'History can often move at breakneck speed'

Ladies and Gentlemen,

Thank you very much for the invitation to be here with you today.

History can often move at breakneck speed – sometimes, defying our ability to keep up. We are living through another of those periods, today – just as we did in 1989, when the sudden collapse of communism set in train the events which led to the foundation of the European Bank for Reconstruction and Development.

In my remarks, I’ll be looking at the challenges that we’ve faced, in Eastern Europe and whether we might think about applying the lessons learned to Europe’s neighbours, across the Mediterranean Sea.

After my speech, I’ll be happy to take your questions about all the issues that I raise, and I very much look forward to a lively debate.

Recent events, in North Africa and the Arab world, have inspired many commentators to draw parallels with the historic changes that swept through Eastern Europe some 20 years ago.

What we saw then and what we are again witnessing today is people’s thirst for freedom, self-determination and democracy. Democracy is a concept not without inherent difficulties – Churchill’s famous dictum comes to mind when he called it “the worst form of government, except for all those other forms that have been tried from time to time.”

But it is the only concept for organising a society which is self-correcting, adjustable and progressive.

It is here that the European Bank for Reconstruction and Development, the institution I am honoured to head and to represent here tonight, comes into play.

Because we are an organisation with a very special – and unique – mandate: Our investments are made to promote the transition to market economy and democracy in our countries of operations. The bank was part of the capitalist world’s imaginative response to the events which started with the 1989 fall of the Berlin Wall and continued until the collapse of the Soviet Union in 1991.

Now, we are seeing a similar wave of people power through parts of the Arab World, bringing fresh challenges. Once again, the international community is having to consider how to respond as the winds of change blow through an important region.

Geographically, our area of activity stretches, already, from Poland in the West to Mongolia and Russia’s Far East – and from the Baltic countries in the North to Turkey in the South. Since the EBRD was established in 1991 we have invested more than €50 billion in our region and attracted an additional €100 billion for our joint projects with other investors.

We are financing mostly private companies – local ones and foreign investors – and we can offer both long-term loans and equity. We are active in a broad range of sectors from wind-farms in Poland to banks in Azerbaijan.

In those 20 years our Bank has accumulated a wealth of experience and expertise. We have seen rapid progress in the early years, we have seen the region go through the 1998 Russia crisis almost unscathed and gain new momentum in the early 2000s.

We have seen significant improvements in living standards, but we have also witnessed persistent and new hardships. Aspiring to democracy and the rule of law turned out to be much easier than actually implementing the core foundations of democratic rule.

We call this process transition, and what we have learnt is that transition is not the application of a fixed set of rules and formalities, where a country and society runs through some gigantic checklist (like when you do your MOT for your car), leading to a certificate declaring the country a democracy and a market economy.

Transition in reality is anything but static: It is a moving, living process where we see progress but also backlashes, where we have seen historic achievements but where also much remains to be done.

This understanding of transition as a constantly evolving process does not only apply to Eastern Europe. Just consider how the process of European integration has transformed Western Europe in the last decades and is today shaping the whole continent. Today, we cannot know what will happen next in the Arab world, but I believe it is safe to expect that the dynamism and momentum of recent weeks and months will remain very powerful.

Dynamism and momentum are also two words which very aptly describe the developments in Eastern Europe over the past 20 years. My first job as a young man was to work as an assistant to Willy Brandt. And what had inspired me particularly was his “Ostpolitik”, the policy of “change through rapprochement”.

At that time it was virtually inconceivable for my generation that we would see countries like Poland or Hungary in the European Union. For you, the young generation, this might be a normal state of affairs. You have grown up in a unified Europe with no iron curtain. This shows how far we have come.

Yet, despite all this progress, Eastern Europe was hit particularly hard by the 2008 global financial crisis which originated in the advanced economies of the West. When these shockwaves ultimately reached the region, many countries succumbed to its onslaught with sometimes dramatic slumps in economic performance.

Suddenly many of the achievements of the transition process were in acute danger, with companies threatened by bankruptcy, local banks fearing for their future funding and households crippled by mounting debt.

When Lehman collapsed, there was a dangerous moment when policy-makers began to resort to national solutions to what was a global problem. But fortunately, these centrifugal forces were quickly contained and a quite impressive, coordinated response from international institutions, European bodies, and the G20 was launched. This was particularly important for Eastern Europe.

The mature and resilient response in the region to the crisis was also crucial to contain what was a very serious challenge. These policies were rewarded: After the most severe decline since the fall of communism and the beginning of transition 20 years ago, with an overall contraction of 5.5 per cent in 2009, the EBRD region returned to growth last year with an estimated expansion of 4.2 per cent.  We expect roughly the same growth this year.

The aggregate figure may be promising, but it masks a worrying trend: Within our 29 countries of operations we are experiencing a growing differentiation, with larger and resource-rich countries attracting much more of the much sought-after capital inflows and benefiting from rising world market prices for their commodities.

Secondly, the aggregate figure of some 4 per cent growth may be significantly stronger than what we expect in the West. But it remains far from satisfactory when we consider emerging Europe’s growth potential and pent-up demand.

And it is actually a cause for concern, when we compare it with projected growth rates in other emerging market regions like Asia or Latin America with which Eastern Europe today finds itself in direct and fierce competition for capital inflows and investments.

Given these circumstances it is imperative today for the countries of the EBRD region to reinvigorate growth and at the same time make it more sustainable and less volatile. Convergence growth must find new sources, while catch-up growth must be used wisely to strengthen diversification. Now that the region has returned to growth is the right time to implement the lessons learnt during the 2008/9 crisis in order to bolster and boost the nascent recovery.

Let me just make a few points in this context:

1. A crucial lesson from the crisis is that Eastern Europe needs to build or strengthen the development of local capital and currency markets. During the early 2000s not enough effort was made to create these markets as foreign funding kept gushing in. Other countries were already preparing themselves for the introduction of the euro, but so far only Slovenia, the Slovak Republic and, most recently, Estonia have succeeded in the effort to join the common European currency.

Foreign currency lending exposes lenders to the volatility of exchange rate shifts which, at the peak of the crisis, have been dramatic in many countries. The depreciation of the local currency led to a sharp increase of liabilities in foreign-denominated loans which threaten hundreds of thousands of households and businesses.

In our latest Transition Report, published in November, EBRD economists examine how Eastern Europe can build viable and sustainable local currency markets. The report proposes three main strategies:

• Countries with high inflation volatility are advised to prioritise an improvement of macroeconomic institutions and policies
• Countries with a sound track-record on inflation should concentrate on improving infrastructure to support the development of local currency capital markets and
• Countries with a fixed exchange rate (and especially those in preparation of joining the euro) should aim to build up sufficient fiscal and liquidity buffers to withstand a large shock to external financing

2. Eastern Europe must find and strengthen new growth drivers as the inflow of capital is highly unlikely to return to pre-crisis levels. One such area is the region’s export potential where competitive advantages could play a beneficial role: These advantages range from the natural wealth of many East European countries to a relatively low level of unit labour costs.

The latter example, however, also includes a warning: As convergence has progressed, labour costs have increased and the difference, especially within the European Union, is bound to become smaller and smaller. For the countries of Eastern Europe this is a clear message to seek alternative routes to safeguard and improve the competitiveness of their exports.

One important way to do so is through lowering non-tariff trade barriers that impede exports, reducing corruption and improving the rule of law and customs procedures. A key lesson from the crisis is to reduce the dependence on single products and markets, and instead widen the export base in terms of products and destinations – think here of the dynamic emerging markets to the east of the region.

3. A prerequisite for strengthening the export base is a significant increase in competitiveness. An important step is to move towards a more knowledge-based and high-tech economy. The potential is huge.

Here in Oxford, one of the leading universities in the world, you will have met colleagues from faraway places in Central Asia, Russia or Eastern Europe. You may also have seen that last year’s Nobel Prize for physics was awarded to two researchers who were born and educated in Russia, yet are today working at the University of Manchester –  Andre Geim and Konstantin Novoselov.

In a nutshell this sums up the triumph and tragedy of higher education in much of contemporary Eastern Europe. It illustrates the intellectual potential of the region, but it also shows the size of the challenge to create conditions where talent can flourish in Eastern Europe and not abroad.

4. One of the preconditions for a flourishing economy is a sound business environment. Every three years, together with the World Bank, we ask thousands of entrepreneurs about their experience in doing business in Eastern Europe. These Business Environment and Enterprise Performance Surveys (BEEPS) show three areas of concern: Availability of skills; corruption and tax administration.

To be very frank: Some countries in the EBRD region need a dramatic improvement in their business environment, a significant reduction of red tape, a meaningful implementation of the rule of law and a serious crackdown on corruption. What is written in the law is important – but it counts for little if the law is neither respected nor enforced.

Progress is possible. Georgia used to be shattered by corruption and nowadays can claim to have an exemplary civil service. Estonia was a forerunner in efficient administration, an effort widely praised by investors. This is encouraging, but many have yet to follow such examples and it would be a grave mistake to underestimate the seriousness of the matter.

Corruption, let us be clear, is the cancer eating away at the foundations of every sound economy. Significant progress in this area is essential to improve the attractiveness of Eastern Europe; it is equally important for the stability and long term development prospects of the transition region.

5. There is one final area which I would like to mention today. While the economic news from Eastern Europe has largely been much more encouraging lately, some political developments have given rise to serious concerns. There is the danger that the economic crisis and its painful aftermath will turn people against the concepts of market economy and democracy.

Eastern Europe was rightly praised for its mature response to the global crisis, but today there are serious reasons for concern. We have seen incidents that seem to indicate a level of disenchantment, disillusionment and resentment among parts of the population in some countries – particularly among the young. That is clearly a wake-up call for policy-makers in Eastern Europe and beyond not to let the achievements and progress of 20 years of transition slip away.

For many of these 20 years Eastern Europe has forged ahead economically and in many cases this has allowed it to paper over shortcomings in the democratisation process. Eastern Europeans have often been cynical about their political leaders but despite many misgivings have been largely supportive of the transition process as long as they were rewarded with higher living standards and access to the goods that, for generations, eluded them.

Today, we must not allow these serious challenges to the transition process and the concepts of the market economy, democracy and European integration to gain any ground. We must stand up against seductive calls for protectionist or nationalist pseudo-solutions and strengthen the foundations on which Europe has been built.

The gains from uniting the continent, as I’ve been outlining, have been enormous. Two decades have passed swiftly and the EBRD has now amassed huge expertise in helping countries to manage transition. It is experience which has the potential to travel beyond our existing areas of work.

Even before the current crisis in North Africa, the EBRD was assessing a request, from the Egyptian government, to become one of the bank’s countries of operation.  Now, that examination is proceeding apace. We will analyse Egypt’s commitment to democracy and the market economy – values promoted by the EBRD’s statutes. An initial report should be ready by the spring and it will, then, be considered by the Bank’s Directors. A final decision will have to be taken by the bank’s shareholders.

This is a complex process, but, if called upon by our shareholders, we would be ready to take up the task. We have the ability to deliver the development of the private sector, particularly the small and medium sized enterprises which drive job creation, and thus supplement the efforts of other International Financial Institutions which focus on public infrastructure. It should not be forgotten that youth unemployment has fuelled much of the discontent in Egypt, and elsewhere. Our initial view is that, within the bank’s existing resources, we could invest a billion Euros, annually, in to the Egyptian economy.

Twenty years ago, the EBRD rose to the challenge posed by the collapse of communism. Today, in the Middle East, if called upon by our shareholders, we are ready to act, again – championing the values that we hold dear.

Thank you for your attention.