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"Changing political landscape"

Klaus Welle speech at AmCham EU dinner

Tuesday, February 14, 2017

I think one of the best guarantees to have a failed dinner speech is to be introduced as the high part of the day... Now I have all the chances on my side to fall into this category!

What I will try to do is that I will try to provide – as best as I can – a kind of analytical frame. I will try to refrain from value statements, as much as possible, but nevertheless I think it is interesting to provide an analytical frame on where we are and what are the challenges.

I believe that too many speeches about the European Union immediately start with the problems. If we immediately start with the problems, the likelihood is quite high that we will never leave the problem area. I think that every honest assessment of the difficulties should first start with the achievements.

Looking 25 years forward – which of course I will be unable to do – should always start with looking 25 years backwards. So, what have we achieved since 1991? Why do I take 1991? Because 1991 – the year of the collapse of the Soviet Union – has been the moment where a lot of opportunities came up. And I think that, before we get into the ‘depression phase’, it is worth remembering what the European Union has been made out of these opportunities.

First, I would like to argue that Western Institutions - Democracy, Market Economy, Human Rights - have been around this time firmly established 1.000 km to the East. I am coming from Germany, which was then divided Germany. We knew exactly what it meant to be on the one side or on the other side of the iron curtain. So, integration in Western Institutions, in NATO and the European Union has meant that Western Institutions - Democracy, Market Economy, Human Rights - were enlarged 1.000 km to the East, and this has happened peacefully.

If I am allowed to make that remark, attempts were made to establish democracy and system change with other means. And I think the European Union does not need to shy away in the comparison, especially when it comes to success. What the European Union has achieved is really an achievement of historical dimension: to enlarge the space of values 1.000 km to the East. This development has occurred at the same time as the end of Totalitarianism in Europe. We have seen it in different forms in the 20th century but 1991 clearly marked the end of Totalitarianism in Europe and that is something, I believe, that we should never forget.

We also have had a succession of Treaties for Europe. We forget, maybe, where we were before the Maastricht Treaty. But, since 1991, every 5, 6 or 7 years we have had a new Treaty which has changed the European Union beyond recognition and firmly anchored democracy into its functioning. The European Parliament – at least – has changed beyond recognition through this succession of Treaties over the last 25 years. Many things, of course, can be criticized, but the Euro was established: the second most important currency around the world, for 330 million people. Of course we read every year that it is the last year for the Euro, but we also read every year that this ‘last year’ will have to be slightly postponed. So, let us see if this will be a continuing trend. And let's not forget that also the opportunity arose at the same time to establish markets on a global level, which means: hundreds of millions of people had the chance to get out of poverty.

I hope I have sufficiently prepared you for the next phase, which of course is a throw you into depression!

25 years are over – which is one generation – and I believe we can have the feeling that something fundamental is changing. Somehow, the tendency which started in 1991 has been a bit running out of steam.


So, what has changed? I think before we can have a go at the question: What should happen in the future?

First, we need an honest analysis of what has changed.

I think if we look outside the European Union, we see that our environment has fundamentally changed:

To the East, we have Russia, which has behaved aggressively, not only in Georgia but also in Ukraine. There we have a kind of implicit Putin doctrine which is saying: any other State who would like to join the Western Institutions will be threatened, if needed by military force.

If we look to the South, we have the Islamic Word in disarray and disintegration. We have a whole number of States where basic State functions are no longer guaranteed. From Iraq to Syria, from Libya to Sudan and Mali, and this is not a closed list. All of those countries are on the edge. And we are confronted with the consequences of the instability there through mass immigration or Islamism terrorism. They are the consequences of the instability in our South.

In the West, fortunately, first there is a lot of water. And the water hasn't changed so much recently. But behind the water, we have a new US administration, which needs to be looked at carefully. If you take the election campaign at face value, you could come to the conclusion that it is the end of the World order as it was established after 1945. But now we have to see what is actually coming…

And in the North, until recently the biggest problem was Iceland. Remember, Iceland went bankrupt some years ago, but the problem was far too small for us. So, now the biggest problem is not Iceland, the biggest problem we are having is called Brexit.

This means: trouble in the East, trouble in the South, trouble in the West, and also now, trouble in the North.


Unfortunately, there is also insecurity inside. I believe that we are still suffering from the aftershock of the financial crisis. At least when we have a look at "confidence figures in Institutions", the drop off is from about 50% in 2008 to a little bit above 30% today. By the way: the drop in confidence is not only for the European Institutions but for National Institutions as well. If I should choose a drastic formulation: there is only one thing, which is less popular than us, these are National Institutions! So, those who believe that this is a choice against the European Institutions in favour of the National Institutions will not find a basis to support their view in the actual figures. It is a general disappointment with Institutions both at European and at National level, and clearly linked to the moment of financial crisis in 2008-2009.

Why? Because I believe that Institutions have lost some credibility in economic policy. Economic models were allowed for banks, which were looking for 20% return on investment. But you can only have such a return if you have basically no own capital. Because only with a very limited own capital you can get such a leverage effect. But then taxpayers had to pay the bill and also people depending on social security because of the cuts needed in public spending and public debt.

We have very much increased the debt level, which means that the space for fiscal policy is limited, which put some traditional economic approaches in difficulty, like Keynesian economics – if you have already 100% debt to GDP, Keynesian economics becomes definitively more difficult – but also the space for monetary policy is exhausted when you have Central Bank rates roughly close to 0% and sometimes the interests even in the negative.

So, we have lost the traditional tools for doing traditional economic policy.

Then comes globalisation, of which many blue-collar workers already felt to be the victims. To it adds something which we like very much, which is called technological disruption. We like it, if it comes in the form of iPads and iPhones. But not everybody likes it so much, when it comes in the form of medium size enterprises losing out or banks no longer having viable business models or – let's say – the travel industry having difficulties because everything is simply done otherwise. This means that disruption, technological disruption is not only technological disruption; it is also economic and social disruption and if you have economic and social disruption, you are very quickly also in political disruption.

So, all of these effects are coming together, plus mass immigration – as we had last year – not in a very controlled way, which is also provoking public reactions.

Are we now all depressed enough? Because if we are all depressed, normally we should come with means to get us out of depression. Unfortunately, we cannot be so quick.

So, the consequence of all of the recent changes – and I hope I am still analytical in what I am saying and not getting into value judgement – the consequences – and I think it is a fair description – is that the party systems in Europe are changing.

It means that we now have a very high degree of volatility in the system. 20-30 years ago a 2-3% shift was regarded as something important. Now we see that new parties can come up in a few years, also because the cost of organisation has dramatically decreased, because you don't need grassroots organisations all over the country, you do it over the internet, which means, that the political market has become much more volatile.

But it also means that the traditional situation of regular shifts between centre right and centre left, and then back to the centre right, and then back to the centre left, and then back to the centre right may be coming to an end. When we have a look at different political systems which are now coming into being in many European countries, we see that this traditional alternative cannot be anymore taken for granted. In many countries the alternative, nowadays, becomes a nationalist party, which normally promises to protect. So, the core promises of nationalist parties are promises of protection, in times when the traditional parties have difficulties to handle the traditional policy instruments to protect.

So, in the political competition, the choice becomes between a more traditional moderate party and a nationalist party, which means that after 25 years the ‘system question’ is back. In the communist times in the East, until 89-90-91, there was a system alternative: the East and the West – different, fundamentally different choices. The choice between traditional moderate parties and nationalist parties is also a ‘system choice’. Because it is the choice between: negotiation, compromise, lengthy procedures to find an agreement and the traditional power politics, which we know well from our history and which is rather based – and again I try to avoid value judgements – on national strengths. So, the ‘system issue’ is back in the political landscape on the European Union.


What is the ‘system question’ basically about?

If you try to make it very simple, I would argue that the basic system question, which is nowadays posed is between ‘open’ and ‘closed’. I hope this is not a polemic remark. Open or closed. Open, this is an issue already on the national level: How open are you to minorities? How open are you to refugees? How open are you to foreigners? How open are you towards the European integration and cooperation. But also, how open are you on the global level to trade and cooperation. Open or closed. So open society or closed society, I think that is the essence of the choice which is presented to us. And if that is correct, then the issue about Europe and Euro-scepticism or Europhobia is just a sub-issue of a much bigger, much wider issue, which is also posed on the national level and on the global level. We always like to believe that we are the most important, but maybe we are just one aspect of a much larger game on a much wider stage.

And I would argue that the election outcome and the election campaign in the United States, which is not a member of the European Union, which has never aspired to become a member of the European Union and which is not too closely connected to the European Union – I think - is a clear demonstration that we are confronted with a much wider phenomenon then just a judgement on whether the European Union is a perfect organisation or not. And probably-anyhow- we are not one.


So, what is the European Union's reaction?

I believe that the key answer is formulated in the Bratislava Declaration, because the focus there is clearly put on security. If the problem for citizens is insecurity then it could indeed be a good idea to give an answer which has to do with security. So, Bratislava is focused around external security (security and defence, border protection), internal security (fighting against terrorism) and also social security. So, external security, internal security, social security, or, in other words, an offer for protection. Yes. An offer for protection!


But how can the European Union protect and what are the changes necessary if we want to protect?

I would argue that the European Union traditionally has been established as a legislative machine. We are perfect in legislating! I mean, we can process hundreds and thousands of amendments – no problem – and we might have 67 trilogues with Council. We are wonderful in that! We have been established as a legislative machine; there, we are very good. But when you go to protection, you probably need to do something else, which I would call, "complementary executive capacity".

So, what is complementary executive capacity? It means that you may need to help out to protect the external border here or there – and this is not just legislation. The European Union has decided to establish a coast and border guard to help out Bulgaria which was saying: "we have difficulties in controlling the border with Turkey, please help". So, the European Union is building up a complementary executive capacity. But this is a different business to the one which we had up to now, which is to be legislative machine.

There is now a discussion on security and defence and when you ask one of the experts – I am not an expert – they say that the European Union cannot do everything but yes it could come in and help, for instance, with transport capacity or medical doctors, because it is difficult to send people into combat if there are no medical doctors around. So, it means the European Union could be asked to provide complementary executive capacity also in the area of security and defence and this is something different from just being a legislative machine.

And when we look back to what some call the "Euro crisis" - I would call it the debt crisis - when we look back to this, what was the necessity at the European Union level? The European Union had to help out with a fund of 750 billion – if I remember the figure roughly correctly –Member States who alone couldn't cope. The Union needed to provide complementary executive capacity in this field too and passing a law was not enough. So, obviously the Union is in a kind of change of business model: from "legislative machine" to "complementary executive capacity".


What does it mean for our issue here?
I would argue that there are two sources of Euro-scepticism. The first source is – that is the traditional one – people believe, you know, they would like to have very little European intervention while in fact the Union is intervening far too much. So we could call this: "the citizens want a mouse and we are delivering an elephant" – to put it into an image. We are doing far too much. They are asking us for a mouse and we are delivering an elephant. But I would argue that there is also a second source of Euro-scepticism, which is that "citizens are asking for an elephant and the European Union is delivering a mouse"! And they are asking for an elephant now in the area of security and defence, in border protection, in internal security and also in building up the euro system into a viable thing. So, that will be my final remark: we need, the European Union needs to deliver on some elephants in the room!