK or other countriesthat they have gotten used to. But sooner or later theywill have to realize that times are changing. The cash-loaded investors are now in the Middle East and oth-er emerging countries, and we cannot simply denythat fact anymore in theWestern world. Better to jointhem than to believe that we are still living in theworldof the 1980s or 1990s.We are not!’’TheMuslim population outsideMuslim countries

is growing fast. This social evolution allowed, again,Muslim social reality to becomemore familiar amongthe Western Christian population. Both Ammar andVan Dijk stress that the global financial and Europeandebt crises (which were triggered by extremely riskyand unethical behavior in theWestern financial world)paved the way for a growing demand of ethical prod-ucts by non-Muslims. And this translated into a grow-ing interest in Islamic finance as well, because sharia-compliant strategies are perceived as ethical and lessrisky financial products that inmany respects go backto the fundamentals.Recently it became clear that Europe’s main cities

are eager to seize the opportunity to host Islamic fi-nance institutions and thus become a hub for this typeof finance. Among themany interested, two cities seemto be emerging in the final competition: London andLuxemburg. Both cities have some perks. The Britishgovernment has mandated banks to arrange a five-year £200million sukuk – theworld’s first Islamic bondto be issued by aWestern sovereign. “The Islamic bondcould be issued in the coming weeks, subject to mar-

ket conditions,” the Treasury said in a statement inJune. The roadshow will start in Jeddah and KualaLumpur, then moving to Riyadh, Dubai, Doha, andAbu Dhabi, ending in London on June 20. A sovereignsukuk is the centerpiece of Prime Minister DavidCameron’s bid to position London as a leading hub forIslamic finance, as competition heats upwith financialcenters in theMiddle East and Asia. “London has a his-torical relationshipwith IslamandMuslims all over theworld, and it is also considered a good market for re-tail investors.” Al Jabri agrees: “London is a leadingglobal financial hub, very well respected as a leadingsharia hub in financing aswell as capitalmarkets. Lon-don not only has a presence of most major banks andfinancial institutions, but it also houses a strong talentpool of lawyers and bankers in Islamic finance.”Nevertheless Luxemburg is emerging as a com-

petitor. “On December 17, 2013, the LuxembourgMin-ister of Finance introduced before the Luxembourgparliament a bill to issue sukuk for an amount of€200million (or its equivalent inUSdollars).This long await-ed bill was welcomed by all at the Luxembourg finan-cial center as an important step to strengthen thecountry’s position as a hub for Islamic finance.The billdefines three government buildings as the underlyingassets for the planned sukuk al-ijara structure. Thethree buildings will be transferred through a real saleto a Luxembourg SPV that will act as the sukuk issuer.The Luxembourg Council of State hadmany questionsregarding the bill, including the transfer of ownership

title from the government to the SPV. The Council’sconcern on this matter stems from the fact that thethree government buildings will be transferred to theSPV which, although fully owned by the government,will not entail that the three buildings will, strictlyspeaking, still be owned by the government. The realbeneficial owners of the three buildings will be thesukuk-holders with the SPV acting as a trustee forthem.Therefore, in the Council’s opinion, the govern-ment should perform an audit to assess the real mar-ket value of the three buildings as well as take a sepa-rate insurance policy to cover all risks in order to avoidtotal or partial loss of the underlying assets (i.e. thethree government buildings),” says Sufian Bataineh,partner at OPF partners, a law firm operating in Lux-emburg, with a large expertise about Islamic finance.“While some at the Luxembourg financial center

seem anxious about the Council’s concerns, and theirpotential effect on the viability of the bill, the Council’scomments will not lead the government to abandonthe sukuk project and turn instead to conventionalsovereign bonds. Inmy opinion the government is stilldetermined to see to fruition Luxembourg’s debut sov-ereign sukuk issue, which could place the country in aleadership position in Islamic finance in Europe, ri-valing London,” Bataineh concludes.“Luxembourg is one of the best jurisdictions for

having a UCITS or SIF funds platforms; they currentlyhave€2.6 trillion of which€1.9 billion are sharia-com-pliant AUMs. Luxembourg allowed assetmanagers like

People walk pastIslamic Bank ofBritain’s (IBB) 6rstbranch established onEdgware Road inLondon, September 21,2004. IBB, was the 6rstbank licensed byBritain that operatedentirely in line withsharia law, under whichMuslims must not payor receive interest.

The Dubai InternationalFinancial Center, inDubai SAE.

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ic fund centers worldwide).VanDijk adds the fact thatLuxembourg – like Switzerland – is a smaller countrywithout lots of political power at the global level, letalonemilitary activities in other countries, which alsohelpful. “No matter how lovely Middle Eastern in-vestors find London as a city to invest in by buying pre-miumproperties, it is andwill remain a fact that theUKdoes use its direct political andmilitary influence in theMiddle East when necessary, just like the US does.’’However there are challenges that need to be faced

before Islamic finance will expand in Europe. “Thethreemain issues are scale, diversity, performance/trackrecord. It is very difficult to gainmomentum for Islam-ic investmentswithout having scale; one of the biggestchallenges faced by global institutionswhen theyweredeveloping Islamic investment products was the in-ability to gather sufficient seed investment volumes todevelop strong products that provide diversity and ap-peal to investors with different risk and return ap-petites.This caused the funds to be small, limited in di-versity and expensive,” says al Jabri. “We addressedthese three issues through SEDCOCapital’s platform inLuxembourgwherewewere able to build sizable fundsthrough16different strategies appealing todifferent ap-petites of risk and return with more than $1.6 billion.”VanDijk corroborates al Jabri’s analysis: “It is always thesame.Whengoodplayers showup in anewmarket, theyfirst need to put their money where their mouth is, so

that potential clients and prospects can get acquaint-ed with the new players and products. It is great that aMiddle Eastern top player like SEDCO is now showingthat it is very serious about European expansion.”The future of Islamic finance looks promising. EY,

the consultancy formerly known as Ernst & Young,predicts that Islamic banking alone will grow to $3.4trillion by 2018 given that many Muslims remain un-banked, partly because of religious prohibitions. Tap-ping the savings of manyMuslims in Europe could beaway to integrate them in the system, a system that canoffer them amore familiar environment.However after the financial crisis that struck the

heart of Europe and the thirst for a more secure in-vestment the path seems ready. “It is very interestingand attractive for investors in general as well as forthe ethical and prudent investor as the two (shariaand ESG) are very well aligned in terms of their focusto develop sustainable economies. Another benefitcomes from the prudence element inherent in thesharia investment guidelines, which prohibits excessiveleverage and therefore reduces the risk. On the fi-nancing side, all asset-backed financing can be struc-tured into Sharia compliant products,” explains al Jabri.Erik vanDijk, also active in Europe’s largest institutionalmarket for sustainable and ethical products – theNetherlands – adds that there is definitely room for athorough and robust integration of sharia and ESGguidelines, though it is of course always a challenge tomake sure that the ethical and sharia boards that havethe ultimate supervision over the investment strategyas far as ethical and sharia guidelines are concernedcan cooperate properly. As soon as one would believeit ismore important than the other, thismight backfire.“Both provide good guidance and filters, that – whenused in combination – can lead to attractive investmentstrategies,” says Van Dijk.While evolving andblossoming in theWesternmar-

kets there is a growing feeling that Islamic finance andits religious pillar could Westernize themselves toomuch. Recently, Tarek El Diwany, a derivatives traderturned Islamic finance proselytementioned this in anarticle in the Financial Times. According to him Is-lamic finance has simply copied the institutionalframework and products of conventional banking.“That’s not just a failure of vision, it’s often complete-ly counterproductive to the objectives of Islamic law,”he says. Diwany argues that Islamic finance would befarmore respected among outsiders if it offered a gen-uine alternative, one that could have been compellingin the wake of the global financial crisis. “Rather thansticking to our traditional principles, somany partici-pants in this industry see the sharia as an obstacle tobe overcome, as something for which aworkaround isneeded.Where’s the intellectual substance in that? Andwhere’s the dignity?” he asks.

Some proponents feel that Islamic finance has oc-casionally compromised its principles in its efforts togrow. That has led to periodic pushback from the“sharia scholars,” the specialist clerics who act asguardians of the industry’s religious foundations.Amore positive vision is supported byHasan Shak-

ib al Jabri and Erik van Dijk. “The principles of Islam-ic finance are very clear and today we have the toolsthat enable us to structure almost any financial needinto a sharia compliant structure,” al Jabri says. “So I re-ally don’t think therewill be any ease of religious pillars;otherwise it will lose its creditability andwouldn’t be ac-cepted as sharia compliant.” Van Dijk adds: “We haveworked with Islamic scholars and institutions frommany countries and of course there are those whoseem to use sharia-compliant as something ‘hot’ and‘fancy’ but themajority of thosewe havemet andworkwith see it as a pure thing. As always, it is tempting touse critique of the extremes for an extrapolation that af-fects the whole asset class and way-of-thinking aboutinvestments, but we believe that this is unfair.’’By addressing the challenges noted above, Islamic

finance could increasinglymeet the preferences of lo-cal cultures and boost financial inclusion and inter-mediation. Islamic finance could also helpmobilize fi-nancing for small and medium enterprises, as well aslong-term funding for infrastructure and other devel-opment projects, which are critical for acceleratingsustainable and inclusive growth.

SEDCOCapital to establish considerable economies ofscale through its well-respected regulatory environ-ment. The country was able to attract strong andwell-regarded administrators and custodians. Luxembourg’sdedication to become the Islamic finance hub in Eu-rope aswell as offering the possibility of passporting itsfunds in Europe was also an important advantage. SoLuxembourg is a strong player for Islamic funds and as-setmanagement, while London is a strong player in theIslamic finance and capital markets,” says Hasan AlJabri.“A table for two” seems the title of a comedy, but in

the sharia arena it seems that there is place for twocities in Europe, as confirmedbyAshraf Ammar. “Thereis no Islamic finance hub in the eurozone, and the op-portunities for Luxembourg are therefore definitelythere.The city was the firstmoverwithin the Europeanmarket in terms of Islamic finance.Somedates on a timeline help us to understand this

fast evolution: in 1978, the first Islamic bank in Europewas operating out of Luxembourg. In 1983, the first Is-lamic insurance company in Europewas established inLuxembourg. In 2002, the first European country to listsukuk in its stockmarket was once again Luxembourg,which has more advantages in terms of the decision-making process compared to some bigger countries.Luxembourg is a very respectable fund center (sec-ond largest in the world and one of the top ten Islam-

A Muslim woman visitsan Islamic 6nancestand in thecommercial space ofthe 31st annual meetingof the Muslims ofFrance organized bythe Union of IslamicOrganisations ofFrance (UOIF), at theexhibition center of LeBourget, near Paris,April 18, 2014.

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The Dubai Islamic Bankplans to open its 6rstbank in Germany nextyear.

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enrico verga is an institutional relations manager andassociated researcher at ISAG, (Istituto di Alti Studi in GeopoliticaScienze Ausiliarie).

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Warming bloopers

longitude #41 - 123

Warming bloopers

content and social unrest, such as the lat-est one in the eastern city of Hangzhou inearlyMay when police vehicles were over-turned and dozens of people were injuredduring a public protest against the con-struction of a new incinerator.

For all these reasons, at this year’s an-nual session of the National People’s Con-gress in March, Prime Minister Li Keqiangdeclared that it was time for China to “de-clare war” on pollution.

To fight this war, China needs to goaheadwith the process of reengineering itseconomy, move forward from its depend-ence on cheap coal and shut down pollut-ing enterprises, in most cases the sameones that have fueled China’s growth andkept its citizens gainfully employed main-taining social stability. In order tomove ontoward this new model of growth, Chinaneeds the support of private companies toparticipate in the clean-up effort and, toachieve this aim, President Xi Jinping andPremier Li have pledged to spend morethan $275 billion over five years to fight airpollution.

In this context, green investing as awhole is booming in China and dirty in-dustries are progressively loosing marketshares: Chinese coal stocks have fallen by40% over the past three years while electriccar makers such as the Shenzhen auto-mobile manufacturer BYD – the largestselling Chinese brand – has risen morethan 20%.

Clean air has indeed become a power-ful marketing tool. SOHO China, one ofChina’smost famous real estate developers,is incorporating clean indoor air in its busi-ness plans. One of SOHO’s best-knownbuildings, the Galaxy SOHO in Beijing,which was inaugurated in 2012 and de-signed by Pritzker Architecture Prize win-ning, architect Zaha Hadid, can chargehigher rents – on average 10% to 15%more– because of the air system. In fact, since itsinception, the project has been designedand planned using a series of green build-ing strategies which include cutting-edgeantipollution technology.

Since the Beijing Olympics games in2008, several Chinese cities have beengetting increasing worldwide atten-

tion because of the dangerous level of airpollution.

In the last years, China’s air quality cri-sis moved from being an emergency foronly Beijing and Shanghai – where moreand more often the levels of air pollutionare reported to be from “beyond index” tomerely “hazardous” – to become a nation-al crisis. In fact, major Chinese cities fromShandong province in the east to Guizhouin the southwest fail to meet basic stan-dards laid down by the World Health Or-ganization (WHO).The level of the smallestand most dangerous particles of air pollu-tants, known as PM2.5 because theymeas-ure 2.5microns or less in diameter and arefine enough to enter deep into the lungsand into the bloodstream, are out of con-trol. The WHO deems 25 micrograms ofsuchmatter per cubicmeter of air to be anachievable and acceptable level, while alevel of 10 is considered healthy. In Beijing,readings hit spikes of nearly 1,000 micro-grams and the authoritieswere forced to or-der emergency measures such as suspen-sion of production at polluting enterprisesand on construction sites, cancel severalflights and ban travel in government cars.

The health impact of this pollution ishuge. Research published by Lancet in2012, the world’s leading medical journal,estimated that around 1.2 million prema-ture deaths in China in 2010 could be at-tributed to the effects of pollution. In thepast three decades, in parallel with its im-pressive economic growth and industrial-ization, China has seen a more than five-fold jump inmortality rates for lung cancer.The economic impact is large, too. Ac-cording to a study published in 2013 byChina’s environment ministry, direct eco-nomic losses in 2010 amounted to 2.5% ofChina’s GDP, double the proportion of2004. Finally, together with the health andeconomic impact, the increasing level ofpollution is becoming a dangerous andsignificant leading cause of popular dis-

From SOHO real estate toVC firm suchas Northern Light Venture Capital – a Chi-na-focused venture capital firmmanaging$1 billion with interests ranging from hy-drogen fuel cells to energy recovery tech-nologies – to many other internationalcompanies, it seems that the new frontier ofthe Chinese green economy is representedby significant investments in green tech-nologies.

Markus Rodlauer, the InternationalMonetary Fund’s mission chief for China,

China’s clean technology

by carlo clini

The next frontier of Chineseeconomic growth could comein part from amuch neededeffort to curtail the pollutionin its major cities and makeresidential buildings on thewhole greener.

says in a recent interview that the countryhas proved it can enact massive reformssince opening up in the late 1970s – fromliberalizing the banking industry to be-coming a global trading partner. “Given theway China has changed over the past 30years, it does deserve probably the benefitof the doubt that it will find its way throughthese challenges,” he says.

Following the statement of the primeminister, and the economic effort of thegovernment, if public and private inter-

ests join forces to fight air pollution, it willbe a challenging step towards a new busi-ness model for a new deal of the Chineseeconomy.

122 - longitude #41

carlo clini is an Associate Fellow of e Institutefor Environmental Security.

A worker cleans solarpanels on the rooftopof the YiwuInternational Trade Cityin Yiwu, Zhejiangprovince, China.

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longitude #41 - 125

Chosen words

124 - longitude #41

Chosen words


Here’s my story,vote for me

“You’re not a real candidate,Pinocchio, if you haven’twritten your own book,”

said the senior political analyst forTimemagazineMark Halperin whenhe was the political director of ABCNews. “If you know everybody else isdoing a book, you’ve got to do abook.”

Autobiographies are a peculiarcharacteristic of American politics.The Audacity of Hope, which soldmore than 400,000 copies in 2008alone, together with the reissuing ofthe 1995 memoir Dreams From MyFather, mightily helped SenatorBarack Obama of Illinois became thenew president.

Now Hillary Rodham Clinton isteasing the public with a new book,Hard Choices, adding to previoustomes: It Takes a Village: And OtherLessons Children Teach Us (1996);Dear Socks, Dear Buddy: Kids’ Lettersto the First Pets (1998); An Invitationto theWhiteHouse:At HomewithHis-tory(2001); and LivingHistory (2003).

The list of books by presidentialhopefuls is long. For the Democratsformer Senator John Edwards wrotethree, Dennis Kucinich wrote two,and Vice President Joe Biden wroteone.

For the Republicans, Senator JohnMcCain wrote five, former New YorkMayor Rudolph Giuliani wrote one,as did formerGovernorMitt Romney.Not to be left out New Gingrich, RickPerry, Rick Santorum and Ron Paul,all added their contributions.

The tradition of candidate booksdates back at least to the 1950s, whensenator John F. Kennedy introducedhimself as a viable presidential can-didate with the 1957 Pulitzer Prize-winning book Profiles in Courage.Since that book was plagued by ac-cusations that it was ghostwritten byTheodore Sorensen, many of thesebooks are also signed by their co-au-thors. For instance, McCain’s MarkSalter.

“There are three basic types ofcandidate books,” Julie Bosman stat-ed in a New York Times article. Thefirst is the “introduction” book, inwhich candidates without muchname recognition introduce them-selves to the public: as in Edwards’sFour Trials, published as he an-nounced his candidacy for presidentin 2003.Then there is the “manifesto”book, which typically outlines what acandidate would do if elected. Thethird category includes off-topicbooks like Earth in the Balance by AlGore.

But there is also a fourth categoryof books by authors who not want tobe presidential candidates directly,but use the occasion on elections,also mid-term elections, to promotethe debate.

Just in caseI go (for) broke

The book opens with: “All of us face hardchoices in our lives.” In order to explainhow “what’s true in our daily lives is alsotrue at the highest levels of government,”Clinton reminds us that “the most famousexample” from her four years as Secretaryof State “was President Obama’s order tosend a teamofNavy SEALs into amoonlessPakistani night to bringOsamabin Laden tojustice.The President’s top advisorswere di-vided.The intelligencewas compelling, butfar from definitive... It was as crisp andcourageous a display of leadership as I’veever seen.” From the beginning this bookwas partly seen in the light of a possible bidin the 2016 US presidential election. “Thetime for another hard choice will comesoon,” she writes. Among her other choic-es there were those involving the MiddleEast and the Arab Spring, with special at-tention given to the Egyptian Revolutionof 2011 and her relations with HosniMubarak.Hillary Clinton also reports aboutBerlusconi’s wrath over Libyan events,“Berlusconi felt upstaged by Sarkozy, andhe threatened to walk out of the coalitionand close access to his country’s bases,”admitting that “beyond the bruised egos…Berlusconi and others had good reason tobe concerned.” Sometimes she delves intodisagreementswithin theObama adminis-tration and where she stood, such as herlosing the argument to arm moderate ele-ments of the Syrian opposition. But inmostof the cases she does not, saying such dis-cussions “will remain private to honor thecode of confidentiality that should exist be-tween a president and his secretary of state,especially while he is still in office.”

Hard Choicesby Hillary RodhamClintonSimon & Schuster2014

Sticking it to the man

Previously a Harvard Law School profes-sor, ElizabethWarren served as chair of theCongressional Oversight Panel created tooversee the Troubled Asset Relief Program(TARP) in the wake of the 2008 financialcrisis. She later served as Assistant to thePresident and Special Advisor to the Secre-tary of the Treasury for the Consumer Fi-nancial Protection Bureau under PresidentBarack Obama. She has been recognizedby publications such as the National LawJournal and the Time 100 as an increasing-ly influential public policy figure, andnamed in 2009 Boston Globe’s Bostonianof the Year. In September 2011 ElizabethWarren announced her candidacy for theUS Senate, challenging Republican incum-bent Scott Brown, though she herself was aRepublican until 1995. “I was a Republicanbecause I thought that thosewere the peo-ple who best supported markets,” she ex-plains. Shewon the general election in 2012to become the first female senator fromMassachusetts, and regainedTedKennedy’sseat for the Democrats. By now a leadingfigure among American progressives, shehas frequently been mentioned by somepundits as a potential 2016 presidentialcandidate. She repeatedly stated that shehas no plans to run, but this has the typicaltone of a potential presidential candidate’sbook. “I’m Elizabeth Warren. I’m a wife, amother, and a grandmother. For nearly allmy life, I would have said I’m a teacher, butI guess I really can’t say that anymore. NowI’d have to introduce myself as a UnitedStates senator, though I still feel a small joltof surprise whenever I say that. This is mystory, and it’s a story born of gratitude.”

A Fighting Chanceby Elizabeth WarrenMetropolitan Books2014

Right needs might

Contrary to Elizabeth Warren, DavidHorowitz began his political life at the leftend of the spectrum and later shifted tothe right. Raised byparentswhoweremem-bers of the US Communist Party, Horowitzwas an outspoken adherent of theNewLeftbefore rejecting leftism completely.Horowitz has recounted his ideologicaljourney in a series of retrospectives, cul-minating with his 1996 memoir RadicalSon: A Generational Odyssey. In the springof 1985 he had alreadywritten an article forTheWashington Post entitled “Goodbye toAll That,” inwhich he explained his changeof views and decision to vote for RonaldReagan. Founder in 1988 of the DavidHorowitz FreedomCenter, he is editor of itsonline FrontPageMagazine; director of thewebsite Discover the Networks, founder ofthe Organization Students for AcademicFreedom, whose self-stated goal is com-bating what it calls “leftist indoctrination”in academia. He is not running for the nextpresidential elections, but is consideredone of themost influential American writ-ers, saying it’s time for conservatives to takethe gloves off – and take our country back.America is at a crucial turning point in herhistory, and Republicans have been losingground to Democrats for too long. In hisnew book Take No Prisoners, Horowitzsounds a clarion call for conservatives touse liberals’ political playbook against themin the fight for America’s future. No longercan the GOP afford to let Democratsbrazenly claim themoral high groundwhilethe Democratic agenda bankrupts hard-working Americans.

Take No Prisoners:The Battle Planfor Defeatingthe Leftby David HorowitzRegnery Publishing2014

Lazarus Walker

As the 45th Governor of Wisconsin, ScottWalker is a Republican politician and pos-sible 2016 presidential candidate. But in2011 his chances of staying in office lookedbleak. Angry protesters – furious about hiscollective bargaining proposal – swarmedMadison, camped in the capitol, and at-tempted to block the passage of the gover-nor’s reform legislation. His approval num-bers fell to the basement, liberals de-nounced “Dead Man Walker.” He foundhimself fighting for his reforms, fieldingdeath threats, and facing an unprecedent-ed recall election. But thenWalker’s policiesbegan to work. His constituents realizedthey were better off with his leadership,and in June 2012, he became the first gov-ernor in American history to survive a recallattempt. In this book he tells the story of hisfight to saveWisconsin from a $3.6 billionbudget deficit while simultaneously im-proving the state’s schools and public in-frastructure. He describes howhe stood forhis convictions against enormous politicalpressure and personal attacks. He explainshow he knew his reforms would work,based on his experience as a local official.He outlines lessons conservatives on thenational stage can learn from his success.Change the polls, not your principles. Don’taccept the false choices presented to you.You can reform entitlements and survive.Austerity is not the answer. Never stop re-forming. Walker claims to be living proofthat conservatives need not move to thecenter to win. He argues that Republicansmust offer Americans big, bold, positivesolutions for the nation’s challenges – andhave the courage to implement them.

Unintimidated:A Governor’s Storyand a Nation’sChallengeby Scott Walkerand Marc ThiessenSentinel2013

longitude #40 - 127

Numbers

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Numbers

by federico bini

Something shy going on

But there’s a big shadow over the fishingindustry: overfishing. The excessive ex-ploitation of fishing zones results in thehindering of the natural reproductivecycle.

When it comes to production, one countrydominates all the others. The ranking seesgiants like the European Union or theUnited States behind little Peru.

No other food product on Earth is as plen-tiful and available as fish. It can be foundwith relative ease, and if one does not con-sider farmed fish, it requires almost no hu-man intervention apart from the actualcapture.

Percentage of 9sh destinedfor human consumption:

86%Of which eaten fresh:

46%

Percentage of the 9sh stocks thatare fully exploited:

54%Moderately exploited:

21%Overexploited:

17%Depleted:

7%Recovering from depletion:

1%

Percentage of world’s 9sh productioncaught in China:

31%Indonesia:

7.7%India:

5%European Union:

3.5%United States:

3.1%

People employedin 9sh farming in France:

10,658In traditional 9shing:

7,477

Underlying all this is a huge fishing fleet.

But if the queen of the producers is acolossus, the queen of the products is asmall sardine.

At one time the EU had the largest concen-trated fishing industry in the world, thanksto the legendary fleets of Portugal, Spainand Scandinavia, and the resources of theMediterranean. Today everything haschanged and old Europe plays only a mar-ginal role.

Even the Mediterranean has for centurieslost its primacy.

Between 6 and 12 meters:

45,946Over 12 meters:

13,301Average age of vessels9shing in EU:

21 years

Percentage of the catch in the EU that hailsfrom the northeast Atlantic:

69.6%From the north-central Atlantic:

12.9%From the Mediterranean:

9.6%

A significant proportion (but still belowthe world average) comes from farming.

Percentage of the catch in the EU that co-mes from the sea and inland waters:

80%By farming:

20%

Trout:

14.7%Salmon:

13.5%Oysters:

7.9%

Percentage of 9sh farmed in the EUthat are mussels:

39.1%

There is a country with an ancient seafar-ing tradition that has long reversed itsproduction priorities.

In this case, shellfish are the main catch.

Fishing boatsin the world: 4.7 million

Of which, in the seasand oceans: 3.2 million

In inland waters:

1.5 million

Vietnam:

3.7%Philippines:

3.2%

Ranking of the Peruvian anchoveta(Engraulis ringens) among the most-9shedspecies in the world:

1

Where the Asian giant beats everyone elseis in fish farming, a practice that has expe-rienced a huge boost in recent decadesthanks to heavy investment in research.

Percentage of farmed 9sh in the worldmanufactured in China:

60.7%Indonesia:

9.6%India:

5.5%

Reduction of the number of 9shing vesselsin the EU since 1995:

32.4%Fishing boats in the EU:

86,445Of which from 0 to 6 meters:

28,198

federico binihas written three books on numbers,including Presi per il caso (Taking the Rear View).

The Neolithic revolution camewhen people started farmingthe land instead of hunting andgathering. Now a similarrevolution is happening withfishing. Our oceans will neverbe the same.

There is an enormous wealth in thewater that makes up seven-tenths ofour planet – economic wealth and

food in the form of fish. They give humansprotein and employment in seemingly in-exhaustible quantities.

(Data from the EU and FAO)

Fish caught worldwideeach year:

177 million tonsOf which,in open water:

60%Farms:

40%Countries in the world that 9sh more thanone million tons annually:

19

Islamic Finance - With SEDCO and our Erik van Dijk

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Transcript of Islamic Finance - With SEDCO and our Erik van Dijk