Atlantic Council Energy & Economic Summit: “New Opportunities in a Dynamic Region” 

Istanbul Chamber of Commerce Special Luncheon: Navigating the Storm – The Euro-crisis and its Global and Regional Implications

Introduction:

Sekib Avdagiç
Vice President
Istanbul Chamber of Commerce

Moderator:
Frederick Kempe,
President and CEO,
Atlantic Council

Speakers:
His Excellency Ali Babacan,
Deputy Prime Minister, Republic of Turkey

His Excellency Kairat Kelimbetov,
Deputy Prime Minister, Republic of Kazakhstan

His Excellency Gordon Bajnai,
Founder, Patriotism and Progress Public Policy Foundation
and former Prime Minister, Hungary

Tzvetan Vassilev,
Chairman of the supervisory board,
Corporate Commercial Bank

Location:
Fuji Ballroom II
Swissôtel, The Bosphorus
Istanbul, Turkey

Time:
1:45 – 3:45 p.m.

Date:
Thursday, November 15, 2012

Transcript by
Federal News Service
Washington, D.C.

ROSS WILSON (Director, Dinu Patriciu Eurasia Center, Atlantic Council of the United States): Ladies and gentlemen, if I could have your attention please. Good afternoon. For those of you that weren’t part of the morning session, the opening session, my name is Ross Wilson. I am the director of the Dinu Patriciu Eurasia Center.

Welcome to this first special luncheon of this year’s Atlantic Council Energy and Economic Summit. This particular luncheon today is generously supported by the Istanbul Chamber of Commerce, which for the second year is partnering with the Atlantic Council in a major way to support this regional initiative we are carrying out here.

Before I introduce the Istanbul Chamber vice president to make a few remarks, we have a little bit of a change in our program today and I just want briefly to describe that. First, the moderator – the individual who was to moderate this session, Erik Berglof, got tied up in London traffic on his way here and was unable – missed his flight to Istanbul and so will not be with us today. Leading this session instead will be the Atlantic Council’s president and chief executive officer, Fred Kempe.

We will – after – the next piece we will have in rearranging our program here a little bit – Deputy Prime Minister Babacan must be back in Ankara earlier than expected for some important parliamentary business. So we’re rearranging the program here. He will speak – Fred Kempe will introduce him to speak immediately after Istanbul Chamber Vice President Avdagic. He will make some remarks, I think he will take a question or two, and then he needs to – he needs to depart.

We will – at that point, the main course will be served, and then following that the remaining participants in this session will gather as a group for a conversation moderated by – moderated by Fred Kempe.

With that over, it’s my pleasure to again thank the Istanbul Chamber for its generosity here and to introduce to you the vice president of the Istanbul Chamber of Commerce, Sekib Avdagic. He has been vice president since 2009. He played a major role in the work that was done here in Istanbul to make this city a European capital of culture in 2010 – a very good friend of the council’s, a good friend of mine. Please join me in welcoming Sekib Avdagic. (Applause.)

SEKIB AVDAGIC (Vice President, Istanbul Chamber of Commerce): (Mr. Avdagic’s remarks are provided through an interpreter.) Distinguished deputy prime ministers of the Republic of Turkey and Kazakhstan, esteemed participants, distinguished audience, in the beginning of my remarks on behalf of the business community in Istanbul I would like to greet you all with respect. And on the occasion of this summit, I would also like to express my happiness and honor to be able to see you in Istanbul. Welcome to Istanbul.

I would also like to underline the fact that as Istanbul Chamber of Commerce, we are proud of supporting Atlantic Council summit because we all know that Istanbul is not a city connecting Europe with Asia but also Istanbul is a very important center all around the world. Not only seas meet in this city, but also different cultures and also different cultures and civilizations do meet in this very city. In addition, as is the proof with this Atlantic Council summit, Istanbul has always been the point – merging point of economy, politics and culture. And above all, the history of commerce in Istanbul dates back to 8,000 years ago.

Since then, if we take a look at what has taken place, we see that some maritime transportation of cereals, grains took place in 8,000 years ago, and then from Istanbul ships sailed to the Black Sea and brought goods from the Black Sea region and carried these goods all the way to the Mediterranean. This function is continued today.

Distinguished participants, ladies and gentlemen, without forgetting the past, we are trying to read whatsoever the values of today – prevailing today. Globalization is one of the most important values that we are all facing, and we have to understand what globalization means fully in order to take steps further. Communication and transportation technologies are very much important, and we have achieved considerable distance, and NGOs have become an important global actor.

Globalization and economy are shaped according to the destination where money follows. Economic capital is also shaping the future of our world, and if there is technological advancement then you have prosperity. I have to underline the fact that energy resources, energy corridors do play a very important role in the demarcation of economies.

Energy and economy are intertwined, and it is very important that we are discussing this issue in Istanbul. And it’s very meaningful. Why? Because Istanbul is one of the main arteries of global economy. Yesterday Istanbul was part of the Silk Road; now, Istanbul is – has a very important role in the global economy and neighboring with some energy resources.

Of course, you can not only consider the geopolitical effects regarding the Turkish economy. You have to consider the development potential and its financial capabilities. And Turkish economy is having a say all around the world.

We have 350,000 members at the Istanbul Chamber of Commerce, and as the representative of this chamber, I have to state that Turkey demonstrates a huge economic potential with all its global companies. We believe that together with the summit where we will be discussing the global economic issues, we will once again understand the importance of Istanbul.

I wish you all a fruitful summit, and on this occasion I would like to congratulate the organizers of the Atlantic Council. And I would also like to congratulate the Atlantic Council for its 50th anniversary and wish them all a successful future. I hope we will in the near future and of course for quite some time be holding these summits in Istanbul. I greet you with respect. (Applause.)

FREDERICK KEMPE: Thank you for those kind words.

The Atlantic Council is deeply grateful for the support for a second consecutive year of the Istanbul Chamber of Commerce. We had a very good conversation before this lunch about working together going forward and some very innovative ideas about how to bring even more Turkish businesses – energy businesses into cooperation with us. And we look forward to working with the Istanbul Chamber of Commerce, for – as you said, for many years to come.

As Ross said, we’re going to change what’s in the printed program. It’s my great honor to introduce His Excellency Minister Babacan again, after his good address this morning. So I’m just going to say a couple of extra things about him that I wasn’t able to say.

After that, we’ll hear first from Deputy Prime Minister Kelimbetov, and have a conversation among our other participants here on the stage – the former prime minister of Hungary, Mr. Bajnai; Tzvetan Vassilev, a real business leader in Bulgaria and a great partner of the Atlantic Council, as well as the deputy prime minister of Kazakhstan.

His Excellency Deputy Prime Minister Ali Babacan – it may be correct to say that no member of the Turkish government, except perhaps Prime Minister Erdogan himself, has successfully worked across such a vast range of issues – economics minister, charting the way out of the economic mess in which Turkey found itself after the 2001 economic – or, financial crisis. He helped craft and implement economic and financial stabilization and reform policies that would have astonished Turkish leaders a few years ago. So successful was his internal and external diplomacy on economic matters that when Abdullah Gul became president in 2007, the prime minister kept Ali Babacan to be foreign minister. Two years later he moved back into one of just a couple of deputy prime minister positions, where he now oversees all things economic.

It’s not an easy time to have that job. I just got a flash on my BlackBerry from The Wall Street Journal reporting that the eurozone contracted in the third quarter – the second quarter in a row of contraction, which by our measurement is a recession. Four quarters in a row without expansion. That’s a difficult – that’s a difficult context in which Turkey has to operate. Surely the fact that Turkey has remained relatively healthy despite that and despite the security issues around it is in significant measure to Deputy Prime Minister Babacan’s skill as a manager, as leader. Your Excellency, we’re grateful for your leadership today.

Please join me in welcoming Deputy Prime Minister Ali Babacan. And if we have a little time we’ll take a couple questions afterwards. (Applause.)

ALI BABACAN: Mr. Prime Minister, ministers – (inaudible) – ladies and gentlemen, distinguished guests, it’s a great pleasure and honor for me to be here with you and to address such a distinguished audience. And as I have already told in the morning, I would like to express my appreciation for the Atlantic Council, and also specifically Ambassador Wilson for making this event a successful one. And its success has been proven by the fact that it is now the fourth organization – fourth summit in a row, four years in a row, which is getting more and more attention in our region.

And today’s discussions and tomorrow’s discussions I think will be quite enlightening because we have so many prominent speakers from very different countries with very different backgrounds, and I hope that this series of discussions here in Istanbul will be useful for coming up with some fresh ideas and some new strategies.

Ladies and gentlemen, distinguished guests, let me talk about the European economy and how to navigate through this storm. It is quite peculiar times that we are going through because this economic crisis has been a very costly one, and many people compare the cost of this crisis to the cost of the Second World War. Actually, when you look at the public debt stock of the advanced countries, of the developed countries, debt-to-GDP ratio is going to go up back to the levels of the post-Second World War era. So in a way, that cost is now reflected in the public debt stock of the advanced countries, developed countries.

In European Union, especially the eurozone, being the epicenter of this crisis, I think it’s important to first follow what is going on very carefully, especially for countries like Turkey which has deep integration and strong flows – trade flows, investing flows – between the European countries and us.

The European Union, especially eurozone, has a common currency, and this monetary union in a way was designed in such a way that countries were left almost free to have their own fiscal policies. OK, there were the master criteria, master rules, but the penalty, the enforcements for those countries who break those rules were not really that effective. It was actually first Germany and France breaking the 3 percent budget deficit rule. And that – and also that, OK, the rules are broken, but we are going to go back and compensate for this.

And then many countries then followed, and it became such a situation that there has been now a (free-riders ?) problem – countries in the eurozone with high deficits living in a way an artificial level of wealth there, bringing – (inaudible) – to those countries which have low deficits or small surpluses.

So the monetary union is going to be more and more of a fiscal union and more and more of a banking union. Either there will be a stronger cohesion or it might be a terrible breakup. So we believe that more cohesion, more solidarity is the right way for the European Union and eurozone to go, especially if there is one European central bank and only one central bank for the 17 countries. And if the central bank is the lender of last resort, there has to be a strong common fiscal framework and there has to be strong regulation and supervision of the financial sector.

If this bank, ECB, is going to be financing countries – financing needs and financing each of the banks, the financial sector, then there has to be a stronger central mechanism, which we believe is happening more and more.

For Turkey, what we have been doing first was following different policies and different paths. When we found out that government debt and public finances is going to be at the core of the discussions and that many countries in the eurozone or members of the European Union were implementing fiscal expansion programs, fiscal stimulus program, especially in 2009, we implemented a fiscal – (inaudible) – program, and this program worked excellent for us. We made sure that public finances are strong; we made sure that our banking sector is strong, and we enabled our private sector to do the job for growth, and our growth is coming only from private sector activity.

And now when you look at the risk indicators of Turkey, like the risk premium on top of German bonds or U.S. bonds, or – (inaudible) – credits, we are safer, we are perceived to be less risky than more than half of the European Union countries.

We also deliberately worked to diversify our trade relations. European Union exports were more than 50 percent of our total export composition. Then we were very active to open new embassies in many countries who had – (inaudible) – with Turkish Airlines. For example, in Africa in 2008 we used to have only 12 embassies. Right now, we have 32 embassies. Turkish Airlines now flies to more than 25 destinations nonstop in Africa. We opened embassies in Colombia, in Peru; now in Panama or countries like Myanmar. And Turkish Airlines now flies to 92 countries. And this ranks Turkish Airlines number one in the world. So there is no other airline in the world which flies to more countries than Turkish Airlines. New nonstop flights to Los Angeles, to Sao Paolo – these have been generating a lot of new business.

And right now our exports to the European Union as of 2012 is going to be probably 36 (percent) or 37 percent of our total export composition this year. So we have already reduced our – (inaudible) – dependency on the European Union from more than half to about one-third of the whole world composition. And we think that’s – especially given the domestic market conditions of the developed countries, especially European countries. It’s very important to diversify as fast as possible.

But then we also put a lot of emphasis on our banking sector – (inaudible) – to what we do in the other parts of the metric of management. If we are not careful about the banks, about the financial sector, it prepares a very important risk area. And we did this in a conscientious way. In good times, we have tightened regulation on the banks and in slower times we have lightened the regulation on the banks. Actually, politics and – especially domestic politics, helps us the other way around. Especially in good times when banks are lending a lot, then the growth rates are high, then countries and companies are borrowing and spending – (inaudible).

It is very rare that authorities, governments, can step in and say that, hey, you are taking risks so we have to slow down. And we were able to do it, and we were able to do it twice during our government of the last 10 years. The first one was in 2004-(20)05 period when we introduced a brand new banking law, a brand new credit card law, brand new mortgage law, saving deposits insurance fund law, and these were all done to tighten things during high-growth years. Those were our high-growth years.

For example, with our mortgage law, we introduced 25 percent down payment requirements. And it was a tough job because, we did that in 2006; this was before the mortgage crisis. It was before the financial crisis. And when we tried to introduce the law in the parliament there was a big reaction, and they were telling us – our parliamentary colleagues were telling us that – look at the U.S. They have the best mortgage markets. They are doing this for 100 years and they don’t have such rules. And why are we putting such rules in our banking system and brand new mortgage law?

It took us some time to convince our colleagues, but finally we were able to do it because that rule is very important to make sure that people who borrow is actually has a certain strength of paying back, and 25 percent cash down-payment is a measure of their payment strength. And also for the banks it’s important because it protects their balance sheets because in the long term, real estate prices fluctuate. And when the real estate price is high and banks lend, the collateral is the real estate itself. When the prices fall and the amount of the debt is higher than the value of the property, then there is always an incentive not to pay back for the house owners.

So that 25 percent rule has been protecting our banks system through all the ups and downs because the collateral, which is worth hundreds, is used for a loan of this same price. So it absorbs all the real estate price fluctuations and ups and downs in the economy.

Another measure – we have banks consumer lending in foreign currencies. I know that now many Eastern European countries are suffering from this. They have been issuing consumer loans in foreign currencies and then the exchange rates change, consumers find themselves all of a sudden unable to pay because of the new exchange rate situation. So these are of course not popular steps or measures that we introduced, but it pays off during difficult times.

Again in 2010, when we were growing at 9.2 percent, we decided to contain the law of the lending body in Turkey. We announced that we are creating a trust of 15 percent maximum growth for the – (inaudible) – consumers – (inaudible). It was not popular, of course, because banks were lending, our consumers were spending, our corporations were investing, we had good high growth rates, but then we were – (inaudible) – risks for inflation and for external balances. So we took steps, first with the central bank and then with our banking authority, and we introduced new measures as the government. And now the growth volume for the loan of our banks is at about 14 (percent) to 15 percent.

Will we be able to continue this? Maybe. We have now a lower growth rate this year, next year, but we have more of a sustainable growth. It’s good for stability purposes. And this approach, this measured approach, and a balancing – act of balancing of our economy helped us to have lower and lower interest rates. Turkish treasury nowadays has the historical low borrowing rates, not because of the central bank, money printing corporations, but because of the confidence in our system. Because our central bank, all through this crisis, did not have any extraordinary liquidated operations or extraordinary monetary situations.

And the monetary policy mix of Turkish central bank is a very unique one. It’s the first of its kind. It’s very innovative. At first the markets approached the short-term decree with suspicion, but now credibility is already there, very strong credibility for our central bank to implement a very innovative policy mix of monetary policy tools together with – (inaudible) – tools to protect our economy during turbulent times.

It’s very effective for the debt – adverse effects of short-term flow. Our policy is very effective to build confidence and lower risks for our economy. We alleviate inflation on one side, we alleviate external debts on the other side for financial stability, price stability. And the mix has been working quite well.

So we are going to understand the times and we have to implement, understand the policies. These are not normal times for the global economy, for the European economy, and new policy approaches is a must. Classical approaches have been proving not to work in many cases. Like 2009, many European countries implementing fiscal stimulus programs, it’s not working. It’s backfiring. Of course, central banks printing incredible amounts of money – trillions of dollars, trillions of premiums of euros. And it’s not sufficient to ignite growth.

So at the end of the day, what’s important is confidence – confidence of the consumer’s – (inaudible) – confidence of the producer’s corporate growth, confidence of the financial sector’s – (inaudible) – and a policy mix which will help that confidence to get stronger and stronger. That’s what we have found from our own experiences.

So, ladies and gentlemen, distinguished guests, maybe this was a little bit too much of a Turkey-oriented presentation, but that’s the economy which I happen to know the best. So – and – (inaudible) – is not so bad. So – and I know that now the main course is waiting, so I don’t want to make this a long speech, which is already longer than which I had originally planned. So I understand there will be a few questions if you would like. But anyway, thank you for your interest. (Applause.)

MR. KEMPE: I think you can stay at the podium. We’ll just take two quick questions because I know you have to go. And if the folks would like to start serving the main course, they can.

Do I see questions? I’ll come right out to the audience. If not, I certainly have some that I would like to ask.

Then I’m going to ask one and still keep an eye for a second one, but I think this one may take up enough time. Actually, let me pose the two questions because I think they’re related.

You’ve said with the eurozone you’re either going to have stronger cohesion or a terrible breakup, so that suggests to me you don’t think the option is muddling through any longer. So the question growing out of that for me is on the current trajectory of where Europe is going, is it heading for more cohesion or a terrible breakup? In other words, are you confident of the direction?

And then my favorite question for people in your situation is, what keeps you awake at night? What is the biggest risk you’re looking at? You’ve got a situation with – you just mentioned Gaza and Israel this morning; you see Iran, you see Syria, you see the eurozone crisis. This morning you mentioned your worries about the U.S. economy. If you could pick out one of those that concerns you most, what would it be?

MR. BABACAN: About the first question, I think what has been done in the eurozone and – (inaudible) – over the last one year or so has been very positive steps forward, like the – (inaudible) – of the commission, like the fiscal compacts, like the European firewall which is now much larger, or the programs for Ireland, Portugal, Greece. The new Italian government, new Spanish government are trying to do many good things, and ECB being very, very active and doing what is needed when there’s a fire – get your fire extinguished – the extinguishing mechanism that – (inaudible) – has implemented.

But then, you cannot rely on the central banks forever. What central banks do is just to give an opportunity window for the governments and authorities to take the right measures. It just, in a way, postpones a possible failure for them or a possible failure of the states. So just relying on the oppressions of the central bank is probably not going to – (inaudible) – long term.

But then what will happen is many – as I said, good steps, good decisions – but are they going to be implemented? Like the fiscal contact, which has to be approved by parliaments, and this will be a constitution – (inaudible) – legislation. So if there is a failure in this process, especially in some major countries, it will be a big, big setback. So we have to see if this is going to be implemented. We have to see if the rules will be followed. We have to see if the commitments will be fulfilled.

So I think implementation is going to be the key word for the eurozone and for many European countries for the next months and years.

But monetary-wise, the public debt is now so high and it’s putting such a big burden on many countries, public financing, that the potential growth rate of many countries – and I mean compared to pre-crisis and after-crisis – it could mean a much lower great of potential growth for many countries. So for some countries to get rid of this debt it’s going to take years; maybe for some of them it will take decades.

So Europe before the crisis and Europe after the crisis is going to be two different pictures in my view. And for Europe to go forward, it has to be more inclusive, in terms of free trade agreements, for example, that the European Union is now signing with many countries, and this is a big right step forward. So being more open, being more inclusive.

In terms of accession, in terms of the enlargement process of the European Union, as long as the enlargement continues, EU is going to gain more strength – like our bad experience, for example, with the European Union, a process which is being blocked in many, many ways, especially political barriers put by many countries. And I don’t think it is beneficial for the European Union. There are many things which a country like Turkey can contribute eventually, but this is being played more and more. So I think, eventually, Europe will be more cohesive in itself but more open to outside is going to be a good outcome. That is my hope and wish.

For the second question, of course Turkey is in such an area that just to the West of us is the epicenter of the global economic crisis, and in the east and south of the country there is a historical transition process going on with many Arab countries. The Arab awakening in a way is causing some short-term challenges for this region. But then there will be even long-term opportunities and probably good results, which will – which we expect will come eventually. And of course for Syria, with the political situation now, the civil war going on, a regime bombing its own citizens. And with the situation of Iran, the nuclear program and so forth, tensions are there. And with the Israelis and Palestinians problems, which which has been there for decades and decades – very explosive. And it is at the heart of the Middle Eastern problems. Unless the Israeli-Palestinian issue is resolved in a peaceful way and a sustainable way, we are not going to see a stable – (inaudible) – for this region. Many problems, when we look at the people today, it’s coming out of that – (inaudible). It’s polarizing the region in a really strict way.

So maybe it’s Iran, but in terms of our quote, unquote – (inaudible) – in terms of our interrelations, international relations, we are following a very principled route, very open policy based on international law, based on human rights, based on values like democracy, rule of law. And this approach is, I think, contributing to the regional closeness. And for the economic side, this is from Europe and elsewhere, I’ve already told what we are doing.

So I think risks – many risks around, but we are quite comfortable in our policies – which is not making us very uncomfortable, I have to say. So at night – I don’t have much problems of sleep at nights. (Laughter.)

MR. KEMPE: Thank you, Mr. Deputy Prime Minister. I just want to say, a half day in your life is a long time. Thank you for spending it with us. (Applause.) And we know you have to go. Safe travels back to Ankara, and good luck to your country in the months and years to come.

With that portion, we’re going to take a short break for lunch, and I think very short because we want to get your main courses on your table, have a chance for you to chat, and then get our speakers up to the stage. Enjoy your meals.

(Lunch.)

MR. KEMPE: Thank you very much. I hope you’ve enjoyed your lunches. We’re going to offer you a little bit of intellectual dessert.

In the interest of time, I’m not going to give long introductions, but I think what we’ve got here is we’ve got people very much involved in the public sector but with a lot of private sector experience, and then of course one banker who is very much in the private sector. I’m going to introduce each of the three of them, then each will give a small opening comment, and then we’ll get right into the Q-and-A.

We’re going to hear first from Kairat Kelibetov, who has served as Kazakhstan’s deputy prime minister for the economy – more or less the position that Ali Babacan has in Turkey, if I’m not mistaken – has oversight for economics, finance and trade. He studied at Georgetown University – so not so far from the Atlantic national offices – and he greatly impressed us all at last year’s Istanbul gathering with the insights he provided on how the world looks from Central Asia.

But on top of that, he does really understand the global financial world and the context as well. He looked after the customs union, common economic space, Eurasian economic communities – so he was looking after all those entities and was CEO of the Sovereign Wealth Fund in Kazakhstan.

Second will be Gordon Bajnai, Hungary’s prime minister from 2009 to 2010, and he led the government as a nonpartisan technocrat, something that’s been – become a little bit more popular in the European Union through a period of economic crisis. And he had internationally acclaimed results from that time in office. And he’s made a remarkable return to politics now and is the leader of the opposition in Hungary.

He taught at Columbia University’s School of International and Public Affairs; last year, a distinguished fellow at Johns Hopkins and senior adviser to CSIS. He also is a former businessman, and he ran and – actually the CEO of the Wallace Group, the leading Hungarian diversified – leading Hungarian diversified investment company.

And then finally, someone who has been a regular of these gatherings, a great friend of the Atlantic Council, the Corporate Commercial Bank of Bulgaria’s, one of our most important corporate members, Tzvetan Vassilev, chairman of the supervisory board and a true veteran also of the Istanbul summit. Tzvetan has great insight not only into how the eurozone operates in Southern Europe and its impact on the southern tier but very much – very much also the eurozone and its place in the world and whether or not – and what it’s up against.

So let’s start with the deputy prime minister – Kelimbetov, if you could get us started and give us your view.

KAIRAT KELIMBETOV: Thank you very much.

So I actually – because – I am first speaker in this session, so let me start to predicate a discussion in terms of the future of eurozone. And so the euro crisis is already three years old and it is far from the beginning we see the situation. So there, probably, is eurozone is unlikely to survive in the current configuration because what we see – what happened last three years is more from – is very far from the successful decision.

So let’s see what happened in Europe – mostly in my mind the decision-makers tried to treat the symptoms rather than really actually solve the problem. And we see at the beginning maybe it was a false diagnostic to tell – to say that the problem is the only – let’s say, in particular countries they’re probably not very – mismanagement in the budget or something like this, and to frankly say it’s not – the situation is not like this. Maybe only in Greece the situation of mismanagement in budget and budget discipline, but the full crisis in Spain, for example – it was a budget surplus, and I think only this year the Spain will really overcome the public debt ratio of Germany.

So it means that the problem not was only with Greece but probably the problem was – balance of payment issues. And we see that it was a boom in Spain before Lehman Brothers collapsed, and then we see that when it start – unstable situation in these investment flows, then they faced the problems.

So again, at the beginning it was a false diagnostic, and then it was, say – what was the proposal – mostly so-called austerity measures. And the austerity measures was not really part of the program of creation of – (inaudible) – in the countries and of economic growth in the countries. And it’s completely – (inaudible) – with whatever economic growth problems in many countries. And this kind of policy was mostly in all European countries.

What we see right now is, typically, recession in eurozone. And even the apparent(ly) rushed decision of division of – (inaudible) – European stability mechanism, these are also – (inaudible) – bail out countries the size of – (inaudible) – 500 billion euro, which probably will help to support the countries with distressed situation in the economy or distressed bank. But this is again only temporary decision because – (inaudible) – and the problem is the future. The problem is – (inaudible) – come back to the previous councils, more global competitiveness – (off mic).

To take an example – (inaudible) – companies which are part of – (inaudible) – where we have a – (inaudible) – American companies. We have – (inaudible) – companies from Israel – (inaudible) – between companies from European Union, basically. (Off mic.)

Number two is the imbalances between north and south. If we have a – (inaudible) – account surplus in Germany, which 240 million U.S. dollars, the rest of the European countries – (inaudible) – with 140 million U.S. dollars.

There is another problem which is, as we see, the next three to five years, we will not see the real willingness of the European authorities to make the right decisions to – let’s say to fix these mistakes. And I think in these terms, definitely, I am euro optimist. I think it was a great idea – euro integration, and it’s a benchmark for us in – (inaudible) – how we should integrate our economies. But right now, it’s very difficult to say that we – (off mic).

MR. KEMPE: One quick follow-up for you, Mr. Deputy Prime Minister. “Unlikely to survive in the current configuration” – and you’re not seeing a great deal of political will to change that configuration.

I talked to a couple of companies recently, including one of the world’s largest insurance companies, and they’re actually – they’ve done risk tests for the breakup of the euro, and they’ve decided they’ve covered themselves. Can you tell me how that would be with Kazakhstan? Have you done contingencies for breakup of the euro? What impact has this had on your country already, and what impact would it have on your country and the world economy should this get worse?

MR. KELIMBETOV: (Off mic.) (Inaudible) – one country, let’s say we would be out of eurozone, and when this process with other countries could be out of the – (inaudible).

Number two, opportunities to create two-track eurozone with, let’s say, rich and less-rich countries. That’s probably the best solution and the only solution, but as long as the European authorities will not make a decision, it’s more difficult to deliberate these scenarios.

There are several hypothetical scenarios, like if Germany will leave the eurozone or the new elected government will stop the austerity measures. But I think finally we will have to make some decision, and this decision will be really – should be really practical.

MR. KEMPE: Thank you. Thank you, sir.

Prime Minister Bajnai, this is pretty interesting. I’d love to hear your response to the Kazakh deputy prime minister. Listening to him it sounds like the euro is as much a source of risk and instability as it is of financial stability and confidence. How does it look to you from Central Europe?

GORDON BAJNAI: Well, when I try to understand what is happening and why it’s happening, I often remember that in 1986 when I started to go to university in Budapest it was the Karl Marx University of Economics, and the introductory subject was political economics. And then when I finished in 1991, it was already called the Budapest University of Economics – the same building – and we were studying economic policy. And we saw that this is going to – from now on, it will be – (inaudible) – economic policy that – (off mic). And what I’ve tried to understand now – (off mic).

I believe that Europe’s crisis is pretty much – (off mic) – is by now a political crisis. There are many potential economic – economically devised solutions to this problem, but there are fundamental political reasons why these solutions cannot be implemented. The main reason is that Europe is not – (off mic) – and the designers of the European Union from state to state could never come to an optimal solution from the technocratic point of view. They always had to go for the politically possible – (inaudible) – solution, and they have postponed problems to later. And now we are facing these problems.

Now, if we want explain what is happening in Europe, as for how the solution can be found in Europe, we have to raise four political economic questions – (off mic). Number one, if there is a crisis, the first question to ask in politics is who is to blame, who is guilty, right? That’s what the electorate wants to get an explanation for at the beginning. If you believe that everybody else is guilty and you are not guilty then you, it will be very difficult to find a solution. And in the case of the eurozone crisis, the simple answer to who is guilty is everybody is guilty. It was Germany and France who broke the rules of – (inaudible) – first; it was the Brussels commission who let it join on false numbers. It was the Greek and Portuguese governments and Spanish government and others who played a part in mismanaging their economies. So everybody has committed a lot of mistakes.

If – and then the answer is, if everybody is guilty, then everybody will have to pay. Those who have access to cash will pay in cash; those who don’t are paying in austerity. But everybody is paying in one form or the other for the past mistakes.

The second question to ask from the political economic point of view is can you realistically expect the citizens of Germany or Netherlands and Finland – so the north, the developed north – to sign another blank check without an expiry date for the troubles of the eurozone? They have many, many times in the past during the last 60 years. And the answer is clearly no. Politically it’s impossible to ask them to sign a blank check again. They want to get assurances that this sort of crisis cannot happen again. And they are getting those. The new – the six-pack and two-pack and the whole new economic structure that is developing in Europe is developing quite fine, and many things have happened which can really be considered unimaginable. So the northern countries are now getting assurances that such a crisis cannot happen again in the future, but nobody has explained how we can survive the present crisis so that we don’t have to face another one. So the answer is, yes, Europe needs more integration on economic policy. That will raise new questions later on – I’ll come to that – but many things have been done recently.

The third political economic question is, can you realistically expect the citizens of Greece or Portugal or Spain or others to walk into a tunnel knowing there is no exit at the other end of the tunnel? Because this is what they are being asked at the moment. Greece is the – (inaudible) – country in this respect because it is clear that Greece cannot repay 200 percent of the GDP, but they will not pay – (off mic).

(Off mic.)

And this – I understand the political reasons why this cannot be accepted – (off mic). I do agree that – (off mic) – but I think it has come from a tragic – (off mic). But it can be done – (off mic).

There was a – (inaudible) – report a year ago which calculated that if Greece leaves the eurozone they will take a hit on their economy of roughly 40 percent of GDP in one year. That’s practically civil war. But there was also a calculation by UBS which said if Germany leaves the eurozone they will take a hit of 15 (percent) to 20 percent on their GDP because of the sudden increase in the value of the new deutschmark, which would again be a disaster. So one can say it was not ideal to create the eurozone 20 years ago and decide about that 20 years ago, but now we are in a situation and the way out of this situation is more integration.

And then my last point is, in the 60-year history of the European Union, this is the first time that the two most important factors of politics, markets and voters, have realized that if they want to find a solution to their problem, they don’t need – they cannot go to the local capital; they have to go to Brussels because integration has reached this – half-finished but large-enough level. And therefore, Europe has started first to react to the request of markets and economists. But very quickly we are experiencing now the second reaction, which will be to the demand of voters. You cannot make centralized fiscal policy, which is the heart of any politics. It is about how much money you take from one group of taxpayers and give that money to other groups of taxpayers.

If you put this issue up to the Brussels level, you need to create the democratic mechanisms to control this process at the Brussels level, because without proper legitimation, as you see from the example of the U.S., no taxation without representation. That is true for Europe. There has to be a proper political representation (of ?) legitimacy at the level of the European – (inaudible).

MR. KEMPE: One very quick question before I turn to Tzvetan. You say the voters are going to turn to Brussels more. I agree that one needs more democratic legitimacy in Brussels, but one doesn’t have it yet. And so instead what you’re seeing is a renationalization of politics, and you’re seeing populism in your country above all.

What’s going to win out, (technocracy ?) or populism?

MR. BAJNAI: I believe that the – as I’ve said, everybody’s interested to keep this together and develop it further, because (the way out of it ?) would be a disaster. The problem is – and if I would need to bet my 100 euros, I would put probably 80 percent, 80 euros, betting on the eurozone staying together, because every rational interest is there.

But probably, 20 euros I would convert into U.S. dollars and keep in my pocket, because our history books, especially in Europe, are all about momentary lapses of reason, about situations where long-term rationale was overridden by populism. And that’s why our fundamental job – every politician’s job, in opposition or in government these days, is to counteract populism while focus on democratic legitimacy of the necessary changes and structure of reforms.

MR. KEMPE: So that’s 4-to-1 odds, Tzvetan, or 1-to-4 if you’re looking at it from the other standpoint. Let’s start – let’s make this more of a conversation, too. We’re going to go to the audience in a second. But as I ask Tzvetan his question, you know, let’s turn this into a conversation where, if either one of you want to jump in, jump in.

You actually have to do business in this setting. On the one hand, you have Greek capital flight making your business somewhat easier. Your bank seems to be doing just fine. On the other hand, how does it really look in southeastern Europe? How is this part of the world, your country, coping with Europe’s financial woes? And do you agree with the picture that’s been painted here that you’ve heard thus far?

TZVETAN VASSILEV: It’s not been easy task to work in such conditions. And I can say that the one thing is that maybe Bulgaria joined European Union not at the right time, a little bit late. (Chuckles.) So my opinion about the problem and the crisis, the particular crisis in Europe, is that besides the reasons of global financial crisis, when we are discussing the crisis in Europe we have to add the systemic errors which Europe added to the reasons of the crisis.

By systemic errors, I mean the way of the enlargement process was done. Because according to the main – the basis of systemic approach, if we are talking about the system, we should assure – the integrity of the system means we should assure the integrity of all the countries, which we didn’t see in the case of Europe, because the process of the enlargement instead, to back up the stability of the countries and to broaden the gap between the levels of development, it practically enlarged this debt. Why?

The way it was done – simply, if you see, most of the funds coming from – (inaudible) – structuring program, they’re not going to increase the competitiveness of the economies. They’re going to support the infrastructure of the countries, which is, of course, not bad, but it’s not sufficient.

And it is – if we are looking at the history and the development of the last 10 years, which is practically including the period of the fast enlargement of Europe, we can see – we can see that we have two groups of countries, northern countries, especially Germany and Netherlands, which are having chronic surplus in the intra-systemic (off mic). And countries like Greece and Spain – I’m not talking about Bulgaria and Romania, the newcomers, which are creating a negative and economical bankruptcy from current accounts.

And being all these countries means also not rich in primarily resources and toil – they became practically a chronicle – the chronicle debt position. In order to cover this, they needed to issue a sovereign debt. So this sovereign debt was growing during all these years, and especially when some of the countries not well prepared have been accepted in eurozone, immediately current account deficit and budget deficit have been combined, which increased enormously the problem. So it was inevitable to reach such a big crisis.

But still the main focus of the – still we don’t see the integrity of the European Union, because each country – if we look at the first reactions in 2010 of the European countries, it was to save themselves, to save their own industries. Let us remember the state of German government to pay 2,000 euro to every purchase of a new car. So this was to preserve themselves, not to –

MR. KEMPE: Preserve the European Union.

MR. VASSILEV: Yes, to preserve the European Union. So also – so the biggest problem is that we found now that all of us European countries were not keeping the rules, practically, and also the biggest countries. But why so long time we followed this policy? Why? This I cannot understand.

Even now, when Bulgaria is one of the, let’s say, best-performing countries, Bulgaria is not somehow ameliorated from that. Bulgarian people are suffering, and nobody’s ameliorating the Bulgarian people. What’s the difference between Bulgarian people, living with 250 euro salary per month, and let’s say Greek people, do not accept 500 euro per month? This is –

MR. KEMPE: So the European Union is not looking as attractive to Bulgaria as when Bulgaria first got in. But here’s a question, and then we’ll get to the audience. Prime Minister Bajnai gave us a useful number – 80 percent, 20 percent, 4-to-1 odds, of the eurozone staying together. You’re a businessman who actually has to make that bet with much of your business. What odds would you give? And I’d ask the deputy prime minister to give his odds as well.

MR. VASSILEV: I think that, going this way, Europe has – (inaudible) – chances – (inaudible). When Deputy Prime Minister Babacan was saying three crises and – (inaudible) – Europe, we should think about the continent Europe and European Union. If European Union wants to continue being a union, they should change the rules. Of course, we have elective leadership now. We created in Brussels a second center of democracy and civil servants, not politicians, with the vision how to overcome the negative impacts of crisis.

MR. KEMPE: So you would turn the odds the other way. You would say maybe 4 to 1 against. I’m not putting words in your mouth, but you sound much more –

MR. VASSILEV: I’m 50-50.

MR. KEMPE: Fifty-fifty. Fifty-fifty, OK.

MR. BAJNAI: I think it will be another 10 years’ discussion what to do. It definitely will be – (inaudible) – like Professor Ferguson from Harvard University mentioned in his book. And definitely Europe needs structural reform in maybe five, 10 years issues.

But the issues of eurozone – people always try to bring eurozone issues and euro integration in European Union. U.K. is out of eurozone and is also part of the European Union. Norway is also European country but out of eurozone. And everything is going well in those countries. I mean, it should make – the eurozone authorities should make a decision. And as long as decision will not be made, is more problem we will have globally from it. The EU is trade partner number one for Kazakhstan. It’s 51 percent of trade. We export a lot of the natural resources to region. The Chinese slowdown – Chinese economy also depends on what happens with euro economy. So it means a lot of issues which – definitely, the independence from each other is increased the last 50 years. That’s why I think we very much hope the decision will be made right way.

MR. KEMPE: Questions from the audience. And with some real skepticism toward the future of the euro up here, I’m more than happy to take a comment on that from the audience as well, whether you agree with some of the skepticism or not. We can keep discussing up here, but I want to give you a chance at these individuals who are dealing with these issues.

All right, now, Atlantic Council staff will be required to ask a question within 30 seconds. So just a – please. OK, great. Thank you. And if you could identify yourself and to whom you’d like to ask the question as well.

Q: Thank you. I’m Chris Otopoulos (ph), former secretary general of – (inaudible).

I would like to ask the following questions basically to the former prime minister of Hungary. As far as Greece is concerned, measures that are being implemented are not working, and they haven’t been working for the last three years. So the question is, if the measures are not working, why does the European Union still insist on imposing them at the detriment of Greece and its society? Because as was said previously, the Greek people are on the verge of revoking. They do not see any light to these measures that are being taken, and they’re not willing to make any further sacrifices that do not bring any results. Thank you.

MR. KEMPE: Hungarian prime – former –

MR. BAJNAI: Thank you very much.

First of all, I think I agree with the assumption that was part of your question. I believe that the level of – and not just the level – the speed of austerity that was imposed on Greece are showing the limits of social affordability. Also, Greece’s example is showing very quickly this linkage between decisions can only be made in Brussels, but democratic legitimacy still lies with the Greek government. And Greece has changed three prime ministers during less than one year, but the policies have not changed.

And that is showing the democracy deficit and the interdependence of the European economy, and then, as a consequence, European politics. That is why I believe that the next crisis of the European Union, after solving the financial crisis, will be the democratic legitimacy crisis.

Secondly, I was arguing for facing reality. Greece’s economy is not able to repay not even close to the current debt level or even the previous debt level. The debt level there was reduced too from a previous level. It’s still roughly double of the size that the economy of Greece’s development could manage.

There’s a great book by Kenneth Rogoff about “This Time Is Different.” And there, there’s a full chapter explaining that roughly half or more than half of government defaults between 1970 and 2001 happened at the debt-to-GDP rate of below 80 percent. So the conclusion is the quality of institutions in a country are defining the amount of debt that the country can manage.

For example, the tax collection problem in Greece, which is clearly an institutional problem, or the quality of governance previously, are showing that the country cannot afford that level of debt. So I don’t – I’m not a great believer of the solution letting Greece out of the eurozone, because Greece at the moment doesn’t have the industrial production base that could benefit from a reduced value currency, and consequent increased exports.

First, I think there is a strong development needed in Greece in terms of institutional capacity, structural reforms and industrial capacity. And that will be a longer-term process. There will be – a lot of development tools will be needed with European support.

So I believe that Greece’s situation could be dealt with within the eurozone with its special measures, including partial debt relief. But the big question – and on that also we have to be understanding towards Germany and the northern part of Europe.

There is a huge moral hazard. If they just let the debt go from Greece, everybody else who is in debt will be asking for the same, from Ireland to Portugal to Spain. And that would collapse the European economy. So there has to be a proper balance, and we should be much faster in finding the balance between finding a solution to the debt problem and, on the other hand, not letting moral hazard collapse the European economy.

MR. KEMPE: But I’ll also go back to something you said earlier, which is, one has a tendency to blame Greece, which is easier to blame someone else. But Thomas Mayer, Deutsche Bank economist, wrote about how Greece was the canary in the coal mine. And, of course, one’s blaming the canary instead of the coal mine. And the coal mine here, of course, is the way that the whole structure was set up to start with.

Questions. Please. Let’s take one there and then one here. We’ll take two questions.

Q: I actually have two, but you can just make it one. One question was, given the voting patterns within Europe on the EU Commission representatives in the parliament, do you really think that the countries are willing to pass over fiscal authority into the EU Commission?

The other part of the question is, if you go to a two-track system, how is that going to play out for those countries that are the lower end of the income scale and are trying to improve their economies vis-à-vis the Western European countries?

MR. KEMPE: Yeah, I think this is really an interesting question, because it is – if we think democracy is important, would democracy support fiscal union, which politicians are currently talking about? And maybe both of you could give your – I actually wanted to talk to you about Silk Road in the end, but why don’t we – our Hungarian colleague, then Bulgarian colleague, who’s both a voter but not necessarily within the eurozone.

Yeah, please?

MR. BAJNAI: On the two-speed or two-track Europe, this is very tempting and politically the easiest solution to the current problem. And there is a high likelihood that this solution will be chosen. My biggest concern is what will be the second speed. Is it not going to be a reverse gear for those countries who are in the second tier of countries? But also, one has to look at the type of country that may or may not be in the second group. I think the situation of the U.K. is very different from the situation of Hungary, Bulgaria or others.

And I do believe that there are at least four groups of countries in Europe. I think there is the northern group. There is the southern group, which is currently in trouble. France at the moment is facing the choice whether they belong to the north or the south. It’s going to be a choice of a lifetime.

The third group is probably the U.K., pretty much alone. U.K. is facing the decision whether it’s the most western country in the European Union or the closest western neighbor of Europe. And that’s going to be, again, a very – another decision of a lifetime if it goes that far.

And then, interestingly enough, the newly joined, the newer members of the European Union mostly have followed a path which brings them closer to the northern side than to the southern side, because all of these countries has a very strong and developing industrial base. They have become a new manufacturing belt of the eurozone. And despite all the popular discontent, these countries are benefiting still greatly from the European Union.

And if there is one argument that should be more widely understood is that, in this globalizing world, in this post-hegemonic world, as Professor Brzezinski said in the morning, the only chance for all of the countries and each of the countries of the European Union to not only survive but to learn in this new world, is to keep this integration together. Because divided they fall, but united they could stand if they get through this process.

MR. KEMPE: So I’m going to close with one last question to Tzvetan and one last question to deputy prime minister.

Tzvetan, let me ask you a question that you are sort of the most uniquely qualified person on this panel to answer, which is, how do you play this as a businessperson? What is the opportunity in this euro crisis for you? What is the danger in the euro crisis for you? How are you playing it?

MR. VASSILEV: For sure, it’s a challenging time. And I’m usually saying that my business life passed through a crisis in the crisis conditions, because I started with the transition in Bulgaria, which started in 1990-1991. So I’m following all this transition period with my business life.

So conditions now in my country are not very different than the former crisis, with only one exception. This is the so-called growth which I’m calling artificial growth during 2005-2010, which is with very doubtful effects in Bulgaria. Because, as you might know, Bulgaria has a currency board, so our local currency, national currency, is pegged to European currency. So there is no fluctuation. That’s why we are quite like – very close to eurozone, which is helping to compensate us, but on other side is preventing us from bigger troubles.

So what I can say is that with the crisis, the conditions for the bigger players in the market, Bulgarian market, especially banks, changed and came closer to the conditions my bank was working all this time. So now, it appears that we are more prepared: The big banks, working from different conditions and following a different strategy, which was a result of the conditions which they had before.

So generally the crisis is helping me a lot because my bank had 50 percent growth for the last two years. But on the other side, of course, the crisis having negative impact on Bulgaria mainly because of the very low demand of our markets. So to work with focusing only on local market is very difficult. That’s why we have followed, now, the strategy mainly to – (off mic) – sectors like infrastructure and energy, and also with the public sector – (inaudible) – companies based in Bulgaria, because it’s the only way somehow to amortize the negative impacts of the crisis.

MR. KEMPE: Very interesting question, since one’s dealt with crisis since the transition from the Soviet bloc – you’re ready for this.

Mr. Deputy Prime Minister, last question to you, and this is off the eurozone crisis. We’re down to the last couple of minutes. I’d ask you to keep it short. But it’s a big question. And as we heard a lot about the Silk Road, there’s a lot of buzz about this new potential economic area that could be tremendously exciting.

How much of this is just hype, and how much is real opportunity?

MR. BAJNAI: If you analyze and view EU economy – (off mic). And not only the Chinese – (off mic.) And I like – (inaudible) – recently. And it’s not only China, India and Russia, but it’s also the countries like Indonesia, South Korea and Turkey.

So – (off mic) – understands that the role of Kazakhstan – (off mic) – crossroads between global economies, might be closer to Europe, to Turkey, to the Middle East. And in order to be closer, we have to create really – (off mic). The idea or recovering the ancient Silk Road way, which was the link between China and – (inaudible). It’s also part of the economic growth program in Kazakhstan, who now became part of the Caspian Union. And we see – (off mic) – in the future development of the world economy.

One issue which I would like to raise just one minute is – we talked about – (of mic) – but I think it’s not just European – (off mic) – and especially – (off mic) – President Obama. You have a unique political situation in the United States – (off mic) – should think about. And I think – (off mic) – better will be for us to continue building economic prosperity in the world.

MR. KEMPE: Thank you very much. I want to thank these gentlemen. I think this was an incredibly rich conversation – in many ways, a richer conversation on this issue than what might have had in Brussels right now. The – but there’s so much at stake.

I just returned from a meeting in the UAE with the World Economic Forum, where great thinkers from all over the world were asked what they thought the biggest risk factor for 2013 would be. And the interesting thing is it wasn’t the U.S. economy. It wasn’t Iran. It wasn’t the Middle East. It was the eurozone. There are business people that are operating – (off mic). So this was a very important conversation.

Thank you so much for joining us for this lunch. The afternoon panel starts in about 15 minutes, in the two rooms you’ve been going to. So please get there as quickly as you can. And thank you so much for this great conversation, gentlemen. (Applause.)

(END)