Twenty Years of Transition conference

European Bank for Reconstruction and Development and Centre for European Reform

Monday 2 November 2009

Participants:
Aleksander Kwasniewski, President of the Republic of Poland, 1995-2005
Ján Čarnogurský, Prime Minister of the Slovak Republic, 1991-1992
Timothy Garton Ash, Professor of European Studies, University of Oxford
Thomas Mirow, EBRD President
Katinka Barysch, Deputy Director of the Centre for European Reform, London (Moderator)

……………..earlier that year, some of them only weeks earlier: in China a bloody crack down of protesters at Tiananmen Square; the very next day in Poland a peaceful, democratic earthquake when Solidarity took a landslide victory in the elections. In Hungary the parliament adopted legislation providing for multi-party parliamentary elections and a direct presidential election, transforming the country into the Republic of Hungary.

In East Germany, Erich Honecker has just been deposed by his party and replaced by one Egon Krenz. The country looked isolated. The Soviet bloc was falling apart and, unbeknown to most of us then, the seeds had already been sown for the break-up of the Soviet Union. Then, a week later, this.

Today, 2 November 2009, what happened 20 years ago will form the historic background to our discussions but the essence of what is about to be discussed today is just like the EBRD itself. It is about the future, about transition, about building from what was into another system, into another kind of future. The past 20 years have been an unprecedented success, both economically as well as politically. Democracy has taken root. The economies have grown. People have prospered. Over the past years alone, much of the region where the EBRD operates has enjoyed double digit growth. Then the financial crisis hit.

Today our day will begin with our Chief Economist Erik Berglöf who will analyse what went wrong and why. In presenting the publication Twenty Years of Transition, he will discuss whether transition in itself is now in crisis and explore the lessons to be learnt. Erik’s speech will be followed by a panel discussion attended by former Polish President Aleksander Kwasniewski, former Slovak Prime Minister Ján Čarnogurský, Oxford historian Timothy Garton Ash and President Thomas Mirow.
The panel discussion, organised in tandem with the Centre for European Reform and moderated by CER Deputy Katinka Barysch, begins at 11.30, after a break followed by the discussion.

For my part, may I simply conclude by saying that notwithstanding the merits of our other distinguished guests today, we in EBRD are humbled and honoured to be able to host two such distinguished political figures and leaders as Aleksander Kwasniewski and Ján Čarnogurský, people who were not only present when history was made but were among the few who actually made it happen.

If I were to start introducing Erik and his academic merits as an economist it would take too much time out of his presentation, so I will only say this. In 1989 he was a young research fellow at Harvard School of Law in the United States and the young father of a child. Today, he is here with us. Over to you, Erik.
MR BERGLÖF: (Slide Presentation) Thank you, Reijo. It is indeed true that I was in the United States and in Cambridge Massachusetts when all these transforming events happened. It was a strange feeling to be deprived of the chance to be part of this. When the Wall fell, it was third in the news on the radio station in Cambridge. It has been a real honour and pleasure and I am very grateful to the EBRD for letting me somehow come back to the front line of transition. I have had a few years here and they have been extremely rewarding. Tonight it is a real honour to be addressing and presenting this report in front of such a distinguished audience and some of the heroes of transition.
This report is very much a team effort, an effort of the Office of the Chief Economist, and I am particularly grateful to Jeromin Zettelmeyer who has been leading this effort but has really involved the whole Bank and also some people from the outside. What I am representing today is just the tip of the iceberg of what has contributed to this report.
It is an ambitious report. To my mind, it is the first comprehensive attempt to look at the reasons and the impact of the crisis in our region. It is also an attempt to look back at the lessons from the crisis and from two decades of transition.

We have left a lot off the graph, the economic analysis, and out of these slides but there is a separate handout for those who have a perverse economic interest. What I am presenting now is the basic storyline.

For those of you who have not noticed, there is a crisis out there. It is a crisis that has been affecting most of us, particularly the people of our region, but it took some time for the region to be hit. If the global crisis started in August 2007, still in March 2008 very few countries really had experienced any impact of the crisis in our region. The main exception was Kazakhstan, a country that relied a lot on international markets and had a very ambitious financial system. It was affected by the global financial crisis.
After the collapse in commodity prices, the collapse in demand of Western export markets and the collapse of Lehman – this is December 2008 – we can see what the heat map is trying to show you. Looking at some factors – currency markets and industrial production – and at the total picture, the dark spots here are now in Ukraine and the Baltics. If you move forward here to March 2009, most of the region is affected. You will see that there is a lot of variation. Here also within Russia itself, which covered so much of the previous picture, there is a lot of variation
What we are going to try to do in this presentation is to use these variations across countries to try to understand better what it was that determined the extent of the impact in region. We are also trying to explain why we avoided a much worse crisis, the crisis that we all worried about at the end of last year and the beginning of this year. We have tried to draw some lessons for transition and what we have learned about the basic models of transition. Then we look forward to see what are the main lessons from transition as such and the prospects for transition going forward.

A summary of the crisis: the crisis has been a deep one in our region. It was a sudden crisis. The last quarter of last year and the first quarter of this year had a dramatic impact on most of the countries. Again, there was a lot of variation but most countries felt this very strongly.
There has been a sharp fall in external demand and a sharp fall in exports, particularly in the last quarter of last year. Capital inflows have stopped and in some cases even reversed. I will come back to that.

It is a deep crisis. This year we expect output to fall by 6 per cent or so and a few countries – the Baltics, Armenia and Ukraine – will have a double digit decline, and thus there will be a very serious effect on these countries. We will have a continuing credit crunch in the region. There are still a lot of bad debts and balance sheets in the banks, a lot of restructuring needed and unemployment is on the rise. When we look at the recovery, in many cases these countries are very dependent on what is happening in their export markets. We expect a slow, patchy recovery, again with a lot of variation, but the basic features show a slow recovery.

What made this impact so bad for the region as a whole? Obviously the fact that these countries were very dependent on export markets, the fact that these countries were so deeply financially integrated and all the cross-border lending that came with that was an important part of the story but it was not the whole story. There were also the very high financing needs that have built up. Even if the actual outflow of capital was perhaps not so big, the fact that this region was so dependent clearly had an important role to play. Also, other financial channels than bank debt such as trade credit certainly played a role.

What happened around the Lehman collapse and the impact on asset prices in general influenced investors very much. That also had an impact on our region. In many countries the downturn in the business cycle had already started, so this crisis came on top of that downturn.

The factor that influenced and contributed to the extent of the decline in output in our countries were the pre-crisis credit booms, and most of our countries over the last decade have had many years of credit booms. In some countries, almost every year was a credit boom year. This built up very large external debt and the more debt you had, the more you were impacted by the crisis. The more you depended on export shocks, not surprisingly, the more you were impacted. Also, now we see that in the crisis at least these hard currency pegs really meant that the ability to adjust was limited. That is not true for all countries but it was true for the Baltics. We also saw that many counties with the flexibility used it.

What were the mitigating factors? What helped the countries through the crisis? What is very important and what we have found from our analysis is that foreign banks played a stabilising role. I am talking now about the strategic foreign banks, the dozen or so banks that have a strong subsidiary presence in the region. This seems to have stabilised the countries. The institutional quality mattered and also the extent of foreign direct investment, because that was capital that was much less likely to flee the region.
The good news is really that we did not have the traditional emerging market crisis. The net capital outflows were less sharp than in previous crises and less sharp than in other parts of the world. I snuck in one graph here just to irritate the Communications Department. This slide shows the last quarter of 2007 and the first quarter of 2008 compared to the last quarter of 2008 and the first quarter of 2009. You can see the difference but you also see that if you break up our region, Russia and Ukraine were affected very much by outflows but emerging Europe, excluding Russia and Ukraine, less so. Of course Central Asia and the Caucasus, being much less integrated, suffered much less. If you compare this to Latin America and emerging Asia, these outflows were still in most cases quite modest.

It is true that in many cases the macro vulnerabilities were high but the financial systems as such were essentially sound. We have seen relatively little of a banking crisis in the region. Not too many other aspects of the financial system were so much part of the crisis. I will return to this because it is very important. There was a very forceful coordinated and comprehensive crisis response, both domestically and internationally.

Let me say a little bit about the crisis response. This picture here is from the Annual Meeting of EBRD in May. I think at that point we were very much still in crisis mode trying to help the region.

To understand the challenge that we were facing at the time, at the end of last year and the beginning of this year, you have to understand the nature of the banking system in Europe. Here I am just going to show you a few of the links that exist between the Western European banks and the banks in our region. Here we have Austrian banks and Italian banks, and you see the extraordinary networks; you have the Swedish banks in the north and the Greek banks in the south. There are more countries that have a strong presence of Greeks: Hungary had its own OTP Bank with subsidiaries across the region; you had Belgium with its KBC, France with important banks, Denmark with one important bank in the Baltic region and from the Netherlands. Here you see the complex web. When you think about the policy response and the policy challenges at the time, it was extraordinary. The strong Western European bank support programmes were critical at the time and they held up the Western European banks. The worry then was of course that these resources were not being used to benefit the subsidiaries of these banks. It was very difficult for politicians and policy makers to convince taxpayers that their money should be used for banks in Ukraine and so on. It was very important to make sure that this kind of discrimination did not happen.

It was equally important in the eastern European countries to make sure that there were not policies that ring-fenced or prevented these banks from transferring resources between their subsidiaries and to the parent bank. You also had many other coordination problems; you had problems between the post-insurance schemes being introduced in one country and not in others or not being credible in another country; you had transfers of deposits from eastern Europe to western Europe. It was very important that we got a handle on these local domestic policies. Maybe the most important coordination problem here was the one that was facing the private sector as such, the banking system. We knew that lower debt levels would be needed in the region. We knew that there would be less demand for credit. The leveraging, as we say, would happen. If you are a bank and you know that asset values are probably going to come down, it is very tempting to be the first one to withdraw, but of course for the banks as a collective it was critical that this happened in a managed way and that we did not see a dramatic run for the exits. There was a need for someone to intervene, sit down with these institutions and make sure that all this happened in an orderly fashion.

These were the policy challenges that we were facing at the beginning of the crisis. What came about was a truly remarkably effort I think with massive domestic support in western Europe, both in terms of fiscal stimulus and in terms of support to the banking sector. There were very mature responses in central and eastern Europe and none of the ring fencing. Of course, their resources to do fiscal stimulus were in most cases very limited.

If you look at the international support, it was unprecedented. When the crisis started, we were concerned that if there was a systemic crisis in eastern Europe, even the resources of the IMF at the time would not be enough just to deal with that crisis. So when the resources to the IMF were tripled as part of the G20 meeting here in London, that was critical to the peace of mind of the policy makers in trying to address the crisis. The EU quadrupled, in the course of six months, its balance of payments support. The signals that were given at the G20 of reinforced capital to the multilateral development banks were critical and the fact that these systemic parent banks stayed in the game was very important; they stayed committed to the region. Even though in many cases each subsidiary was marginal to the parent banks, that subsidiary in the host country was critical and in most cases systemic.
A very important part of this crisis response was the Vienna Initiative, The need to coordinate with the banks to maintain their exposures, the package that was put together by the international financial institutions – EBRD, EIB, the World Bank Group – was critical to providing confidence to the region. The home countries that allowed support to subsidiaries and that provided liquidity equally to foreign and domestic owned banks was all part of this coordination effort.

Stepping back for a moment and looking at two decades of transition and the crisis, what have we learnt? This report asks a lot of difficult questions. Of course, the crisis teaches us something. It tries to look at how market-oriented institutions have performed in this crisis. Are these development models still attractive? I am thinking here of the financial integration model of central and eastern Europe and the commodity-based model that we see in some countries with rich assets of natural resources.

What about the transition goals? Are they the same after these two decades of transition after this crisis? How far away are they? We spent a lot of energy and analysis in the report on trying to measure where we are in terms of transition, both using firm level data and macro data. Of course, ultimately what we worry about is the transition process as such in crisis, and not only on the economies of these countries and whether the crisis will lead to anti-reform backlash. All those issues are addressed in the report.
I will focus now on the lessons for the financial integration model. This financial integration model of course was not something that happened in isolation. It was part of a broader integration model of political regulatory integration with the European Union, and trade integration, particularly with the European Union. Financial integration took many forms. It is reflected in very rapidly growing external assets and liabilities – we have foreign direct investment and debt inflows – and the growing role of the EU banking group. In some countries, this all happened in a very short space of time.

In looking at this data, we have and the experience of the crisis and something stands out. What is absolutely clear is the very strong impact of financial integration on growth, the very strong contribution that this rapid financial integration has meant for the region. If this region had been forced to rely on its own savings, we would have been nowhere close to where we are today.

It is important to say this because essentially it is not true everywhere. Our region stands out if we look at other parts of the merging markets in the developing world where financial integration has not really contributed to growth. Of course financial integration was also a channel of contagion in the crisis. Had these countries not been connected to the global financial system, the impact, as we saw for example in the Caucasus and Central Asia, would have been less. So financial integration, while promoting growth, opened them up to these vulnerabilities. There are some vulnerabilities that are particularly important, and we document them clearly in the report. Foreign banks did play a role in fuelling credit booms, particularly when it happened in a very short space of time. We need to draw lessons from that. The excessive debt levels, and perhaps most importantly the very large foreign currency exposures of households that have income in local currency, mean that they expose themselves to loans in euro or even worse in Swiss francs or Japanese yen. The foreign banks did play a role in that and we need to think about the response to that in terms of policy.

As I emphasised, when you look at the big picture in the crisis, the presence of these foreign banks was a stabilising force, so the countries that had more foreign banks suffered from a given export shock less output decline, and that is very important to remember. We should embrace financial integration but we need to manage the speed of credit growth and the build-up of foreign exchange exposures. I will return to how we can do this.

If we look at where transition is today and where it is going, here are pictures from the Orange Revolution. When we think of Ukraine today, I guess some of the ambiguities of what was achieved in 2004 are still with us. Of course, basic democracy is in place but this also shows how difficult it can be to operate such a democracy.
We look at transition and what it means today. When we started this process and when this institution was set up, the focus was on reducing the role of the state, creating markets and building a private sector. I think today when we look at the combined experience of these two decades and the crisis, we see the need for markets to be supported by a strong state with institutions of a high quality, both in the state sector and in the private sector. These are critical elements. To us, the crisis underlines the need to redefine rather than to minimise the role of the state.

Let me give you one example that I think will be a very important part of EBRD’s future agenda, but it also illustrates this role of the state and the role of institutions, both in the state sector and in the private sector. We need to work in the crisis, of course, to restructure the balance sheets of banks and companies. We need to find ways through effective regulation to reduce the foreign exchange lending. You cannot do this by command or by putting in place laws and regulations. You also need address the macro-economic policies because much of this is reflected in the vulnerabilities of these macro policies. We also need to work at the micro level, working with the banks and encouraging them to have better risk management. This is a role for both the domestic authorities and for us as an international financial institution.
What is the lesson in looking at the future of transition? It is clear that the crisis has slowed down the reform momentum in our region but we do not really see much of a reversal. Again, that is a tribute to what has been achieved in these two decades. There is a major re-think of the state’s role, and that is true not only in our region but also globally. There is no talk about replacing the market system. The public solutions that are now involved certainly in our region do not represent an anti-market backlash.
We will certainly see increased political volatility but we have not really seen much of a drift towards populism. When we look at the changes that have happened in governments in our region since the crisis started, most of those charges have, if anything, been pushing in the direction of more commitment to reform. I think these are very positive signs; they are positive tributes to what has been achieved.

To summarise, this is definitely the worst crisis for the region since the transitional recession in the early Nineties. The basic growth model of financial integration and the model of dependence on commodities have been challenged. Fundamentally, the overall goals remain; we need to readjust them somewhat but the overall goals of integration and building markets are still there.

What are the main lessons learnt? I have mentioned a few of them already but they are really to address the downside of financial integration, the build-up of credit bubbles and the build-up of foreign exchange exposures. In the countries that are dependent on commodities, the lessons are: the need to diversify through further financial development, to invest in human capital and in training and education, and overall we need to define the role of the state and emphasise institutional quality, again both in the state and the private sector. The answer is not to replace the transition agenda but to extend it.

MR KEMPPINEN: Thank you very much. We are running slightly behind schedule but, given the fact that we started late, I think we can overrun by perhaps ten minutes. Let us have your questions.

MR BAYER: Thank you, Reijo. I am the Austrian Director at the Board here.

I appreciate the Transition Report which you have given, Erik. It is a very good paper. Essentially, I would like to make a connection with what Reijo said at the start, that we have had 20 years of unmitigated success in the region. Yes, of course, it has been successful but there have been tremendous costs. We have to remember, and you mentioned this in your last words, that the transition recession has reduced output by about 50 per cent in the region and has essentially destroyed the social system. That has led to a tremendous increase in poverty and unemployment.

At the time of transition, there was a certain model of transition which we followed and that may have led to some of the negative factors and the very large costs of transition. I refer of course to the shock therapy which was introduced in most of the countries, though at a different pace in each. My question is this. If you had paid at that time more attention to the building of the markets and to maintaining institutions to make the transition possible through a more gradual approach, do you not think that maybe some of these large costs could have been avoided and the region might have been a little bit more resilient to the present crisis?

MR BERGLÖF: That is very much in the spirit of what I was trying to say, that I think lessons were learnt about how transition was implemented. That is very understandable; when we move back in time, there was a need to get this done very quickly. We always want to get sustainable policies in place as quickly as possible. The problem is: what is possible and how do you do it? The lesson we have learnt now is that sustainability is much more important and more difficult than we had understood at the time. What I have tried to focus on today is that what is particularly important is the role of the state and redefining the role of the state, making sure that the state is there to support the markets and not just to withdraw completely. Some of the things that you alluded to I think are a reflection of a complete withdrawal of the state. I do not want to pass judgment too much because there was of course an urgency for the policies at the time that perhaps we do not have to the same extent today.

SPEAKER: I ask you to reflect on the role that the post-accession relationship between many of these countries and the euro and particularly the timing of entry had on the build-up of foreign currency debt. I am particularly thinking of the expectations about precisely when a lot of these countries, ex-Slovakia and Slovenia, might adopt the euro and the role that might have played in making households and companies a little more tolerant of the foreign currency risk. Do you think that played a big role perhaps in encouraging the foreign currency credit boom? Would your conclusion be very strongly that target dates are a very bad idea, either for the existing members of the European Union that have not joined the eurozone or for potential new members when the Western Balkans starts to join the EU in the next decade?

MR BERGLÖF: I think it is understandable that households and entrepreneurs saw this euro entry as something quite immediate, certainly for the period that many of these loans covered. At the time, euro entry looked quite possible. You must understand their willingness to take these kinds of risks in the light of that. I think it was unfortunate and the crisis has shown that. The countries that put this off, countries like the Czech Republic for example, have fared better and managed to develop local currency markets. One of the benefits of the crisis now perhaps is that euro entry for most of the countries is further away. That will allow authorities but perhaps more importantly market actors to step in and build the local currency market, making sure that there is long-term funding in local currency. That is absolutely critical to addressing these foreign exchange exposures.

It is wrong to set dates. I do not want to speculate. I think it is important to make sure that even though you have this long-term objective, and again for many of the countries we are talking about perhaps four or five years before euro entry is realistic, you can do a lot in those four or five years. The Czech Republic is the example that shows that this is possible.

SPEAKER: How and when do you think the banks in the region are going to tackle their non-performing loans which are piling up every day? I do not think we have seen a systemic solution yet on a larger scale as we see in the US and Western Europe. What is your view and is EBRD going to play any role in that?

MR BERGLÖF: That is a very important question. There is a lot of variation across countries as to the extent to which they have recognised the situation of their balance sheets. One country that I know has not done this is Ukraine. We know that Ukraine will face a very difficult situation at the beginning of next year because that is when they will have to recognise these loans that have been postponed. I think EBRD has a very important role as part of the debt restructuring to make sure that these bad debts are recognised but also that, when they are recognised, solutions are provided for the banks on how to move out but also for the companies that are part of these bad debts. That is a very important issue and one that will come more to the fore in the next few months.

MS GHEORGIOU: I am Virginia Gheorgiu and I represent Romania. I have one question, Erik. You and the President of the Bank have stated many times that the next stage of the crisis will hit the real economy; by that I mean the enterprise sector. I know that the Bank is working on these issues. What do you see will be the effect of the small and medium enterprises being hit by the crisis in the transition countries? They provide a lot of employment, obviously, and they are basically the middle class that we dreamt about 20 years ago.

MR BERGLÖF: Perhaps the first thing we should do is to recognise that the banking system has reached these groups because for many years, in the first decade of transition, the foreign banks, not even the local banks provided credit to this sector, to the small and medium sized enterprises. The great achievement of financial integration and financial development has been that these groups are now receiving credit. Of course the downside of that is that now that the crisis is hitting, they are also very much affected. I think it is absolutely critical to deal with the previous issue, the issue of the bad loans and bad balance sheet of banks. Until those issues have been addressed, we cannot expect a flow to the small and medium sized enterprises. In the meantime, an institution like EBRD has a very important role to play in making sure that there is credit flowing to that part of the economy.

MR EDWARD LUCAS (The Economist): I think you are absolutely right to highlight institutions, both as something that was overlooked a bit in the early Nineties and something that is very important in determining outcomes now. Do we have any idea really what contributes towards the strength of institutions? We have been talking about them for years and they seem to grow or wither independently of what we do. What are your policy recommendations both for the international institutions such as EBRD and domestically for making these wonderful things actually grow and thrive?

MR BERGLÖF: First, it is easy to become too pessimistic about the ability to improve institutions because a lot has happened. Remember that when we see the crisis and how it came to the region, it took a long time, and I think that is one achievement that we can point to, the fact that the quality of the institutions has improved. Even in countries that we think are particularly difficult in terms of developing institutions, like the countries that depend on natural resources, some of the institutions, perhaps not most, have held up very well in the crisis. For example, in Russia the institutions surrounding the stability funds have been shown to be quite resilient both in the boom period when there was a lot of pressure for these resources to be used to fuel the boom further but also now as to how they have been used responsibly in the crisis. Yes, it is a very difficult thing to develop these institutions but I think there has been quite a lot of progress. Again, there is no single cut that you can make to build institutions. When we look back at how institutions were built in our own countries and how corruption was fought there or in the United States, we had to work across a broad range of areas. Of course, at the bottom of this is the political process; if you do not have a legitimate political process, you will never be able to address these institutions and build them. I agree that this is something that perhaps we throw around too easily, but there are some real success stories.

SPEAKER: Congratulations on the report. If you do not mind, I would like to return to the old days of the EBRD where the Bank stood as the spokesman of the region, not only praising some good things but also indicating some negative sides of transition. One of the issues is the role of foreign banks. It is not enough in the presentation to emphasise the stabilising role of foreign banks. We have to be more objective on this issue and we also have to indicate clearly that some of the foreign banks introduced to the region practices and policies which were much below the compulsory standards at home and imposed by the regulator at home. That was driven mostly by the desire to increase the market share. That is why extensive lending in FOREX below standard, lending to the poor instead of lending to the affluent as took place in some countries, lending at the tenor or up to 50 years when the mismatch of assets and liabilities was quite visible, led to over-leveraging and tremendous currency exposure in some of the countries, including the best performing ones.

Secondly, we also observed in the region that when the crisis hit they practically put a stop on lending. On the one side, it was driven by the fact that the parent company at home stopped providing funding and that is why the banks were exposed too much and the credit to deposit ratio was sometimes 200 per cent or more, but also it was due to the fact that the parent company stopped funding. That is why the credit crunch, which was already painful to some countries, was accelerated by the fact that the foreign banks stopped lending to almost everybody and almost immediately, particularly in the countries further east. That is why we need to be more objective or critical of the performance of the extremely important financial sector which the EBRD has always promoted as the most important transition factor.

MR BERGLÖF: I hope I have not conveyed the impression that this is uniform praise for the foreign banks. I pointed to their role in building foreign exchange exposures, in fuelling local asset booms, in building up unsustainable debt levels. I think that is undeniable and we have documented it very clearly in the report. Having said that, I think these foreign banks have played a very important role, and we also document this, in making sure that there was an orderly leveraging process.

Essentially all the problems in the banking sector in terms of the banking crisis have been in domestic banks. We have not seen a single foreign bank subsidiary go into crisis. I agree with you very much that there has been a slow down or even a stop in some cases to credit. That is true for foreign banks as well as for domestic banks; they do not differ. I think the challenge we have now is to make sure that this process re-starts.

What I said about debt restructuring and addressing bad portfolios goes for foreign and domestic banks, but I think foreign banks have a particular responsibility because they are also incredibly important in the region in addressing the issues of foreign currency lending in particular. Again, they cannot do it on their own; they need to be supported by macro policies; they need to be supported by a regulatory framework. This probably cannot happen at the level of the countries in eastern Europe; it has to happen in Western Europe, and not only at the national level. We need a European wide framework to deal with this. You saw the pictures I showed of the network. This cannot be addressed by a single country. It has to be addressed at the European level. We need to find ways of addressing the fact that the European financial system does not respect the borders of the euro area, or the EU, but goes beyond that. We need to find ways of addressing that.

I agree with you that the picture is quite mixed on the role of the foreign banks but the bottom line is that they have done a lot to build up this region and have contributed to growth and they have had a stabilising effect in the crisis.

MS ANNA (?) (Member of Parliament, Sweden): I am also a member of the European Parliamentary Assembly of the Council of Europe. The Financial Committee of the Council of Europe each year visits EBRD. We also pose questions relating to institutional change and transparency in the transition economies.
My question relates to the one about institutions. How do you look at the work between the different international institutions that you were referring to, like the IMF, that together with EBRD put big resources into saving the situation in the transition economies? How do you look the possibilities in this situation of seeing that the financial institutions and regulations become more sound?

I come from Sweden. Latvia is close to us. We are working together with the IMF and other Nordic countries to lend money, and so we do a lot to make this work. What happened was that the Latvian Government suggested that they were going to change the security situation so that mortgage loans would only be covered to the point of the present market value of the property. That is an awful big loss for Swedish banks, for example. This did not happen, as I understand it, but it was pretty close. Could you comment on that development?

MR BERGLÖF: One thing I should have mentioned, which is an important effect of the crisis and a very positive thing, is that these international institutions today collaborate in a very different way from before. If I speak about my own experience, just taking the IMF, I may have dealt with them every other month before the crisis. There is not a week when I do not have some interaction with my counterparts in the IMF. I think in general the working environment and the closeness has gone up in orders of magnitude, and very much in the area that you have referred to. One part of this has been our experience in addressing the immediate problems of the crisis but the next step is in building local currency markets, building more broadly capital markets in the region to address the debt restructuring issues. We are working very closely. I think this is one of the great contributions that the crisis has had on us. We will have to see how much impact there will be because ultimately these improvements in institutions have to come from within the domestic political process.

As you have said, in Latvia they can produce all kinds of things. Luckily I think there has been international pressure and some realisation in the local political community that the policies that were proposed were harmful for the long term. Those things need to be addressed and we can play a role in that. Ultimately, these things have to be addressed by the local political process. When you look at the combined impact of the crisis so far, the response has been remarkably mature. That is perhaps the most comfort we can draw from this crisis, that many things could have happened in these democracies that are still young. I think they have come out of this quite well.
MS ANNA (?) (Member of Parliament, Sweden): In talking about foreign banks, what strikes me, from looking at your charts, is the total absence of Germany as the major economic power in central Europe and German banks. Could you elucidate on that?

MR BERGLÖF: There has been some presence of German banks in the region. I did not focus on that. Some of them are now also of course reassessing their engagement in eastern Europe. Of course Germany plays a very important role in the economies of these countries. You would expect the banking system perhaps to be more involved. They may now feel that they were present enough not to become too deeply engaged. I think we will see even further integration, perhaps more in the area of the real economy, than we have already seen between Germany and the rest of the region. Undoubtedly, what happens in the German economy is absolutely critical to these countries.

MR KEMPPENEN: I do not want to be impolite but I will have to take the last question or the second half of the main course will be served too late and it will be cold.

MR DANIEL DAIANU (Finance Ministry of Romania, former MEP): I think that the report probably emphasises what comes out of the huge financial mess all over the world. If this is the case, we have to have a different understanding of the way financial market function. We should probably re-examine financial integration as the main driver of economic growth. I believe that this is something that has to be more closely looked at and, if we keep saying that we need to continue reforms, we might have a temporary set back but then there will be a resumption of growth by regulating better and having better supervision. In my view, that is not sufficient. If financial integration is also closely linked with the way financial markets function and we change our cosmology of understanding how financial markets function, then probably – and I am almost certain about this – we will have to re-examine financial integration. What would the policy recommendations be in taking the route of financial integration?

MR BERGLÖF: It is a big question to end on. I guess my response, looking at the two decades of experience and the crisis, is that financial integration is unavoidable; on balance, it has been very good for the region. We need to address the dark sides of this financial integration, not only in the region but globally. Many issues come out of this. The number of these banks and our region are part of that complexity. The cross-border banking part makes it much more difficult to regulate and to deal with these institutions when they get into trouble, and so we need to find ways of addressing that. There are many ideas around, some probably better than others. That whole change in the global system will also fundamental affect our region. We do not know what is going to come out.

My main concern is that we find solutions that will make this financial integration more sustainable. We need to focus on that from the EBRD perspective and in looking at the region. We need to make sure that at the European level there is a meaningful framework for regulating and supervising these banks. We cannot rely on the model that was in place before the home country regulation because that did not work. Unfortunately, the Swedish example illustrates this way too well. The home country regulators or supervisors do not necessarily have the interest of the host countries in mind. We need to find checks for that model. This model has to be there. I do not think it is realistic for the HOST countries to regulate these large international banks, but we need to have a check on the HOST COUNTRY MODEL. For me this is the single most important change that we need to see in our region. Anything that happens at the European level to move us in this direction is very good. Again, what would this region have been had it not been for access to these financial resources from the outside? Had they had to rely on their own domestic savings, we would be in a very different place than we are today.
MR KEMPPINEN: Chief Economist, ladies and gentlemen, thank you very much for the first part. (Applause)
During the short break, journalists can ask Erik their pertinent and difficult questions.
(Short break)

MS BARYSCH: Welcome back, ladies and gentlemen, to this second part of the debate. I hope is going to be at least as interesting as the first, which we all very much enjoyed. Over the next hour and a bit we want you to do some reminiscing because we have people here who were not so much observers of the events of 1989 but very much an integral part of them. We also want perhaps to get an assessment of what has gone right and what has gone wrong over the last 20 years and what lessons we should draw from that.

May I start by expressing my gratitude to the European Bank for Reconstruction and Development for allowing us to be part of this event. It is a particularly important subject for us. We are a European policy think-tank and we have worked a great deal on the question of enlargement, as we still do. We are particularly pleased to be here.
The gentlemen around me do not really need much of an introduction. Since I personally am so thrilled to sit amongst them, let me say a few words about who they are and where they come from.

President Aleksander Kwasniewski took over as President of Poland in 1995 from Lech Walesa. During the next ten years he oversaw his country’s economic and political transition, and he led his country into both NATO in 1999 and the European Union in 2004. His interest in politics dates back much further to his student years in Gdansk and he was already a minister in the communist government in the 1980s. Among his many achievements are helping to transform the former Communist Party in to a modern Social Democratic Party and establishing regional cooperation in central and eastern Europe and with the Baltic States, and that is a very important point. He was also involved in helping to broker a deal after the Orange Revolution in Ukraine. Today he is a distinguished scholar; he is affiliated to the Georgetown University.

To Aleksander’s right we have Timothy Garton Ash, who is clearly one of the most astute observers and commentators on the end of communism and the transformation of Germany and eastern Europe. He had already moved to the divided Germany in the 1980s when he started travelling behind the Iron Curtain. He has an almost unique way of combining history and modern journalism in what he calls “the history of the present”. Today he is Professor of European Studies at St Antony’s College Oxford and Senior Fellow at the Hoover Institution at Stanford. He has written nine books and he is a regular commentator in the media.

On my far left is Thomas Mirow who has had a very rich career in my home country, Germany, in both politics and the private sector. He was a Senator of the City of Hamburg, the key economic adviser to Gerhard Schroeder when he was Chancellor and State Secretary in the Ministry of Finance where he was responsible for EU affairs, financial markets and multilateral organisations. As President of the EBRD he is uniquely placed to tell us about the state of central and eastern Europe and eastern Europe more widely today.

Ján Čarnogurský was one of the protagonists of the Christian Democratic Opposition Movement in the former Czechoslovakia and one of the main supporters of Charter 77. He had to watch the beginnings of the Velvet Revolution in 1989 from a prison cell, but then quickly, after the transformation, he became first Vice Prime Minister and then Prime Minister from 1991 to 1992. He is the founder and was for a long time the Chairman of the Christian Democratic Movement in Slovakia and as such he was one of the main political opponents of Vladimir Mečiar during the 1990s. From 1998 to 2002 he was also Justice Minister and after that he returned to his previous profession of lawyer.
Let me start by asking you a question about a certain piece of furniture 8.8 metres in diameter around which you and your colleagues gathered back in those days? How did all this come about? What was the significance of these initial debates for what subsequently happened, not only in your country but also in Germany and across central and eastern Europe?

MR ČARNOGURSKÝ: First of all, I am not very objective when I am speaking about the round table and Poland because I was a very active participant in this event. I believe that it was one of the most important events in Polish history. The impact and influence of the results of these talks on the history of central and eastern Europe and for the world were unbelievable and stronger than we imagined during the talks. The round table as an event and as a procedure meant that opponents decided to discuss the problems of the country. They were not even opponents because I remember when we started the preparations for the round table some of these opponents were described by the communist government and communist media as enemies, the real political enemies and the strongest anti-communists. I remember the conflict was tight right up to the last minute before the round table.

The two people who were to participate on the side of Solidarity were found totally unacceptable by Jaruzelski and some Politburo members; they were Kuroń and Michnic. It is strange to name these persons today because both of them during the round table and afterwards were extremely pragmatic partners and very patriotically oriented people and they played, and Michnic still plays, an extremely important role in Poland. He is editor in chief of the biggest newspaper and an intellectual who speaks about our situation.
In my opinion from the Polish perspective the round table was like a miracle because in our long history we had been heroes and champions of uprisings, especially unsuccessful uprisings. There has been a lot of blood spilt in the chapters of our history and many victims. For the first time we had a round table and an uprising with no blood, no victims and no destruction. It was a peaceful process on both sides, that of the Communist Party and Solidarność.

Discussions started at a very modest level but finally reached extremely important decisions about change of the political and the economic systems and change in the world but, frankly, during the great round table talks, we did not discuss the unification of Germany. Nobody even mentioned that the Soviet Union would collapse. I am sure that if someone had asked us during the talks if there would be such consequences of this round table, we would not have been so courageous and open, but sometimes the luck of imagination is really a support and an advantage. I do not know if that is a good message to you people from the banks, but it may be.

The first point is that the round table is special in Polish history. Of course, even now we have some very difficult discussion about these talks. We have the black legend of the round table and the white legend. I am closer to the white legend, the positive legend. The results of these 20 years are that Poland is now a democratic state; we have a free market economy; our situation, even during this deep crisis, is relatively not bad. We have a new constitution. We are members of the European Union and of NATO. We are a safe country and during the last 20 years in extremely difficult circumstances and with the political environment in this region, Poland has been an exporter of stability, and all our borders were safe. No wrong ideas have been created in Poland.

It is extremely interesting that enduring these 20 years Poland did not change its own frontiers by even one centimetre while all our neighbours changed theirs a great deal. Not one of our previous neighbours exists: the GDR does not exist, Czechoslovakia is divorced, the Soviet Union has collapsed. We had three neighbours and now we have seven.

That is the success story. I think even during the time of crisis when we are modest about uttering such optimistic words, it is necessary to do so to underline that the round table was a good beginning. It was a wonderful beginning for all these changes at the centre of Europe. We have observed 20 years of our recent history and is really like a miracle. Nobody expected that we could change the region and the world so much. I am sorry about my optimism. I am very much afraid for politicians who are pessimistic. It is better to be too optimistic and these 20 years of our history is really a success story.

MS BAYRSCH: Thank you for starting us out on that positive note. Ján Čarnogurský, you were very much part of the opposition movement in your country. I understand that it was a lot more difficult to find an accommodation with the ruling Communist Party where you came from. Why is it that communism seems to be more able to reform in neighbouring countries such as Hungary and Poland but even in the Czech Republic today we have a Communist Party that has not quite made the jump to social democracy?

MR ČARNOGURSKÝ: The crucial event was the occupation of Czechoslovakia in 1968 and the defeat of the Prague Spring. After the occupation, the Communist Party of Czechoslovakia purged itself of all the more open-minded people. The problem in Czechoslovakia was that after the purges of the Seventies, Aleksander Kwasniewski left the Communist Party. The most dogmatic members of the party took charge of it and they were not able to change the party. They were afraid of any changes inside the party or inside the country because all changes, even the smallest, might place them in danger.

One writer in Czechoslovakia wrote at the beginning of the Seventies that the Communist Party leadership found it is easy to purge all the critical intellectuals who had previously supported Alexander Dubćek but that when a crisis situation arrives, and one will always come along, then the party will have no people able to give a critical analysis of the situation and propose solutions. That situation occurred in ’89. On 17 November 1989 when the Velvet Revolution started, Czechoslovakia was just an island of dogmatic communism inside the region. Eastern Germany had practically collapsed, as had the government of Masowieki in Poland; the Soviet Union had perestroika; and Hungary had decided that the next elections would be free. Czechoslovakia remained an island of dogmatic communism and that was the end of that kind of regime.
MS BARYSCH: So you had total antagonism until the last minute. Intriguingly, you obviously had a lot of opposition to the changes that were happening. You called it a miracle that it went so smoothly and peacefully.

MR ČARNOGURSKÝ: May I add one sentence? That is what I, Čarnogurský, say is important. It is very difficult to discuss this area as one region with all the countries in one so called communist or soviet bloc. If you compare the situation at the end of the Eighties in Czechoslovakia with (Hosak) and Poland, it was different. It was different in Romania with Ceausescu and in the Baltic States is was different again. Of course, we can name many similarities but the regime of (Hosak) was not so prepared to open doors for new people or even for a new generation. I am talking about inside the Communist Party.

MR KWASNIEWSKI: In comparison to, say, the UK, we were a region.

MR ČARNOGURSKÝ: I am not discussing the question of regionality. I am speaking about political differences in this period of history.

MS BARYSCH: Tim Garton Ash, it was peaceful, in the end, in most places. We tend to assume, with the benefit of hindsight, that things could only have happened the way they did. I once heard you refer to that a “the illusion of retrospective determinism”. It could have happened differently. There were guns in Tiananmen Square. There was fear at the time that the revolution that had just started would not be a velvet one. What were the factors that made this miracle possible?

MR GARTON ASH: I think it is very important to remember that. It was actually Henri Bergson who coined the phrase “the illusions of retrospective determinism”, the almost irresistible tendency to think that was actually happened somehow had to happen. This is very misleading in the case of 1989. I will never forget walking into the offices of Michnik’s newspaper Gazeta Wyborcza on 4 June 1989, the day of Poland’s semi-free election, which emerged from the round table with huge excitement and seeing on a television screen the first pictures of the massacre on Tiananmen Square and people being carried off the square. It looked just like Gdansk in 1970 when the workers were carried off on boards. That was a terrific shock.

I would say the ghost of Tiananmen stalked central Europe for the whole of the rest of the year and that in a curious way the fact that Tiananmen happened in China is one of the reasons it did to happen in central Europe because everybody, both the opposition leaders and the reform-minded or pragmatic power holders knew it could happen. We came very close. We know from the archives, for example on 9 October 1989 in Leipzig, that we came extremely close to the use of violence. Honecker had spoken positively of the Chinese solution. There were many reasons why we did not. I think non-violent discipline and the sheer mobilisation of the masses was an important part of the story. We know the story in Leipzig on 9 October. They were prepared to use force, and suddenly they saw 70,000 people on the streets and they said, “We simply cannot beat so many heads”. Restraint on the part of the power holders, of course Gorbachev, but also I would have to say, and here I agree with President Kwasniewski, a lot of luck. Machiavelli says in the print: “In human affairs half of it is fortuna” and fortuna was working overtime in 1989.

I think the result, by the way, was that at the end of the year, almost without knowing it, one had established a new model of revolution. I really do believe after 20 years we can say that the 1989 model of revolution – non-violent, negotiated revolution – had almost established itself as the default model of revolution supplanting the violent model of 1789, and that is quite an achievement.

MS BARYSCH: As the case of Ukraine perhaps shows us, it was not in all cases always a smooth success?

MR GARTON ASH: Hang on a second: Ukraine was a velvet revolution. The problem with velvet revolutions is that because all those hundreds of thousands of people on the street are there to get a compromise at a round table, sometimes you have too much of a compromise and completing the work you have begun becomes more difficult. It is interesting to think about the nature of negotiated revolutions, and what you have to do afterwards to make sure that you really get a revolutionary outcome.

MR KWASNIEWSKI: As for this technology of round table, at the end of the round table revolution the preparation for the third round of elections in Poland had the same concept of talks and compromise, but Ukraine is not Russia, as Kuchman entitled his book, but Ukraine is not Poland either.

MR ČARNOGURSKÝ: Generally it can be said that with these velvet revolutions in central Europe the results did work. I might say that even the speed in Czechoslovakia was a success story.

MR GARTON ASH: It was a velvet revolution.

MR ČARNOGURSKÝ: Yes, it was.

MR GARTON ASH: Or a velvet divorce.

MR ČARNOGURSKÝ: A velvet divorce, yes.

MR KWASNIEWSKI: That is a very interesting description. Please remember it.

MR ČARNOGURSKÝ: In the social and economic sense, it did work and there were no other options than the option chosen during these changes in eastern Europe.

MR GARTON ASH: I think this is an interesting point and it goes straight to the President here. I think that by the time we got to the Rose Revolution in Georgia or the Iron Revolution in Ukraine, there was perhaps too much historical optimism and because they were velvet revolutions, a lot of people thought therefore the outcome is going to be similar. As we know, in both cases it was not. I think we have to look at the other reasons, including the very strong presence of and contribution of the West, the European Union and NATO that got us to the end point.

MS BARYSCH: Let us look a bit more at outcomes. I want to bring all of you in in a minute because this is a debate amongst all of us. Before I do that, I would like to discuss some figures with you, President Mirow, that have come out of a survey you did here at EBRD a couple of years ago called Life in Transition. You asked the central and eastern Europeans then: Is your household today living better than it did in 1989? Forty per cent said “yes”. That does not strike me as a very high figure. Perhaps more surprisingly you asked the same people whether the political situation was better than in 1989 and 30 per cent said “yes”. Funnily enough, the share of people who thought the political situation had improved was much higher in the CIS countries where political reform has gone less far. Only 45 per cent of the people in central and eastern Europe said that they preferred a market economy to other models of economic management, which means that the majority of people in that region either do not know or they think that central planning actually works better. This survey was carried out at the height of the economic boom, so we can perhaps assume that if we did that today the answers would be even more uncertain. What has gone wrong? Why are people not convinced that what they did was the right thing?

MR MIROW: I do not think that things have gone wrong. It is just that many people may have under-estimated the amount of effort that is needed really to change a society and the state. Where you find winners, normally you also find losers. It is as simple as that. My guess is that it also very much applies to different generations. Take someone who had really lived more or less his whole grown-up life in that period of time, pre-’89; it is very difficult now to stand on his or her own feet. Of course there were also false expectations. These were that on the very day on which we were to adhere to the social market economy, things would work by themselves and earnings would be high and all this kind of stuff.

I know a bit more about how people feel in Eastern Germany than I would probably know about how people would feel in Slovakia or in Poland. There it is very clear that with younger people the way of looking at things changes very fundamentally, even though of course you also find an intellectual interface now with a young female editing a book that says, “We are different” and stating why we should stay different because they think that in the merger of the two German states the East Germany identity has not played a sufficient role.

My plea would be not to look too retroactively in terms of what might have gone wrong but to look at the things that need to be done. My sense is that there are very clear lessons to be drawn in economic terms and we should work on them, certainly with some differentiation as to EU countries, for instance, compared to countries like Georgia and Ukraine. I would strongly add a political element to the economic one. I think that the European Union has had to waste a lot of time on its own future. I do hope that now with the Lisbon Treaty, as one might assume, being ratified, the European Union desperately needs to develop a new effort in terms of what one called Ostpolitik in German and which was a national effort and now needs to be a multilateral effort. Why is that? It is because we see within the European Union, I think, the necessity for Poland and others to join the eurozone on a sound basis but as swiftly as possible. We see the unresolved question of the relationship with the Balkan States, which I think are desperately looking for the prospect of joining the European Union. We see countries like Belarus, Moldova and Ukraine to a certain degree in the middle of nowhere and we see an unclear relationship between the European Union and Russia.

My sense is that with the new President of the European Council, with the new High Representative as he is called, we really need jointly to work on what the relationship will be in the next 10 to 20 years because I deeply sense that what has been experienced successfully, which was enlargement of the European Union and enlargement of NATO, cannot just go on. We need something different. We also need to take up what someone like Medvedev has proposed in terms of architecture. One might have very different ideas about that but we need to work it out. My plea would be not to spend too much time working out what might have gone wrong and why people still do not feel as positive as we think they should but rather to focus on the economic and political problems that are still unsolved.

MS BARYSCH: A big agenda indeed! Are there any comments or questions from the audience?

SPEAKER: At the risk of being discourteous to President Mirow, I would like to contradict or at least ignore his suggestion that we look to the future and ask this very distinguished panel a question about the past. It seems to me that there were two big questions in the air in 1989 which were never quite answered. One was: what was going to happen to all the secret police files. Certainly in East Germany there was a very clear answer. Timothy Garton Ash has written a very interesting book about seeing his file. This huge lump of secret information still hangs over countries like Poland and others as a sort of cloud. I would be interested to know the panel’s view on that.
The other big question was the Communist Party and secret police money. Everybody knew there were big slush funds; we did not quite know how much but there was a lot of what you might call loot that had been accumulated over the previous 40 years, and again this seemed just to disappear like snow in the sunshine. Perhaps with the exception of East Germany it has never really been sufficiently explained what happened to it. I would be very interested to know from the panellists whether they think that these two unanswered questions are real questions and, if they are, how far they still poison both the public’s feeling of being perhaps a bit cheated and disappointed and the political processes that still go on at the moment.

MS BARYSCH: I suspect that even if our panellists knew where the money is, they might not tell us! Are there any other questions and comments at this point?

AMBASSADOR OF UKRAINE: I have a short comment on one of the last points made by President Mirow about the location of three central and eastern European countries “in the middle of nowhere”, which is a rather gloomy description, I would say.

My comment would be that as far as we understand it Ukraine is constantly developing its political system. I would rather say that looking at the geographical and human potential of Ukraine, it is rather big in European terms. If you take the historical perspective, building up the worst political system, which is democracy according to Churchill, in the big European countries usually took lengthy periods of time, starting from the Dutch, the French or whatever. You can take any big European democracy and look at the last 400 or 500 years. Ukraine is in its nineteenth year. We are still in the middle of the process of building the best suitable political system for Ukraine. What we have now, and the main political parties agree, is a democracy already; it is not well established but it is a democracy. By the way, we are in the middle of the process of another presidential election. I think we hold the record in Europe for the number of elections held in one country in the course of the last five years. I would rather stick to a more optimistic view. We are in the middle but this middle shows a positive light at the end of the tunnel.

MS BARYSCH: Excellent, thank you very much. Let me go back to my panel and then I will collect some more points. Shall I start with the historian?

MR GARTON ASH: Unsurprisingly, I am going to say that it is worth studying history and try to learn from it. I think there are some interesting lessons from these 20 years. I think Edward Lucas’s question was very much to the point. I myself do not feel that we can look at a figure like only 40 per cent saying, “yes, I am better off or we are better off” and think that that is just the way it is, there are winners and losers. I think that is a very low figure. If you look at those discontents, there is a large economic component but there is also another component. If you go and talk to the workers on the Baltic coast who were the vanguard of the Solidarity movement, the icebreaker, many of them are extremely unhappy. One of the reasons is a sense of historical injustice. They say, “look, just over there are these former secret policemen and former Communist Party apparatchiks and they are now doing extremely well. They are millionaires. They are living it up. They look like the winners and we are the losers and that is unjust.” You see versions of that all over post-communist Europe.

It seems to me that having an exit for those in power is essential to getting a peaceful transition. You have to do that. There has to be a way out, and so to some extent them having the opportunity of exchanging political power for, say, economic power, the privatisation of the nomenclatura, is essential to that kind of revolution. Ernest Gellner rather wonderfully called it “the price of velvet”. You have to pay the price of velvet but then know that there is a price.

My conclusion is twofold. If you are going to do a velvet revolution, first of all you have to have some sort of public symbolic confrontation with a difficult past – not in the courts, not by the guillotine, but some sort of symbolic confrontation. I think that is something that should have happened in central Europe and did not happen. I would say a necessary complement to a velvet revolution is a truth commission so at least we know the truth.

Secondly, the rule of law, which has been much too weak, and I think this has been mentioned already, in the post-communist transitions. Václav Klaus’s famous slogan is “speed is more important than accuracy”. Oh, no, it is not. Accuracy is very important, including the rule of law, for a durable transition.

MR KWASNIEWSKI: What has been said is extremely interesting. To be brief, evolution is not revolution. I agree about the price of velvet. The price of evolution is that we have parts of the previous system in the new system and of course we have the situation which is not only connected with politics; it very much connected to the economic situation, regardless of reforms and winners and losers. The problems of the Gdansk workers are extremely dramatic. Frankly, today in the shipyards we do not have the heroes of 20 years ago but the next generation of workers. The situation is extremely dramatic because in fact the shipyards have no prospects in Europe, especially in Poland. No one politician in Poland has enough courage to say that as part of our economic history the shipyards are finished and it is necessary to look for different concepts for our activity. That is a combination of many reasons. The first point is that evolution means that we have elements of the new system and the old system together for some time. It is difficult to say how long that time is. In my opinion, 20 years in the political sense is close to the end. If you talk about the communist leaders, the leaders of the Communist Party before ‘89, we are speaking about very old people. Before the court we now have Jaruzelsky who is 86 and Kiszczak who is 83 and of course because this procedure is so complicated they need to be alive for 120 or 150 years to finish these procedures. I am not being cynical but it is an element of Polish reality.

The archives raise a different problem. In Poland, I was the President assigned to discuss the bill about archives of the secret police from the communist times. We tried to organise a civilized concept about how to keep these documents and provide the possibility for researchers, scientists and journalists to use these archives. I understand, especially after all that has happened, that it is against the rules that we prepared. That means that we have poisonous documents; they are like drugs and around these drugs the drug dealers and addicts are circulating. There is no space for researchers, scientists and journalists. That is a question of time as well. We are speaking about history that finished 20 years ago. I think in the next five or 10 years this problem will not be so important as it is now, especially in the political life of the post communist countries. Of course it will be used and over-used in some political debates and fights.

Perhaps we could discuss today the sense of the Polish uprisings in the nineteenth century at such a high temperature and the Warsaw uprising in ’44. I am sure in the next generations, and I do not know how many, we will discuss the sense of martial law 1801 in Poland and the round table in ’89 and everything that happened then. I think this division in the Polish society will exist but the role and the impact of this division will not be so important.

I fully agree with you that evolution is the price of the velvet revolution and that is the sense and the substance of the evolutionary process. If you have a process of revolution with all its weaknesses – that or the rule of law, of democratic experiences in our countries – that is a combination of many elements but it is possible to change that. I do not think we should waste time. We should become better each year, more democratic and better organised with better governance and a stronger state of law. That is why I would like to add one word about Ukraine. Of course Ukraine, Belarus and Moldova are not nowhere; they are part of central Europe and important partners for the future. I am very much involved in the process of Ukrainian integration but I would like to say that the Ukrainians have surprised us at least three times. The first time was at the referendum in Ukraine about independence; more than 80 per cent of Ukrainians when the country was still within the frame of the Soviet Union said “yes, we vote for the independence of Ukraine”. Hence it was a surprise for the Ukrainians and it was a surprise for Kravchuk who was President of Ukraine when it was not independent. It was a big surprise, a dramatic surprise, for Gorbachev as well because he did not accept the result.

The second time was at the Orange Revolution. It was a surprise because it was the voice of civil society in Ukraine. Thousands of people assembled in Maidan Square in Kiev in a fight not for a better life or better salaries but for dignity, for a sovereign Ukraine and the dignity of the people living in the country. It was a bit surprise.
The third surprise is not so nice because five years after the Orange Revolution with the unique atmosphere around Ukraine in the international community, this historical five minutes of Ukraine in the world is not as good as was necessary. I ask you, my dear friend, what is going on in Ukraine and the answer is “as usual”. What does that mean? It means that we still really have pure democracy. What is democracy? If you really do not know who will be the next president of the country, that is democracy. If you know very well who will be the next president of the country, that is a lack of democracy. I am not speaking about special countries of course. We have democracy in Ukraine but we have a permanent political crisis. We have the problem of how to reach such goals as the deeper integration into the European structure, et cetera.

I am not very optimistic now. I observe the presidential campaign in Ukraine now and it is really difficult to have a positive imagination of how this cooperation between Tymoschenko and Yanukovych will look after the election. If this is the beginning, please think about the end of this process. If we have this trouble at the beginning of the campaign in such an extremely democratic country as Ukraine, it is necessary to be careful at the end of the process. That is my very friendly advice to you.

MR GARTON ASH: May I just quickly press you on this? With the benefit of hindsight, do you not think that Poland should have tried to do more sooner about the problems of the past? Both you and I remember very well that in 1990 the idea was: we will do it like Spain after Franco. We will not look back – gruba kreska – we will go forward. With the benefit of hindsight, and I am putting this quite neutrally and analytically ---

MR KWASNIEWSKI: Broadly speaking, yes, you are right. Maybe that is what happened. The problem was that even with evolutions the change needs spectacular events. I personally think that may have been a mistake. I remember the atmosphere after the election you mention, the semi-democratic election of 4 June 1989. Of course we remember very well the pictures of Tiananmen. I remember my debates with Geremek, Kuroń, Michnik and others. There was a huge fear in Poland about after this election, which was an absolutely historical success for Solidarność with 99 seats out of 100 in the senate democratically elected. It was an unbelievable success. Even the Solidarność leaders were very afraid that if they took the success to the streets and organised nice celebrations, nothing more, that might provoke the situation because the role of the secret police and the military structures in the communist state were unknown. We thought the structures were weaker. Of course it was a time when the atmosphere for celebration and a spectacular breakthrough would be better for the psychology of the people and to clean up politics but it did not happen. Why is that? I explained that we were very careful because we reformists in the party and Solidarność did not know the real strength of all the structures which were very much against the process of the round table. We cannot change history.

MS BARYSCH: Let me swing the prospect perhaps back to Germany. Obviously the archives are not only open in central and eastern Europe; they are also open in western Europe and we have recently seen files from the Bundesnach and from the German secret service, which show us, if you take the impressions we gained more recently, that Germany was completely unprepared for reunification but some of our neighbours in the West worried about it very greatly. What is your perspective on that?
MR MIROW: I will come to that in a minute, if I may. First of all, I would like to make two short remarks on the discussion we have had. The first is that I agree with you that this helps but I would disagree with you that it makes the whole difference. My sense is that even with a commission of truth and even with open archives, you would find a part of the population that is dissatisfied with the change just because the situation before was not too bad for part of the population. There was a low standard of living but they had what they thought to be a shelter from unemployment and those kinds of things. The market economy is not always a very comfortable thing, especially if you are living in a weak economy with a lot of catching up needed, especially outside the big cities. I would agree that it helps but I would disagree that it makes the whole difference.
Let me say to Ukraine that my remark was not a critical one on Ukraine, even though it is probably not very easy totally to contradict President Kwasniewski. What I was meant when I said “in the middle of nowhere” was in the middle of no cleared political relationships. That is my point. I do not agree with those who think that enlarging the EU and enlarging NATO will be a short term perspective for Ukraine. I totally disagree with that. I think we need to build up a new perspective for that to have a relationship that makes sense for the Europeans as well as for the Ukrainians and others in the region. That was my point.

From (BND) we now know that Mrs Thatcher was critical of German unification – that is not really a big surprise – or that François Mitterrand was critical of German reunification at a certain moment in time, We probably all remember Mitterand’s visit to East Berlin very shortly before the decisive events. He was probably a bit more adaptive to the realities than others, so he was quicker to find a way out of them. With the categories of thinking of the nineteenth century and of the first part of the twentieth century, the reunification of Germany not only for its eastern neighbours but also for its western neighbours was not a source of mere joy, apart from the very self reliant and far away United States which probably had never had those kinds of fears, for good reason, about Germany. I do not think this surprises us. It is nice to read it now in reports from ambassadors and so on but I do not think, to be frank, it adds much insight.

Again looking ahead, what I think is much more interesting is that when German reunification happened, there were some sorts of common views on what would not happen. One of the common views of things that would not happen was the enlargement of NATO to the east. Then it happened. I think many elements that existed at the end of the Eighties and in the early Nineties, as within the OSCE framework and others, of thinking about a new architecture in Europe disappeared too quickly. With the hindsight of 20 years, we need to think – of course not to reverse the EU membership of those who are in, that is not my point – about what is the shape of Europe in the 21st century and we missed many years of doing so because there was a sort of political automaticity that seemed to be so successful that it could go on and on. People did not think about what I think would be the necessary reaction of Russia to it.

MS BARYSCH: In your country today there is a rather populist government that at times sounds very nationalistic. Does that means that people where you live are agreeing with what has been said here about being dissatisfied with the way things went with EU membership, the very rapid economic opening?

MR ČARNOGURSKY: EU membership of Slovakia is still very popular in Slovakia and all the public opinion polls show that the majority supports Slovakia’s EU membership. The change of government three years ago in Slovakia was part of democratic change and, after eight years of centre-right governments in Slovakia, after the elections there was hope for a change to a centre-left government. That happened but even this centre-left government did not change the central or most important economic reforms made by the former government. We have flat tax reforms; we are in the eurozone, et cetera. That is not the point. As the President has said, not all the population groups were satisfied with the reforms. Slovakia had to overcome and accept all the changes from the planned economy to the market economy, even the division of Czechoslovakia, to build up the independent state. I think we have overcome everything quite well because two years ago Slovakia was described as the tiger of central Europe.

Returning to the original question about the secret police, that was an issue in almost all the ex-communist countries and it still is an issue. In Czechoslovakia it was backed by the so called lustration law in ’91; it was a painful experience because the law used the documents of the former state security in Czechoslovakia as if they were the last cup of truth. These files were used for identification as to whether someone was an agent of the secret of police or was not. Many people who were in prison under the communist regime and were opponents of the regime were suddenly described as agents of the secret police of the communist regime. As a lawyer, I now represent some of those who tried to free themselves from this description. They really did not know that they were registered as agents, and of course they do not want to be described as such. For these people it is a painful experience and in this way this discovery of the truth occurred in more or less all countries.

MS BARYSCH: Thank you. Let me bring in some more people from the audience.

MR WILLIAM HORSELY (Journalist): I wonder if our distinguished panel and indeed the rather upbeat conclusions of the EBRD’s 20 year report are not rather ignoring the most difficult and existential question for east and west Europe which is the present course of Russia and its influence on large parts of the continent, including the West. Without quoting any critics, just take the views expressed from the top in Russia. They talk about sovereign democracy; they talk about a power vertical. We are moving towards a one-party situation. They are also demanding a sphere of influence, of course backed by forceful means. We have seen the first change of borders in Europe by force since 1989, and yet there has been very little focus on that. I wonder whether a new kind of leadership is possible from this Europe or whether resignation is in order.

MS BARYSCH: I am very glad that you asked that question.

MR ČARNOGURSKY: Broadly speaking, it may not be better but it is a much pleasanter discussion on central Europe when we do not speak about Russia!

MR KWASNIEWSKI: We fight for quality. Traditionally, Poland has tried to ignore Russia. We try to make the discussions as pleasant as possible.

MS BARYSCH: Such polite people! Let me have some more questions, although I am very tempted to take that one on its own.

MR ALEX NICHOLL (International Institute for Strategic Studies): I just wanted to pick up from the first session in which we heard the EBRD’s views of the impact of the financial crisis. May I ask the panellists whether they see broader impacts on the region from the financial crisis and whether the economic and financial effects that we have seen actually have a political and strategic effect or change the direction of the region in any way.

SPEAKER: That was my question as well. It is about the macro-economic impact and whether fortuna, having smiled upon the region in 1989, might now frown upon the region. It is the same type of question.

MS BARYSCH: Having gone on strike after having worked overtime.

MS JOAN HOAD (Economist Intelligence Unit): This is really a follow on because I think we need to push this a bit further. I agree with Thomas Mirow’s point that the source of the present disaffection and dissatisfaction in the region, which is extraordinarily strong, is contemporary. I think it is wrong to attribute this to some sense of unfinished revolution. It is 20 years on; we have to address this problem, especially in this year. Again as the previous speaker says, what is going to be the political fall-out from the economic crisis this year? What is going to happen in 2010 when many of these countries have to undertake a very dramatic fiscal retrenchment and so on? It is extraordinary, if you look at every single poll coming out of the region in terms of political participation, in terms of lack of trust in political institutions and in political parties, that what is often considered to be a success story of the political transition actually could be questionable. How successful can that model be when so many people in the region do not trust the political system, the institutions, the parties? We should really address this and try to get to the bottom of that dissatisfaction.

MR TONY BRENTON (Former British Ambassador to Russia): To amplify the question that has already been put to the panel, it does seem to me that Russia is the big unfinished piece of business post-1989. I agree with Thomas Mirow that the West has pretty comprehensively mishandled Russia over the last 20 years, although I think we flagellate ourselves too much about that. I think Russia would have gone the way it has gone more or less however we had behaved. There is undoubtedly a serious issue which we are still not addressing. The EU does not have a coherent policy on Russia; NATO does not really have a coherent policy on Russia. Somehow we are not coming together. I should add that President Medvedev’s great initiative does not really have enough flesh on the bones to be a persuasive alternative either. It would be very helpful to have the views of the panel, representing as they do the bits of Europe which are nearest to this problem, as to how we should try to come together to tackle this big piece of unfinished business.

MS BARYSCH: Perhaps I could start with you because you have basically said things that go in the same direction, that we lack imagination by just assuming that we can extend the EU and NATO into eternity and get a workable system for the whole of Europe.
MR MIROW: First, in terms of the question that has been put on the economic field in our region, I would not elaborate too much on that. I very much agree with what Erik said this morning with the Transition Report. I think you can take it that those issues that have been addressed in the report in terms of diversification of the economy, adding more knowledge to the economy by creating local capital markets, et cetera, are part of a common view here in this Bank as elements we should try to add to the economies in the region.

In terms of addressing the concerns, it is not a surprise that in these very difficult times, with a lot of hardship, with people for instance in the Baltic countries experiencing a shrinkage of GDP of 20 per cent, people are concerned and worried and do not think that everything that has been achieved is already perfect. A political and economic crisis of that dimension creates political risks in terms of people being doubtful about the quality of their authorities, the quality of the institutions, the quality of an economic approach, and I think is very understandable. Indeed, it is imperative that the international community, and of course also local and national authorities, address these concerns, otherwise they will continue to rise.

I do not think there is anybody in the room who would think Russia is an easy country to tackle. On the other hand, speaking about history and probably even about the present, very large countries tend to think about spheres of influence. That is not confined to Russia, is it?

Even though I do agree that there might not be enough flesh on the ideas of President Medvedev and there might be some doubts about his capacity to implement, my historical experience would be only of taking up those initiatives and trying to be as concrete as possible in dealing with them. You get a sort of rising awareness, engagement and commitment that one needs a better future. Of course, I have taken note, as all of you will have done, of the words of the American President who said that he has pushed the reset button of the relationship. That is good but we probably now need to see where that leads us. I do not need to elaborate on many of the questions around the periphery of Russia – for instance, Central Asia, Afghanistan and Iran – that need to be addressed in a joint way, whatever that might look like.

I would not agree with the assumption that Russia is the big guy out there and we cannot do much about it. I feel it makes a lot of sense – and it has been proved to be successful, and I am speaking of the German Ostpolitik of the Seventies and what happened afterwards – to engage with Russia, even if nobody can promise that it will be easy.

MR BARYSCH: What is the central European perspective on this? Is Russia a country that is our partner or do we need to fear it?

MR ČARNOGURSKY: Slovakia may be a special case in this question. Our relations with Russia, with Germany and anywhere else such as the US, are not biased. That is why these discussions in Europe about the role of Russia leave us cold because we do not consider it our special problem – not that it is Slovakia’s special problem but Europe’s special problem. Up to now, the security and architecture of Europe has been based on the primacy of the US in this part of the continent but we read in many journals that the time for US primacy in security matters is drawing to an end. Then, yes, another kind of architecture will be necessary and that will be the time to discuss Medvedev’s proposals, perhaps not in the form that Russia is considering but from the western European point of view. The time to consider some new architecture will come because, as President Mirow said, Afghanistan will not be settled without Russia’s participation. That may be the case with Iran as well and for other countries too. I think that it is just an issue for matter-if-fact discussion.

MS BARYSCH: Not everybody in your part of the world is as pragmatic and unemotional about Russia as that.

MR KWASNIEWSKI: We need Russia and Russia is an extremely important partner for Slovakia, for Poland, for the UK, for the USA and for everybody but the problem is extremely complicated. First, over the last 20 years we have been able to speak about three Russias: the Russia at the end of Gorbachev, the Russia of Yeltsin, and then the Russia of Putin. Today it may be a mixture of Putin and Medvedev’s Russia. It is not a new idea but a continuation of Putin’s concept of the state.
For the last 20 years it has been successful for the central European region, as we have said, and we should be very grateful to organisations like NATO, the European Union and EBRD, because you have helped us very much because this crisis did not start in our region but in the USA. We can imagine what would happen if we were not integrated with all these structures and did not have the support of your bank; we would be in an extremely dramatic situation today. We can speak today about the crisis as a dangerous situation with some consequences but it is not the end of the history for the region.

We have many things to say about Russia but my opinion is, first, that we need Russia; secondly, Russia does not define the role of the state in the world because we still have some debate on this, as you mentioned: sovereign democracy and the bridge between Asia and Europe. Nobody needs such bridges because Asia, especially China, has so many bridges that this is not especially important. They are looking for ideas in China and Asia. Capitalism without democracy or with very limited democracy is the first ideologically attractive concept after the collapse of communism because for the last 20 years we have had nothing interesting vis-à-vis Western democracy and Western market values. Today we have the example of China and that means a market economy but without democracy, which many places find interesting. In Ukraine I have heard some groups in Crimea giving the opinion that it is stupid to have all these democratic procedures and we do not need them; we need the people who can rule without all these democratic procedures.

I am still waiting to know what Russia wants to do in this contemporary world. Should it be a partner more integrated to the European structures or extremely independent? That Russia wants to be a player in national politics is not a surprise. I understand that. The problem comes if Russia says that it wants to be a super player with this zone of influence. In the contemporary world, in the world of the 21st century, it is very difficult to accept, not just from Russia’s side but from all sides, that we will divide the world again into zones of influence. In my opinion, this problem exists.

If we are speaking about gas and oil supplies, Russia says it is absolutely against the politicisation of these elements. If you look at the crisis three years ago in Belarus and Ukraine, it is very difficult to say that the problems of gas and oil supplies are not connected with politics, influence and these games.

My last point: you mentioned this new idea of President Medvedev for a new architecture of security. Of course it sounds good, especially because of terrorism in Afghanistan and Iran, that we need a very effective system of security and cooperation in the most important countries in the world. That may be our special Polish sensitivity. That is a typical element of Russian and Soviet foreign policy. Every 50 years they propose a new architecture of security. That has happened from tsarist times; it happened for the first time under Alexander 11, during Stalin’s time, after Yalta and then after Helsinki. We can accept this idea of new architecture but we are afraid that the real sense of this proposal is that this new concept for the architecture means that it is instead of NATO, instead of the system which exists now. For us that is extremely dangerous because it means that very soon, 10 years after our entry into NATO we will again have some kind of security vacuum in central Europe. Why am I saying that is the idea? I have heard very often from Russian specialists that such a fair solution after the end of the Cold War would be the end of the Soviet Union and the end of NATO because these two ---

SPEAKER: What about the end of the Warsaw Pact?

MR KWASNIEWSKI: The Warsaw Pact is finished and it was never treated as enough of a price after the collapse of the Soviet Union: NATO was and is the case. If we are speaking about new architecture, using all the instruments we have now, of course we can continue the discussion. If the proposal is that we start from a point around zero, that is too dangerous. In my opinion this concept of building something instead of the existing structures, first of all of NATO, would be unacceptable, especially for central European countries.

If you ask me how we should deal with Russia, of course we need a common European policy. I am not optimistic after the Lisbon Treaty and with a new President and a new High Commissioner that we will have this common policy immediately because there are too many different interests. Of course if Europe has one idea about what to do, not only on Russia but on China and the United States as well, we will be stronger and we could manage much better the problems of energy, climate change and the financial crisis, all the elements of today’s world.

It is necessary to understand how the Russians are treating the European Union. First of all, Russians do not believe that the European Union is a serious concept project for the next centuries. They treat the European Union as a nice and interesting but sometimes funny episode of civilization. The consequence of that is that Russia in fact has 27 plus one European policies: 27 are bilateral policies with all the members of the European Union and the plus one, which is the last and the least of the priorities, is a policy with Brussels. Among these 27 bilateral polices, you have privileged relationships, not privileged relationships, no relationships, humiliated relationships – I can name many more.

We need Russia and I think Russia needs us. For all the big projects in the future, especially in Russia, I understand President Obama with his resetting of the button but my good advice to Obama and to the new administration in the Untied States is to open new possibilities but to ask about reciprocity. All right, we can do a lot with Russia but how will Russia help us in Iran? How will Russia help is in the Middle East? How can Russia contribute to the Afghanistan questions? If that is one way of resetting, that is not enough.

Just one minute on the consequences of the crisis. First, I am not sure that the crisis has finished. I think we will have some new problems but of course we have consequences on the economy: unemployment, problems with industry and financial tensions. I fully agree with the report that was presented this morning. In looking at the dramatic situation in the Baltic States, the consequences of the crisis are not so deep and dramatic as we predicted some months ago. That is not a reason for saying that in our countries we will have some explosion of populism, street demonstrations and unrest. I do not believe that. I think we still have enough instruments to keep the situation from being so dramatic.

One last element is that I think the main challenge for us is what was said in the introduction in a good sentence. We cannot minimise the role of the state; we should really use the role of the state to solve all these problems. I think that is correct. It is easier to say and do it here in western Europe with very macho democracies but it is not so easy to use this idea in our region. Frankly, for the last 20 years, especially in Poland, we have minimised the role of the state and the market has developed a great deal. Today if we ask for the role of the state to be strengthened I am a little bit afraid that the quality of the structures of our legal instruments and the juridical system are not developed enough to take on this role as a regulator, as a state which is really effective to manage the situation. That is where I place a question mark. It is especially difficult for me to speak about these things because I feel I am a social democrat.

MS BARYSCH: Russia, of course, being a very good example of when the state comes back in a big way it is not necessarily good for the economy.

MR KWASNIEWSKI: But we are still speaking about the state which is centralised but is not strong. In the sense of its effectiveness, it is not strong. That is the problem of this region. We can develop and strengthen the role of the state but the substance of the possibilities for the state are not so nice. That is the problem.

MR BARYSCH: Tim Garton Ash, history has returned to Russia.

MR GARTON ASH: I think there is actually quite a significant disagreement in this panel. I would like undiplomatically to tease it out at the very end, which is the opposite of what a diplomat would do.

Let me just quickly say on the point about the sources of dissatisfaction among the populations that there is no serious disagreement between us. If we had dealt with the problems of the past perfectly and had perfect rule of law, there would still be a lot of unhappy people. Where I do disagree is with the rather economistic view that people’s dissatisfactions can be entirely explained by their current economic situation. That is not how human beings are. They have biographies. They think about their lives as a whole.

The disagreement is a very important one. As President Kwasniewski has just said, Europe does not have a Russian policy. We have had maybe not 27 but six or seven or eight for sure major ones, plus or minus. I think that the position, certainly taken by the Schroeder government but even by Germany now, and which I hear in what you are saying, is to some extent at one end and maybe the position taken by a country like Britain is towards the other. My view is this. Dean Acheson famously said about 50 years ago: “Britain has lost an empire and not yet found a role.” Russia has lost an empire and not yet found a role. It takes a long time. Some would say that Britain has not yet found it. We cannot sit around waiting until Russia has found its role. We have to work out what we in Europe want to be.

Then we move to the disagreement, which I think I can bring to the point on this. I believe that the European Union has a strategic vital interest in enlargement to include not only Turkey but also Ukraine. I believe that is in our vital strategic interest and I think we should be actively pursuing it.

SPEAKER: For which period of time?

MR GARTON ASH: For the position of Europe in the world. As you know better than anyone, the answer to that question depends to a significant degree on the Ukrainians themselves. As the President said rather more tactfully than I am about to say, they have been their own worst enemies. If Ukraine fulfils the conditions, then certainly in a perspective of a decade I would wish to see Ukraine a member of the European Union. I believe we should wish that from our own strategic point of view.

I also believe that Ukraine, like any other democracy, has a right to apply for membership of NATO but unlike in the case of the EU, I do not think that is something we should be pushing in our own strategic interests. I think there is a clear difference between the two. I can see from your reaction that there is a difference of view here. I think the reason we should want Ukraine in the EU has only in small part to do with Russia. It has in larger part to do with Europe itself and Ukraine itself, but that small part is that a Russia that knows it cannot recover Ukraine can no longer be an imperial Russia and it must identify its role as that of a normal nation state. I think that is a good thing for Europe and a good thing for Russia. That is only the smaller part of the argument.

We are not going to solve this as lunch approaches. I feel very strongly that this is the argument we should be having very frankly between us inside the European Union to reach a common European position and not something that we should be doing unilaterally or bilaterally in our relations with Russia and in our own public context. Perhaps we could at least agree on that.

MR MIROW: If I may react to that very quickly, on the last point, yes, I do agree. My sense is that it will take us something like 10 years to include the Balkan states, if at all, and I see more and more conservative parties that are ruling parties in the European Union that say Croatia should be the last one for quite a while. We will see how that plays out. Then we have the other big animal in the room, which is Turkey. In terms of the European Union, will Turkey become a member of the European Union – yes or no? I do not see any realistic prospect – I do not speak about the desirability – for Ukraine to join the European Union in the decade up to 2020.

MS BARYSCH: What I take away from our discussion is that we did not have the imagination 20 years ago to foresee all the momentous events that happen and perhaps, as you said, that was a good thing. We might have messed it up.

MR KWASNIEWSKI: Sometimes lack of imagination is the most optimistic we can offer.

MS BARYSCH: We had a lot of luck. We did not put the brakes on, which was a good thing. From our debate I also take away that our agenda going forward for the next 10 to 20 years is going to be no less interesting. I wonder whether our lack of imagination in this case will surface again. Our luck seems to have run out for the time being. Our time has run out. I do not know about you but I could continue debating for the rest of the afternoon but it is Monday lunch time and you all have very busy jobs. Perhaps you would join me in thanking our excellent panellists. (Applause)
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